Moody's downgraded on December 16 Lebanon's government bond ratings to B2 from B1 and maintained the negative outlook. Lebanon’s creditworthiness is undermined by worsening government debt metrics and the sharp spillover effects from the Syrian crisis on government finances, economic growth and political stability, Moody’s underscored.

Lebanon's local-currency bond and deposit ceilings were also lowered to Ba2 from Ba1. The foreign currency deposit ceiling was downgraded to B2 from B1 while the short term foreign currency deposit ceiling remains at NP.

Moody's attributed the downgrade decision to the rise in Lebanon’s debt burden. In 2015, Lebanon’s government debt will reach nearly 140% of GDP, the third highest among all rated sovereigns, according to Moody’s. The ratings agency said that Lebanon’s government debt has risen every year since 2011, when it reached 123% of GDP. Other debt metrics, such as annual gross financing needs, interest payments as a share of government revenue and debt to revenue, imply an even greater burden, Moody’s warned. The government debt will reach 632% of government revenues next year, the second highest among all rated sovereigns, Moody’s forecasts.

Lebanon’s current debt trends will continue to deteriorate over the next two years. “A combination of lower growth and ongoing political paralysis, exacerbated by the spillover effects of the Syrian crisis, led to a large increase in the fiscal deficit, in turn raising the debt burden,” Moody’s noted.

 Lebanon's real GDP growth averaged 9.1% from 2008 to 2010 but will barely average 2.1% in the five years to 2015, Moody’s added. The fiscal deficit has been rising since 2011 and will likely average around 10% of GDP in 2014 and 2015.

Moody’s reckoned that Lebanon has managed with a very high debt burden for many years, having reached 175% of GDP in 2006. Domestic political turmoil, however, poses a challenge to fiscal consolidation, according to Moody’s.

The negative outlook reflects Moody’s expectations that economic growth has fell sharply and there is little sign of a return to potential in the near term.  Slower economic conditions will also inflict further fiscal challenges, “which are likely to impede a reversal of worsening debt metrics,” Moody’s said.