Moody’s changes Lebanon outlook to stable from nil

Lebanon’s steep economic distress has led US-based Moody’s Investors Service to uphold its rating to “C” in light of its bondholders’ losses likely to exceed 65 percent.

According to Moody’s, the rating reflects the losses incurred due to Lebanon’s ongoing default since March 16, 2020.

The country has steeped in an economic, financial and social crisis, which its weakened institutions appear unable to address.

The agency also changed the country’s outlook to stable from no outlook, mirroring its expectation that the “C” rating will remain for the foreseeable future, given the vast likelihood of significant losses for private creditors.

The agency also expects a volatile economic environment to persist due to recurrent political deadlock and weak institutions.

The economic distress was fueled by the collapse of the national currency in the parallel market and a surge in inflation, reaching a staggering 215.4 percent by the end of October 2023 compared to the year-ago period.

The absence of pivotal steps toward plausible economic and fiscal policy reforms raises doubts about the feasibility of official external funding support accompanying a government debt restructuring in the near term.

Lebanon is facing recurrent political deadlock and grapples with weak institutions, with its vulnerability to a deepening Israel-Hamas conflict reversing recent gains in the tourism industry and further undermining economic activity.

The agency also found that the local currency ceiling remains at “Ca,” indicating its obligation is near default, even as the foreign currency ceiling holds steady at the same level.

Considering environmental, social and governance factors, Lebanon’s ESG Credit Impact Score indicated a considerably lower rating than it would have otherwise received.

Governance constraints, declining wealth levels and an overburdened government balance sheet contribute to low resilience to environmental and social risks.

The country faces environmental challenges, including chronic issues in solid waste management and unsafe drinking water for over 25 percent of the population, with water shortages anticipated to become more widespread without effective policies.

Social risks are underscored by substandard access to essential services, unreliable electricity access, significant outward migration of skilled labor, and an influx of Syrian refugees comprising over 30 percent of the population.

The rating report also provided a snapshot of Lebanon’s challenging economic landscape, with a negative real gross domestic product 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 added that the country’s credit profile remains significantly exposed to environmental risks, social challenges and governance issues, reflecting a “caa3” economic resiliency rating.

Factors that could lead to an upgrade or downgrade of the ratings are limited, given the “C” rating is the lowest on Moody’s scale.

Any potential upgrade post-restructuring would be constrained, requiring a sustained and faster-than-expected pace of fiscal consolidation and structural reforms over several years.

Additionally, the evolution of critical drivers such as economic growth, interest rates, privatization revenue, and the ability to generate and sustain large primary surpluses would play a crucial role in determining the feasibility of a substantial rating upgrade.