Fitch Ratings-Paris: Fitch Ratings has affirmed Lebanon's Long-term foreign and local currency IDRs at 'B' with a Negative Outlook. The issue ratings on Lebanon's senior unsecured foreign- and local-currency bonds are also affirmed at 'B'. The Country Ceiling is affirmed at 'B' and the Short-term Foreign-Currency IDR at 'B'.
Key Rating Drivers
Lebanon's 'B' IDRs reflect political risks exacerbated by the ongoing Syrian war, very weak public finances and anaemic economic performance. The ratings also capture the country's strong external liquidity, resilient banking system and other structural strengths such as high GDP per capita and human development indicators.
Political risks remain high and are a key driver of the Negative Outlook. After a period of improved security since end-2014, bomb attacks in November, including in the capital Beirut, highlighted Lebanon's ongoing vulnerability to spillover from the war in Syria. Lebanon has proved unable to choose a President since May 2014 and the government and parliament have been largely paralysed during this period. Popular protests have emerged in response to worsening public services. While a rare legislative session in November indicated that a modicum of political cooperation is possible and talks are intensifying to choose a President, there is no clear sign that Lebanon can break out of its political deadlock while the Syrian conflict persists.
The war in neighbouring Syria has severely affected Lebanon's economic performance and outlook. Despite the fall in oil prices and the central bank's ongoing stimulus programme, Fitch expects minimal real GDP growth of 1.2% in 2015 and no major improvement in growth prospects before the end of the Syrian conflict. Although the large Syrian refugee population (estimated at around 25% of Lebanon's population) may contribute to sustaining domestic consumption, it does not balance the weak performance of traditional growth engines (including tourism and real estate).
Public finances are very weak. General government debt is the fourth highest among Fitch-rated sovereigns at an estimated 131% of GDP in 2015. High debt levels have contributed to an exceptionally high interest bill, at nearly 40% of government revenues. Despite the positive effect of lower oil prices on spending, large structural budget deficits will persist due to the lack of fiscal reforms and high current spending. This will contribute to further increases in the public debt stock in 2016-17.
Financing of these needs has proven resilient, with the banking system attracting sufficient deposits to fund government borrowing while ensuring moderate growth of credit to the private sector. However, total deposit growth has been slowing in 2015 in percentage (5% yoy in September 2015) and absolute terms. Deposit growth is currently not sufficient to meet the annual financing needs of the government and private sector, estimated at around USD9bn.
Lebanon has maintained strong external liquidity despite persistently large current account deficits (estimated at 17% of GDP in 2015). Its stock of foreign reserves (including gold) was USD42bn at end-September 2015, supported by deposit flows from the Lebanese diaspora. Excluding gold, foreign reserves accounted for 61% of LBP deposits. This underpins confidence in the currency peg, as illustrated by the stability in the dollarisation rate of deposits (64.6% at end-September 2015).
GDP per capita and broader human development indicators are well above 'B' category peers and more in line with the 'BBB' median, although governance indicators are slightly weaker than peers. The government also has an unblemished track record of public debt repayment.
Rating Sensitivities
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade:
-A major destabilisation of Lebanon induced by spill-overs from the Syrian conflict, terrorist attacks or a severe intensification of sectarian tensions.
-A cessation of the domestic banking sector's ability to continue to attract sufficient deposits to keep funding the government.
-A deterioration in public debt dynamics beyond our base case assumptions.
Given the Negative Outlook, Fitch's analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
-Evidence of further resilience in Lebanon's financing model notwithstanding ongoing domestic and regional political risk.
-Greater confidence in the sustainability of the domestic political environment.
-An improvement in public debt dynamics, whether through fiscal tightening or improved economic performance.
-A sustained de-escalation of the war in Syria.
Key Assumptions
-Fitch assumes that sporadic security incidents will prevail as long as conflict in Syria continues, but that Lebanon will not itself descend into full-scale civil conflict.
-Fitch assumes that international oil prices will on average remain lower in 2016 and 2017 than in 2010-14, therefore limiting budget transfers to the state electricity company EDL.
Contact:
Primary Analyst
Amelie Roux
Director
+33144299282
Fitch France S.A.S.
60 rue de Monceau
75008 Paris - France
Secondary Analyst
Toby Iles
Director
+852 22639832
Committee Chairperson
Douglas Renwick
Senior Director
+44 203 530 1045
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com
© Press Release 2015
