Fitch affirms Lebanon’s B ratings, outlook remains negative

By bne IntelliNews June 13, 2014

Fitch said on June 13 it has affirmed Lebanon's Long-term foreign and local currency Issuer Default Ratings (IDRs) at B. The issue ratings on Lebanon's senior unsecured foreign and local currency bonds were also affirmed at B. The outlook on the Long-term IDRs is negative.

Fitch underscored that Lebanon's ratings balance a large and growing public debt burden and government financing needs, amid high political risk, with high GDP per capita and human development. A large and well-managed banking system and a credible exchange rate policy also support Lebanon’s ratings, Fitch said.

Political risk in Lebanon is very high, according to Fitch. The Syrian conflict has reignited the deep political and sectarian divisions over the past two years. It has also triggered a wave of terrorist attacks in Lebanon. The sustained arrival of Syrian refugees to Lebanon (more than 1mn at end-2013, or around 25% of the population) also tests the cohesion of the population, Fitch underscored.

Political uncertainty remains high although tensions have relatively eased since February 2014, when a national unity government was formed. The Lebanese parliament was not able to agree on a new president before the May 25 deadline though. The government's cohesion, however, will be tested in the run-up to the legislative elections in November 2014. Fitch does not expect the political and security environment to materially improve until the end of the Syrian war.

The Syrian conflict is likewise weighing on economic activity, with real GDP estimated to have grown only 1.5% in 2013. GDP growth will pick up modestly to 1.8% in 2014, Fitch forecasts.

Public finances also remain a key rating weakness. Lebanon is the third most heavily indebted sovereign rated by Fitch (after Japan and Greece). Public debt was 141.1% of GDP at end-2013, and the government allocated 40.2% of its revenues to debt interest payments, according to Fitch.

The government posted a primary deficit in 2013 for the second consecutive year, due to falling revenues, pushing the budget deficit to 9.3% of GDP and reversing public debt trends.

Fitch expects budget deficit and public debt to worsen further in 2014 as the impact of the refugees on public infrastructure will likely be felt. The potential upward adjustment of public wages, which is yet to be approved by the parliament, also weighs on the budget.

Lebanon’s sovereign creditworthiness is supported by the large, liquid and well-regulated banking sector, Fitch underscored. The banking sector channels large deposits from the diaspora into financing the government.

Total deposit growth has slowed slightly (7.9% y/y at end-April 2014 against 9.0% in 2013) but Lebanese banks remain willing to finance the government's large financing needs. At end-April 2014, nearly 58.2% of public debt was held by the banking sector, up from 54.0% at end-2012, Fitch estimated.

Lebanon’s GDP per capita and broader human development indicators are in line with BBB medians and are well above B category peers, Fitch noted. The government has also a clean track record of public debt repayment and continues to have access to bond markets.

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