Moody's downgrades Lebanon to lowest rating as economic crisis deepens

Moody's did not assign an outlook and said there is a high probability of significant losses for private creditors

EPWHN2 Beirut, Lebanon
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Moody's Investors Service downgraded Lebanon's issuer rating to C, its lowest grade and on par with Venezuela, and said there is a high probability of significant losses for private creditors.

The cut from Ca "reflects Moody's assessment that the losses incurred by bondholders through Lebanon's current default are likely to exceed 65 per cent", the rating agency said on Monday.

Facing its worst financial crisis since independence in 1943, Lebanon defaulted on $31 billion (Dh114bn) in eurobonds in March and then turned to the International Monetary Fund in May for a $10bn bailout package.

With IMF negotiations having stalled, the economy has deteriorated further. The currency, pegged to the dollar since 1997, has plunged by more than 80 per cent, while inflation and unemployment have increased.

The weakening of the Lebanese pound fuelled a surge in inflation, which reached about 90 per cent year on year in June, according to the credit rating agency. Inflation was 6.7 per cent at the end of last year.

Moody's did not assign an outlook on the new rating and said the country's weak institutions appeared unable to address the economic, financial and social crises.

Lebanon's public debt of $93.14bn at the end of May ranks the country third after Japan and Greece in terms of debt-to-gross domestic product ratio.

Japan has an A1 rating from Moody's, with a stable outlook, while Greece retains a B1 grade with a stable outlook.

Lebanon's debt-to-GDP ratio is projected to increase to about 200 per cent this year, from about 155 per cent of GDP last year, Moody's said.

"The collapse of the currency in the parallel market and the concomitant surge in inflation fuel a highly unstable environment," it said.

"In the absence of key steps towards plausible economic and fiscal policy reform, official external funding support to accompany a government debt restructuring is not forthcoming."

Lebanon's recession is set to deepen this year due to the lack of reforms, which were expected to unlock international donor pledges.

The fund projected in April that the economy would shrink by 12 per cent this year. That contraction could increase if an agreement with the fund is not reached.

Access to $11bn pledged by international donors before the crisis is also contingent on the reforms, which the IMF has also called for.

The rate cut "shouldn't come as a surprise given that, originally, the decision of the government to default on its foreign debt obligations came without any negotiations or an agreement with the IMF", said Nassib Ghobril, chief economist at Byblos Bank.

"Usually 87 per cent of countries that decide to suspend payments on their foreign obligations do it in conjunction with an IMF programme or when they are in advanced stages for an IMF programme," he said.

"Second, the government decided to default on its eurobonds without even consulting the holders, creditors of these eurobonds."

Moody's said Lebanon's lack of fiscal and monetary policy manoeuvring space and "diminished governance performance, especially with respect to control of corruption, inhibits the likelihood of a rapid transition to a new and more sustainable growth model once the debt restructuring is implemented".

Over the long term, a lower growth potential and the country's weak track record of fiscal discipline reduce its "ability to carry debt", Moody's said.

That will warrant a deeper debt write-off that is consistent with the C rating, "or a higher probability of future redefault in the event of insufficient effective debt relief to restore long-term debt sustainability," it said.

Lebanon needs to carry out the necessary reforms at a faster pace for its ratings to improve, Moody's said.

Mr Ghobril echoed Moody's view on the lack of progress in carrying out the reforms.

"Most importantly the government has not made any forward moves after it declared its default, it did not implement any structural or basic reforms that do not need an agreement with the IMF," Mr Ghobril said.

"The IMF expects as a gesture of credibility and seriousness to see basic reforms implemented before signing on an agreement with Lebanese authorities, even this we have not seen."

Moody's said a further precondition for "a substantive upgrade would also be that the key drivers of the country's debt dynamics, such as economic growth, interest rates, privatisation revenue and the ability to generate and sustain large primary surpluses, were seen to be evolving in a way that would ensure debt sustainability in the future".