Moody's report on Lebanon highlights need for new government and reforms, finance minister says

Credit ratings agency cut Lebanon's outlook to negative from stable and affirmed its B3 rating

Tourists visit Pigeons Rock in the Rawcheh area of Beirut. Moody's cut its outlook on Lebanon's credit rating to negative from stable. AP

The decision by rating agency Moody's Investors Service to change Lebanon's outlook to negative underscores the need to form a new government and implement reforms, the country's finance minister said.

Moody's changed its outlook of Lebanon's credit rating from stable to negative citing increasing risks to the government's liquidity position and the country's financial stability, it said in a report on Thursday. It affirmed its B3 rating and said an upgrade to Lebanon's negative outlook is "unlikely."

Moody's report "affirms the importance of forming the government and starting reforms to restore confidence, lower the rate of risks and reduce the deficit," Ali Hassan Khalil, Lebanon's finance minister, tweeted on Friday. "If this is possible now, maybe we will lose that opportunity within months if the outlook remains negative."

Grappling with the world's third largest ratio of debt to gross domestic product and an economic slowdown, Lebanon is also caught in the midst of political wrangling as rival factions are unable to form a new government since parliamentary elections in May. An influx of over one million Syrian refugees into Lebanon has exacerbated years of economic stagnation.The World Bank forecast Lebanon's economy will grow one per cent and its debt-to-GDP ratio to reach 155 per cent by year-end, it said in an October report.

The political deadlock means stalling fiscal reforms that could unlock $11 billion in pledged donor loans during a Paris conference in April.

Without the fiscal consolidation measures and the ensuing international loans, Lebanon's fiscal position would weaken further and contribute to even higher liquidity and financial stability risks, Moody's said.

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While an upgrade to Lebanon's negative outlook is "unlikely," Moody's could change the outlook to stable if significant reforms unlocked the public investment package, raised GDP growth prospects and restored investors' confidence, it said.

Moody's could downgrade Lebanon's rating if the government's ability to access affordable financing is further weakened in the absence of effective fiscal consolidation prospects, it said.

"A further significant slowdown in deposits would denote lower policy effectiveness and point to increasing risks to financial stability, putting downward pressure on the rating," according to the report.

Moody's expects Lebanon's budget deficit to remain wider for longer than it previously expected, raising the government's debt burden at a time when bank deposits are slowing.

Without any government to implement some fiscal consolidation, the budget deficit is likely to stand at 10.5 per cent of GDP this year, compared to 8.9 per cent of GDP in the earlier forecast, Moody's said.

The budget could narrow slightly in the next two years to 9.5 per cent and 9 per cent of the GDP, it said.

Slower economic growth will increase the pace of public debt expansion at a time when the country can ill afford it.

Persistently wide deficits and large debt refinancing needs will keep the government's borrowing needs above 30 per cent of the GDP, Moody's said.

Companies in Lebanon remained pessimistic about the private sector outlook on fears that the political situation may not improve and the uncertainty would weigh on future output, according to the latest Blominvest Bank’s Purchasing Managers Index.

The Byblos Bank/AUB Consumer Confidence Index hardly improved in the third quarter of this year due to the delay in forming a government.

The index averaged 75.3 in the third quarter, up by just 1.5 per cent from the previous quarter, the index showed.

"The ongoing delays and procrastination in the formation of a new Cabinet in Lebanon was the main factor that affected household sentiment in the third quarter of 2018," said Nassib Ghobil, chief economist at Byblos Bank.