A report by Moody’s Investors Service that downgraded the country’s long-term investment ratings reflects the urgent need for quickly forming a new government, implementing reforms and reducing budget deficit, Lebanon’s finance minister and experts said Tuesday.
The statement by Ali Hassan Khalil, in which he assured that Lebanon’s financial and monetary conditions are stable and Beirut is capable to paying back its debt, came in a tweet after Moody’s downgraded Lebanon’s issuer ratings to Caa1 from B3 on Monday. The outlook was changed to stable from negative.
Lebanon’s economy has been under pressure for years from the war in neighboring Syria, a debt of $85 billion equal to 150 percent of its GDP, high unemployment and little growth. Prime Minister-designate Saad Hariri has not been able to form a Cabinet since May’s parliamentary elections because of political disagreements, and concerns of a full-blown crisis are growing.
There are concerns that the political crisis will scuttle pledges worth $11 billion by international donors made during the CEDRE conference in Paris in April last year and lead to economic disaster. A drop in oil prices has also affected transfers by tens of thousands of Lebanese working in oil-rich gulf states to their home country.
More recently, Khalil was quoted by a local newspaper as saying that the country may restructure its debt, leading to a sell-off in Lebanese bonds. He later clarified that Lebanon is committed to paying back all maturing debt.
Moody’s said its decision reflects the heightened risk that the government’s response to increased liquidity and financial stability risks will include “a debt rescheduling or other liability management exercise that may constitute a default under Moody’s definition.”
Moody’s report came a month after the agency also downgraded Lebanon’s rating saying that the then “B3 rating reflects Moody’s assumption that a government will be formed in the near term and will implement some fiscal consolidation.”
Monday’s report came hours after the wealthy nation of Qatar announced it will invest $500 million in Lebanese government bonds to support the Mediterranean country’s struggling economy. The Qatari announcement was a small boost to Lebanon’s standing and calmed nerves in the markets. The Moody’s report appeared to have been researched before the Qatari announcement and made no mention of it.
“This was expected because everyone knows that the political conditions are tense. There are delays in government formation and at the same time the deficit is deteriorating and economic growth is weak,” said economist Ghazi Wazni.
He added that at the same time there are concerns over a drop in the flow of money into Lebanon and an increase of deficit in balance of payment.
Lebanon’s budget deficit stands at about 10 percent of its $55 billion economy.
Lebanon’s Central Bank governor Riad Salameh has been repeatedly reassuring Lebanese that the crisis can be contained, adding that reserves at the bank stand at more than $40 billion and can protect the local currency that has been pegged to the dollar for two decades.
Earlier this month, Lebanon’s Central Bank announced that all money sent through transfer services must now be collected in Lebanese pounds. Some saw the move as a step to boost reserves.
Wazni, the economist, said Moody’s did not take into consideration the Qatar investment that he says was a “message of confidence that Lebanon will pay back its debt.”
Wazni added that Lebanon never defaulted in the past even during critical times such as the 2005 assassination of former Lebanese Prime Minister Rafik Hariri and the 2006 war between Israel and Lebanon’s Hezbollah that lasted for more than a month.