Lebanon’s banks, who have a large exposure to the government, face immense losses as the country’s economy contracts, business comes to a standstill and unemployment rises, Moody’s Investors Service said on Thursday.
"We expect banks to face large losses in light of their heavy exposure to the Lebanese sovereign, which amounted to the equivalent of $143 billion (Dh543bn) or 68 per cent of total assets as of February, including exposure to Banque du Liban, the central bank," said Alexios Philippides, vice president and senior analyst at Moody's.
"The spread of the coronavirus is a further burden for the country at a time when the state has few resources to provide support for vulnerable businesses and individuals."
The ratings agency changed its outlook on Lebanon’s banking system, which underpinned the economy for decades and attracted billions of dollars in deposits, to negative. The change in outlook comes following the government’s default on the repayment of $1.2bn of maturing eurobonds last month and refusal to pay interest on all dollar-denominated eurobonds as it faces its worst economic crisis in three decades.
In total, Lebanon has about $31bn in bond maturities. The bulk of the debt is held by Lebanese financial institutions, with banks accounting for 33.4 per cent and the central bank 43 per cent.
“The government is looking to restructure its debt, which will likely entail significant losses for private creditors, including the banks,” Moody’s said.
Banks are likely to come under funding and liquidity pressures given that private sector deposits declined by $7.2bn in the first two months of 2020 and an average of $15.7bn, or 9.1 per cent, in 2019.
Lending to the private sector is set to contract further, after declining 16 per cent in 2019, while bad loans will rise significantly due to the economic contraction, rising inflation, job losses and salary cuts. Moody’s estimates the economy shrank 6.5 per cent in 2019.
“The probability of government support for failing banks is low,” Moody’s said. “Given the mounting fiscal and external headwinds, and the sovereign's commitment to restructure its public debt, we now incorporate a low likelihood of extraordinary government support for the banks.”
Lebanon’s new government, which came to power in January, needs to implement required economic and fiscal reforms in order to access $11bn pledged by donors two years ago at a conference in Paris.
“Without access to external financial support, a disorderly de-pegging of the currency to the dollar is a tail risk that could unleash sharp currency depreciation and would further pressure the banks,” Moody’s said.
Lebanon’s currency has lost more than 40 per cent of its value against the greenback in the black market.
The central bank’s foreign assets have declined to $30.2bn as of mid-March 2020 (excluding gold worth $14.8bn and Lebanese sovereign eurobonds of $5bn) from $34.8bn at the end of 2018, according to Moody’s.