Lebanon hits bottom of barrel credit rating as government formation flounders

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Lebanon’s credit rating downgraded again on Wednesday as the country continues to feel the effects of compounding economic and financial crises.

Credit ratings company Moody’s Investors Service downgraded Lebanon to the firm’s lowest possible rating, a C, taking the country to the deepest end of junk status. Lebanon’s economic collapse has accelerated since the end of 2019 and talks with the International Monetary Fund to restructure the country’s debt have stalled.

“Lebanon's C rating is the lowest on our rating scale, reflecting our expectation that losses incurred by bondholders will likely exceed 65 percent,” said Elisa Parisi-Capone, vice president - senior analyst at Moody’s Investors Service in a press release. “The rating is unlikely to move from its current position before the restructuring, given the extent of the macroeconomic, financial and social challenges and our expectation of very significant losses.”

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Moody’s said the collapse of the local currency in the parallel market and subsequent inflation have fueled a highly unstable environment.

The Lebanese lira, which is technically pegged to the US dollar at 1,507 lira to one, now trades for above 7,000 on the parallel market. Inflation has soared as a result, salaries have plunged, while prices for basic goods, such as food, have increased.

Lebanon’s economic environment has been made more volatile as access to external funding is conditioned upon government reforms, Moody’s explained. For years, aid from Western donors has been conditional on structural reforms across various sectors that successive governments have failed to make.

“For Lebanon’s rating to rise from current levels, the key drivers of the country's debt dynamics, such as economic growth, interest rates, privatization revenue and the ability to generate and sustain large primary surpluses, would need to evolve in a way that ensures future debt sustainability,” Moody’s said.

Lebanon, which has relied on deposits from abroad to keep its highly dollarized economy running, began to face problems last October as the greenback became increasingly scarce.

Since then, crises have mounted as the fragile political system unwound with protesters taking to the streets calling for reform.

Most recently, government corruption and incompetence came into focus when ammonium nitrate stored at the Port of Beirut caused an unprecedented explosion on August 4, causing damage to large sections of the city, and pushing the country further into economic hardship. While previous governments knew of the chemical’s presence for years, they had failed to move it elsewhere.

Former Prime Minister Hassan Diab stepped down in the wake of the blasts, and now, with French intervention, new Prime Minister-designate Mustapha Adib was given two weeks to form a government. However, that deadline has since passed and rumors now swirl that that Adib may step aside.

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Meanwhile, the country’s economy continues to sink and the current government, in its caretaker capacity, has little ability to pass legislation or make reforms necessary that could attract foreign aid or boost the country’s credit rating.

Moody’s noted that reforms must include making public finances and the banking system solvent again via comprehensive debt restructuring, passing legislation to formalize capital controls, the elimination of the current multiple exchange rate system, and comprehensive audits of state-owned enterprises and the central bank.

While a capital controls law has been drafted, it was shelved by lawmakers. The central bank has intervened to try to stabilize the exchange rate by setting various rates, but the multiple-tiered exchange system is still in place. In July, the government hired Alvarez & Marsal to audit the central bank.

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