Lebanon’s plan to bring its budget deficit back into single digits is a step in the right direction, but it needs to regain market access to keep default concerns at bay, Fitch’s rating analyst said on Thursday.
Heavily indebted Lebanon’s government approved a 2019 budget on Monday including deep spending cuts to narrow its projected deficit to 7.6% from 11% of gross domestic product (GDP) and stave off a financial crisis.
Fitch put a ‘negative outlook’ - effectively a downgrade warning - on its ‘junk’ B- Lebanon rating in December.
Sovereign team director Toby Iles told Reuters that implementation of the “pretty ambitious” budget was key.
“There may be some positive sentiment effect,” he said, “But I do think given the track record (of not implementing spending cuts) people will want to see some results for this to have a lasting impact on confidence.”
Fitch expects Lebanon’s 2019 deficit to be around 9%, higher than the government’s forecast.
Fitch’s move to a negative outlook last year came following a blow-out public sector pay, rise in debt interest payments, electricity subsidies and other forms of spending.
The B- is already a “very low” one Iles said, meaning there is no need to rush another move, but the broad worries are fundamentally about fragile confidence.
“The key things we are watching now as we assess the outlook --as well as the finances-- are whether the Lebanese financial system can attract enough foreign inflows and whether the central bank can maintain the FX reserves.”
The country’s next major debt repayment deadlines are $1.5 billion in November then $1.2 billion next March. Gross currency reserves were $31.1 billion in March meaning those payments should be easily covered, but Beirut will need to regain access to borrowing markets, Iles added.
“It is really about does Lebanon have enough financing to keep the show on the road? That is the kind of thing we are looking at this (B- rating) level,” he said.
“It is a confidence question, and it is the great unknown. $31 billion of reserves is a decent amount, but if depositors lose confidence then those reserves can run out very quickly.”
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