Fitch revised Lebanon's outlook to negative from stable on heightened political risk but affirmed its 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 country ceiling was likewise affirmed at B and the short-term foreign currency IDR at B.

Fitch underscored Lebanon’s heightened political risk arguing that “the involvement of Hezbollah and Sunni groups in the neighbouring Syrian conflict has increased sectarian tensions domestically.” Violence in Lebanon, albeit still sporadic, has intensified in recent months, Fitch said.

The surging number of Syrian refugees is also boosting tensions and strains, especially on infrastructure and public institutions, according to Fitch. Given the lack of political consensus on the composition of a new government, political life in Lebanon has been paralysed since March 2013, and the planned presidential elections in 2014 also increase political uncertainty, Fitch noted.

Fitch likewise warned about Lebanon’s deteriorating public debt dynamics. Following several years of retreat, the public debt-to-GDP ratio is reportedly rising again. The ratio will increase to 138% of GDP at end-2013 from 134.2% the year before and will hit 140% by end-2015, Fitch forecasts. The agency underscored the role of domestic banks in deficit financing through the intermediation of their large deposit base. But the deposits growth has slowed since the start of the Syrian conflict and worsening security in Lebanon exposes the banking sector to a heightened risk of sudden deposit outflows, Fitch warned.

Another factor weighing on Lebanon’s outlook is weak growth prospect amid the spill-overs from the Syrian conflict, according to Fitch. Real GDP growth will reach 1.5% in 2013 and no major improvement is to be expected until the Syrian conflict is resolved, Fitch said.

Fitch assumes that security in Lebanon will worsen further in coming months, but violence will fall short of escalating into a full-scale civil conflict. Fitch also assumes that international oil prices will be lower in 2014 and 2015 than in 2012 and 2013. The trend will help limit the deterioration of the current account deficit and budget transfers to the state electricity company EDL, Fitch said.