CI has also affirmed the ‘B’ foreign currency issue ratings and ‘Stable’ Outlook assigned to Lebanon’s $3 billion global notes issued in three tranches ($1.25 billion due in 2027; $1 billion due in 2032; and $0.75 billion due in 2037) earlier this year. The ratings’ affirmation reflects the relative stabilisation of domestic political risk factors following the end of a two-year political stalemate and the endorsement of an electoral law that is expected to pave the way for parliamentary elections in May 2018. The policymaking environment has also improved, with parliament recently passing the annual draft budget law for the first time in a decade. The ratings affirmation also takes into account Lebanon’s stable buffer of foreign exchange reserves, which provide adequate coverage of the country’s external debt.
Lebanon’s ratings are fundamentally supported by: adequate international liquidity; a remarkably reliable (though undiversified) investor base and strong donor support; and an unblemished record of meeting debt obligations, even during difficult times. The ratings are constrained by: heavy indebtedness and large financing needs; a weak budget structure and limited fiscal flexibility; socio-economic challenges; the slow pace of economic and fiscal reforms; and local and regional political risks. Economic activity has picked up modestly in 2017 but remains relatively weak, with real GDP growth expected to reach around 2.1 per cent, driven by domestic consumption and a rebound in tourism. The short to medium-term outlook has improved slightly, supported by the prospect of a more stable domestic political climate and efforts to restore relations with GCC member states in order to attract tourism, inward investment and boost expatriate employment.
As a result, CI expects real GDP growth to increase to 2.4 per cent in 2018-2019. On the downside, the conflict in Syria continues to weigh heavily on the performance and stability of the Lebanese economy. The influx of refugees, who now comprise around one-third of the population, is placing significant pressure on the country’s limited resources and creating significant social challenges. The public finances remain weak, with the central government budget deficit expected to decrease to 7.9 per cent of GDP in 2017 from 9.7 per cent in 2016 due to a decline in the treasury transfers to municipalities. The primary budget surplus is expected to improve to 1.8 per cent of GDP in 2017, compared to less than 0.1 per cent in 2016, as the government has managed to secure its financing needs at more favourable rates. Public debt remains high and is expected at around 148 per cent of GDP in 2017. Refinancing risk remains significant, with the government’s gross financing requirement likely to exceed 35 per cent of GDP in 2017.
The government continues to benefit from a supportive investor base, with domestic banks providing the bulk of financing in local and foreign currency on generally favourable terms. Nevertheless, the risks arising from the heavy concentration of government financing on a single source remain a major vulnerability for the Lebanese economy and one of the principal constraints on the sovereign’s ratings. In the absence of shocks that could adversely affect the risk appetite of local banks or the confidence of depositors, gross financing needs would appear to be manageable in the short term given the overall soundness of the banking system and continued deposit growth. Should any funding gaps emerge in the near term, the government is likely to meet its needs by borrowing from Banque du Liban (BdL), the central bank, which held about 28 per cent of total debt in July 2017 (26 per cent in 2016). CI expects the external current account deficit to remain large at around 20 per cent of GDP in 2017-2019. However, the improving domestic political climate and slightly higher oil prices are likely to boost remittance inflows and tourism from the Lebanese diaspora, especially in the GCC.
Non-resident deposits—which are a key source of funding—have continued to grow satisfactorily in 2017 and are likely to maintain the same upward trend in the short to medium term. Official international assets remain at adequate levels, having increased to USD46.1billion in August 2017 following the improvement in tourism revenue. The stable outlook balances the relatively weak fiscal and external positions against the adequate level of international reserves, improving political environment, and mildly better domestic economic climate. The global notes constitute senior unsecured obligations of the Republic of Lebanon and rank pari passu in priority of payment with other outstanding unsecured obligations. Accordingly, the ratings assigned by CI are in line with the government’s Long-Term Foreign Currency Issuer Rating.
