Moody’s Investors Service, a U.S.-based financial rating agency, has maintained Lebanon’s rating at “C” due to the country’s severe economic crisis, which has resulted in bondholders experiencing losses of over 65 percent. This rating reflects the ongoing default that Lebanon has been facing since March 16, 2020.
Lebanon is currently grappling with a deep economic, financial, and social crisis, and its weakened institutions are struggling to address the situation. Moody’s has changed the country’s outlook from having no outlook to stable, indicating their expectation that the “C” rating will persist in the foreseeable future due to the high likelihood of significant losses for private creditors. The agency also predicts that the economic environment will remain volatile, mainly due to recurrent political deadlock and weak institutions.
The economic distress in Lebanon has been exacerbated by the devaluation of the national currency in the parallel market and a significant increase in inflation. By the end of October 2023, inflation had skyrocketed to 215.4 percent compared to the same period the previous year.
Absence of reforms
The absence of substantial steps towards implementing plausible economic and fiscal policy reforms raises doubts about the feasibility of receiving official external funding support alongside a government debt restructuring in the near future.
Moody’s also notes that the local currency ceiling remains at “Ca,” signaling a near-default situation, while the foreign currency ceiling remains unchanged at the same level.
In terms of environmental, social, and governance factors, Lebanon’s ESG Credit Impact Score indicates a significantly lower rating than it would have otherwise received. Governance constraints, declining wealth levels, and a heavily burdened government balance sheet contribute to the country’s low resilience to environmental and social risks.
Lebanon faces environmental challenges, including chronic issues with solid waste management and unsafe drinking water for over 25 percent of the population. Without effective policies, water shortages are expected to become more widespread. Social risks are evident in the inadequate access to essential services, unreliable electricity supply, significant emigration of skilled labor, and the presence of Syrian refugees, who make up over 30 percent of the population.
Negative GDP growth
The rating report also provides a snapshot of Lebanon’s challenging economic landscape, including a negative real GDP growth of 2.6 percent in 2022, an inflation rate of 122 percent, and an external debt-to-GDP ratio of 319.6 percent. The report emphasizes that the country’s credit profile remains highly exposed to environmental risks, social challenges, and governance issues, resulting in an “caa3” economic resiliency rating.
Requirements for potential upgrade after restructuring
Given that the “C” rating is the lowest on Moody’s scale, there are limited factors that could lead to an upgrade or downgrade of the ratings. Any potential upgrade following a restructuring would require sustained and faster-than-expected fiscal consolidation and structural reforms over several years. Additionally, the feasibility of a significant rating upgrade would depend on critical drivers such as economic growth, interest rates, privatization revenue, and the ability to generate and maintain substantial primary surpluses.
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