Moody's has revised Lebanon's outlook to negative from stable, while maintaining credit ratings at B3, owing to the government's weak liquidity position and financial stability.
The ratings agency said the revision was in large part "a consequence of domestic and geopolitical risks that have become more intractable."
"In the absence of fiscal consolidation measures that would allow the release of some international loans and partly reverse the widening in risk premia observed in recent months, Lebanon's fiscal metrics that have already been among the weakest of all the sovereigns rated by Moody's would weaken further, contributing to yet higher liquidity and financial stability risks," the ratings agency added.
Lebanon, which is grappling with the world's third highest debt-to-GDP ratio of about 150 per cent, is struggling to revive economic growth and control its finances. Ongoing political wrangling over the formation of a new government after the May parliamentary elections and the hosting of over one million Syrian refugees have exacerbated years of economic stagnation.
The World Bank and Lebanon's caretaker finance minister last month called for the formation of a new government after half a year of political stalemate, highlighting the need for a new administration to halt "confusion" over the economy.
Moody's said its B3 rating reflected an assumption that a new government would be formed "near term" and implementation of fiscal consolidation as part of a new public investment package would support GDP growth and ease liquidity risks.
"The rating affirmation also takes into account the central bank's demonstrated capacity to maintain a degree of financial stability despite very large macroeconomic imbalances and through times of political tensions, although the effectiveness of its financial operations may be diminishing,” it added in the report.
The country's negative outlook would further limit Beirut's access to finance from international donors, with heightened political risk contributing to wider risk premia and higher funding costs, Moody's added.