Capital Intelligence, the international emerging markets rating agency, today announced that it has lowered Lebanon's long-term foreign currency rating to B- from B and affirmed the sovereign's short-term foreign currency rating of B. Long- and short-term local currency ratings have been assigned at B- and B, respectively. The outlook is revised to stable from negative. The downgrade reflects the continued delay in undertaking much needed fiscal and economic reforms, which has made Lebanon more vulnerable to domestic and external shocks.

Heightened political uncertainty following the assassination of former prime minister Rafik Hariri in February has added to long-standing concerns about the sustainability of the public finances and increased the riskiness of holding Lebanese assets. The decline in confidence has triggered a pronounced slowdown in economic activity and led to capital flight and the loss of about USD2 billion in central bank foreign currency reserves over the first four months of the year.

CI notes that it is imperative that the authorities succeed in restoring confidence soon due to the government's dependence on the domestic banking system to meet the bulk of its very large gross financing needs in both local and foreign currency. Sustained deposit outflows or even sluggish deposit growth would undermine the ability of banks to finance the budget deficit, which is projected to widen this year to about 11% of GDP partly because of the deceleration in economic growth. Liquidity problems in the banking sector would put pressure on interest rates and increase the cost of government debt service, in turn exacerbating public debt dynamics.

With limited financing options, the government could borrow yet more from the central bank. However continuous deficit monetisation in the context of a fixed exchange rate and a reduction in the demand for local currency would hasten the erosion of official reserves and could fuel devaluation expectations.

With large financing needs and a debt stock equivalent to 183.7% of GDP at end-2004, the government will remain vulnerable to changes in market sentiment until strong and sustained efforts are made to improve expenditure management and reform the public sector. However it is unclear whether a broad-based consensus for reforms will emerge after the upcoming parliamentary elections.

CI also announced that the long-term foreign currency ratings of the rated Lebanese banks, namely Bank Audi, BBAC, BLOM Bank, Byblos Bank, Credit Libanais, and Fransabank have been lowered to B- as these ratings were capped at the sovereign ceiling. The short-term foreign currency rating of the banks is unchanged at B. A stable outlook is assigned. The financial strength ratings of the above banks are currently under review.

Source: MENAFN Press