Lebanon's banking outlook has been upgraded by rating agency Moody's Investor Service to stable from negative due to an increase of political stability and a resurgence of economic growth.
"Our outlook for the Lebanese banking system is stable, reflecting progress in policy effectiveness after years of political paralysis and a pick-up in economic activity from low levels," Moody's said.
"Continuing deposit inflows and substantial liquidity buffers underpin the financial system's ability to finance the government and the economy."
The rating agency said it expects the economy to grow 3 per cent in 2018, higher than economic growth in 2016 and 2017 yet still below the 9 per cent average registered between 2007 to 2010.
The stability of Lebanon's banking system is underpinned by a steady inflow of deposits as well as the central bank's $41 billion in foreign assets, the rating agency said. Banks also have enough assets abroad to cover a third of total deposits.
Lebanese banks have traditionally kept interest rates on deposits high enabling it to attract billions of dollars from millions of Lebanese living abroad. That interest regime enabled the country to weather the 2008 financial crisis and service its public debt which is about 148 per cent of GDP, the ratio in the Middle East and the third-highest among all rated sovereigns.
Moody's rates three banks, Bank Audi, Blom Bank, and Byblos Bank, which together make up 35 per cent of total banking deposits. Last month Moody's cut those banks' long-term deposit ratings to B3 from B2, saying that that while a return to a fully-functioning political government was a positive move, it was too early to say whether proposed reforms would lift the country's finances.
Lebanon swore in a new government in December following a two-year caretaker regime. After years of political bickering and crises the country's parliament is expected to pass its first budget since 2005 in the coming weeks. Several major tax reforms embedded in the plan and aim to tackle the country's deficit. The country is forecasting a fiscal deficit for this year of $5.2bn, or 8.7 per cent of GDP, down from a deficit of 9.5 per cent of GDP last year.
Still many headwinds for the country remain. Earlier this month, the International Monetary Fund said expects Lebanon's economic growth to be subdued in 2017, weighed down by rising public debt and regional turmoil that has led to a large inflow of Syrian refugees into the country.
The IMF expects Lebanon's economy to grow 2 per cent in 2017 and 2.5 per cent in 2018. That's slower than the 2.6 per cent and 3.4 per cent growth the fund expects for the Middle East, North Africa, Afghanistan and Pakistan for this year and next.
Among other challenges, Lebanon's economy has come under pressure in recent years from the presence of over 1 million refugees fleeing Syria's civil war.
"The country's weak infrastructure is exacerbated by a large influx of Syrian refugees, with one million registered as of December 2016," Moody's said.
"Large external and fiscal deficits are further challenges. Investor confidence is low following years of political paralysis and regional geopolitical paralysis and regional geopolitical uncertainty, and consumer confidence remains volatile reflecting political developments."