The credit profile of Lebanon (B3 stable) reflects challenges stemming from a very large public debt burden, which, at 142.1% of GDP in 2017 (excluding domestic debt holdings by public entities amounting to 11.5% of GDP) is among the largest in the Moody’s rated universe.
Lebanon’s interest-to-revenue ratio of 42.9% is the highest of all sovereigns we rate, and, combined with an average term to maturity of about 5 years, underscores the sovereign’s very high sensitivity to further rising interest rates in a tightening global liquidity environment.
While the domestic commercial banking system with total assets at over four times GDP supports the sovereign in meeting its annual funding requirements of over 30% of GDP, Moody’s viewed the recurrent recourse to Banque du Liban’s (BdL) financing operations that started in May 2016 as indicative of an increase in underlying funding challenges that elevate the sovereign’s susceptibility to event risks. Lebanon’s credit strength includes a resilient bank deposit base, supported by remittances and cross-border transfers from the Lebanese diaspora abroad. The sovereign has also established a history of full and timely debt repayment despite severe economic and political turmoil domestically or in the region. The outgoing government has also secured investment commitments in excess of $11 billion from the international community for its capital investment program over the next five years in order to boost below-trend growth, but conditional on fiscal reform implementation by the incoming government. The stable outlook takes into account Lebanon’s significant foreign exchange buffers, which have proven resilient to political turmoil in recent years. “We would downgrade Lebanon’s rating in case of a sustained easing in deposit inflows, which suggested a heightened risk of a balance of payments crisis and which threatened the banking sector’s ability to continue to finance the government. Conversely, we would upgrade Lebanon’s rating if fiscal reforms result in a stabilization followed by a durable reversal in the debt trajectory,” Moody’s said. — SG