New York, January 21, 2019 -- Moody's Investors Service has today downgraded the Government of Lebanon's
issuer ratings to Caa1. The outlook was changed to stable from
negative.
Moody's decision to downgrade the ratings to Caa1 reflects the heightened
risk that the government's response to increased liquidity and financial
stability risks will include a debt rescheduling or other liability management
exercise that may constitute a default under Moody's definition.
In December 2018 Moody's changed the outlook on Lebanon's
then B3 issuer ratings to negative reflecting rising liquidity and financial
stability risks.
Compared with Moody's previous assessment, this higher probability
of a default event denotes the rising risk that the government,
possessing increasingly limited fiscal and monetary levers to contain
or reverse its high debt and interest burden amid deteriorating domestic
and external funding conditions, may seek to enhance debt sustainability
through other means. The ongoing delay in the formation of a government
is adding to Lebanon's pressures.
The stable outlook reflects a balance of risks at the Caa1 rating level,
between a possibility that an event of default is avoided or that,
on the contrary in a default event, losses to investors are larger
than consistent with a Caa1 rating. An event of default may be
avoided if, upon its formation, a new government takes some
fiscal consolidation measures that unlock the CEDRE public investment
package. Alternatively or in conjunction with CEDRE inflows,
more financial interventions by the central bank could contribute to avoiding
a default event if that is achieved while maintaining broad financial
stability.
Moody's has also downgraded Lebanon's senior unsecured Medium Term Note
Program rating to (P)Caa1 from (P)B3 and affirmed the (P)Not Prime other
short-term rating.
Concurrently, Moody's has lowered the long-term foreign
currency (FC) bond ceiling to B2 from B1, the FC deposit ceiling
to Caa1 from B3, the local currency bond and deposit ceilings to
Ba3 from Ba2. The short-term FC bond and deposit ceilings
remain Not Prime.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Caa1
MOODY'S ASSESSMENT OF A HIGHER PROBABILITY OF DEFAULT EVENT
Moody's decision to downgrade the ratings to Caa1 reflects its assessment
that the probability has increased that a new government, once one
is formed, may take measures aimed at reducing Lebanon's very
large gross financing needs involving some liability management that constitutes
a default under Moody's definition. Lebanon's gross
financing needs exceed 30% of GDP, amongst the highest of
rated sovereigns.
Notwithstanding Lebanon's caretaker government's emphasis
that no restructuring of the government's debt obligations is being
considered, official statements in recent weeks indicate a growing
urgency to address the very high debt burden (estimated at 141%
of GDP in 2018, excluding domestic debt holdings of public entities
accounting for about 11% of GDP) and debt servicing costs (almost
50% of revenue) through a variety of measures, which may
include some options that could result in a default event under Moody's
definition. While the change in the outlook to negative on Lebanon's
then B3 rating in December 2018 reflected Moody's assessment of
the sovereign's heightened fiscal, liquidity and external
pressure, the rising possibility of a default event that has emerged
since, points to a lower rating.
In the absence of significant fiscal consolidation and in the context
of markedly slowing capital inflows and bank deposits, reliance
on the Banque du Liban (BdL, the central bank) to suppress the government's
financing costs in order to prevent a yet higher debt servicing bill is
increasingly challenging to reconcile with the central bank's objective
of maintaining financial stability. According to Moody's
estimates, covering this year's fiscal deficit and Eurobond
maturities without drawing on foreign exchange reserves would require
bank deposit inflows of $6-7 billion, compared to
$4-5 billion estimated in 2018.
Uncertainty for depositors about the sustainability of the exchange rate
peg and financial stability is reflected in slower deposit inflows,
an increasing deposit dollarization rate, to 70% as of November
2018, and in a declining coverage ratio of the broad monetary base
(M3, including foreign currency deposits) by net foreign assets.
Such developments in turn raise financial stability risks since further
shocks to depositor confidence would result in a large drain in foreign
exchange reserves. In turn, these dynamics underline the
trend toward higher interest rates in the local currency segment which,
in Moody's assessment, limit the BdL's room for unsterilized
interventions which would stoke inflation and further undermine external
competitiveness.
Overall, the high political event risk and very low fiscal policy
effectiveness embedded in Lebanon's credit profile reflect Moody's
assessment that the capacity for a government to implement significant
fiscal consolidation is limited, even if a government were formed
in the near future. A continuing delay in the formation of a government
would add to Lebanon's liquidity pressures, increasing the
potential size, perimeter and urgency of such a liability management
exercise in future.
STABLE OUTLOOK
The stable outlook reflects a balance of risks at the Caa1 rating level.
Despite long-standing very weak credit metrics and periods of elevated
credit pressure in the past, Lebanon has a proven track record of
avoiding default. An event of default may be avoided if,
upon its formation, a new government takes some fiscal consolidation
measures that unlock the CEDRE public investment package. Moody's
expects the fiscal reform conditionality attached to the disbursements
equivalent to about 3-4 percentage points of GDP annually to support
the growth outlook and improve investor confidence.
Alternatively or in conjunction with CEDRE inflows, more financial
interventions by the central bank could contribute to avoiding a default
event if that is achieved while maintaining broad financial stability.
Meanwhile, a further deterioration in Lebanon's fiscal and
external metrics, potentially as a result of a continuing delay
in the formation of the government that reduces the chance of some fiscal
consolidation, would exacerbate Lebanon's credit pressures,
and likely further undermine depositor confidence. The resulting
further increase in the threat to financial stability would mean that
a default, if one eventually occurred, would likely involve
more significant losses to investors.
WHAT COULD CHANGE THE RATING UP
Moody's would likely upgrade the rating if the likelihood diminished
that a new government may pursue a liability management exercise that
would trigger a default under Moody's definition over the next few
years.
This would likely involve significant fiscal reforms that support macroeconomic
stability and offer the prospect of an eventual reduction in the debt
ratio. In turn, such prospects would foster sustained financial
inflows, including foreign deposits at Lebanese banks that secure
financing of Lebanon's fiscal and external deficits.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade Lebanon's ratings if the sovereign's
fiscal and external metrics weakened further, jeopardizing financial
stability and pointing to an increased risk that an eventual liability
management operation would involve significant losses for investors.
GDP per capita (PPP basis, US$): 19,565 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.5% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5% (2017
Actual)
Gen. Gov. Financial Balance/GDP: -6.9%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -22.9% (2017 Actual)
(also known as External Balance)
External debt/GDP: External debt/GDP: 104.1%
(2017 Estimate, excluding non-resident deposits)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 16 January 2019, a rating committee was called to discuss the
rating of the Government of Lebanon. The main points raised during
the discussion were the increasing policy constraints to respond to a
higher liquidity and financial stability risk environment.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
