Abu Dhabi, UAESaturday 14 December 2019

Lebanon's sovereign rating downgraded by S&P

Downgrade follows similar actions by competitors Fitch Ratings and Moody's Investors Service

Protesters in Nabatieh wave flags flags during a recent afternoon protest. William Lowry/ The National
Protesters in Nabatieh wave flags flags during a recent afternoon protest. William Lowry/ The National

Ratings agency S&P Global lowered Lebanon's sovereign rating further into junk status, stating that diminishing confidence in the country and its economy has led to a reversal of inflows into the country's banks.

The agency cut Lebanon's long- and short-term foreign and local sovereign credit ratings to CCC/C from B-/B, and said the outlook on its debt was negative, citing a one-in-three chance of a further downgrade as its next rating action. Its downgrade follows similar recent actions taken by competing credit ratings agencies Fitch and Moody's.

"Depositor confidence has eroded further following recent political developments, protracted social unrest, prolonged bank shutdowns, and individual banks reportedly placing some restrictions on foreign exchange transfers and operations. This reflects rising pressure on Lebanese banks' liquidity, and continued outflows will likely weigh on (Lebanon's central bank) Banque du Liban's foreign exchange reserves," S&P Global said in a note announcing the downgrade.

It also warned the risk of "a protracted political vacuum" increasing "policy uncertainty".

Lebanon's prime minister Saad Hariri resigned last month following several weeks of protests, with citizens blaming Lebanon's political elite for widespread corruption and nepotism, which they say contributed to the country accruing $86 billion (Dh316bn) of public debt, equivalent to 150 per cent of gross domestic product.

Confidence in the country's financial system has ebbed, leading to an outflow of capital of about $3bn in the first nine months of the year, according to the Institute of International Finance.

Last week, Banque du Liban's governor, Riad Salameh sought to reassure investors, stating that the central bank would look to protect depositors in the country's banks and was not planning to impose capital controls or impose a haircut (a term used to describe the devaluation of an asset) on the country's bonds.

S&P Global, which downgraded three of Lebanon's banks on Thursday evening, said in its sovereign downgrade that if a new, technocratic government was able to push through immediate reforms it could help to ease social tensions and support depositor confidence, but warned that the country's fragmented power-sharing system meant any solution could be delayed.

"Furthermore, potential reforms might not be sufficient to fundamentally alter the large financial and economic stresses," it said, forecasting that double-digit deficits are set to continue, which could push government debt to 169 per cent of GDP by 2022.

The premiums required on credit default swaps — a form of insurance on Lebanon's sovereign bonds — point to an 84 per cent chance of a default on the country's debt within the next five years, London-based Capital Economics said in a note on Thursday.

A default on the country's debts and a devaluation of the Lebanese pound would trigger severe strains on the country's banking sector and the economy would be plunged into a recession, it added.

Updated: November 16, 2019 04:18 PM

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