S&P Global Ratings revised the outlook on Lebanon to negative from stable on Friday, amid worries about the ability of the world's third most indebted country to pay its foreign debt.
The rating agency, though, affirmed the country's "B-/B" long and short-term foreign and local currency sovereign credit ratings, unlike Moody's Investors Service, which downgraded Lebanon deeper into junk territory for the first time in more than two decades in January. Moody's cited concerns over the government’s ability to pay or restructure its debt because of a liquidity crunch that raises the risk of default.
“The negative outlook reflects the risk that a lack of material reforms to reduce the budget deficit will see investor confidence wane," the S&P report said. " As a result, non-resident deposit flows may decelerate and foreign exchange reserves could continue to decline, eroding Lebanon's ability to service foreign currency debt.”
Lebanon has the world’s third highest debt-to-gross domestic product ratio after Venezuela and Greece, projected at 133 per cent in 2019 by S&P. Struggling with its finances amid a weak macroeconomic environment, higher government spending and pressure from hosting over a million Syrian refugees, the country also suffered from months of political impasse before forming a new government in January.
S&P said it forecast Lebanon’s debt ratio to increase to 162 per cent of GDP by 2022, and expects the country to face fiscal deficits averaging about 10 per cent of GDP over 2019 to 2022.
The report said the Lebanese government’s debt-servicing capacity depends largely on the domestic financial sector’s willingness and ability to add to its holdings of government debt. This, in turn, relies on bank deposit inflows, particularly from non-residents, and on financing from the central bank, or Banque du Liban.
Lebanon formed a government on January 31, after nine months of political wrangling following the May parliamentary elections. The S&P report said that the prolonged uncertainty partly caused deposit inflows into the banking sector to slow, bond yields to soar and dollarisation rates to rise. The agency said the formation of a new government should improve investor confidence.
“We have affirmed the ratings on Lebanon because we expect deposit inflows to the financial system to rebound following the recent formation of a new government,” the report said.
“In addition, we anticipate that donor support from Qatar and potentially Saudi Arabia, alongside BdL’s servicing of the government’s foreign currency debt, will remain sufficient to support the government’s borrowing requirements and fund the country’s external deficit over the next 12 months."
In January, Qatar pledged to buy $500 million (Dh1.83 billion) worth of Lebanese bonds. In 2018, Lebanon was promised aid of about $11bn in soft loans and grants from donors at the Cedre conference in Paris, in return for implementing reforms.
S&P estimates that real economic growth slowed to 0.5 per cent in 2018 and expects that Lebanon’s traditional growth drivers of tourism, real estate and construction will remain weak. It forecasts gradual recovery with increases in exports and public and private investment following the partial implementation of the government’s new Capital Investment Programme, which was developed in conjunction with the World Bank.
“We expect growth to remain subdued but gradually improve to 2.5 per cent by 2022, supported by the government’s investment programme and easing tensions in Syria,” the report said. The growth is still far below the average of 9.2 per cent seen in 2007 to 2010.
S&P said it could lower its ratings on Lebanon within the next year “if political stasis causes fiscal deficits to rise while banking system deposit inflows – the government’s key funding source – slow further.” It also warned that a resulting persistent drawdown of international reserves at the central bank to meet the government’s foreign currency financing needs could test the country’s ability to maintain the currency peg to the US dollar.