Standard & Poor's revised its outlook on Lebanon to negative from stable while affirming its B-/B long- and short-term foreign and local currency sovereign credit ratings. S&P assessed that domestic and regional political instability could further weaken Lebanon’s economic growth over 2015-2018. The banking system's deposit inflows, however, continue to support the government's debt servicing requirement, backed up by the central bank’s ample foreign exchange reserves, the ratings agency underscored.

The negative outlook on Lebanon reflects S&P’s readiness to lower the ratings if over the next 12 months economic growth is slower than expected, or the current political upheaval worsens, “resulting in domestic conflict or acute risks to institutional stability.”

S&P also noted that the outlook revision reflects its view that political uncertainty in Lebanon and regional tensions will continue to dampen economic growth in the medium term. The proper functioning of the Lebanese government is also impaired, S&P warned. The parliament, whose term was set to end in June 2013, has voted for a second time to prolong its term of office to 2017. The parliament has also failed to elect a president since May 2014, and has not passed a budget since 2005.

Lebanon’s private consumption and investment are set to be constrained, with tourism, financial services, trade, and foreign direct investment subdued, S&P noted. Higher disposable income, amid lower oil prices, will, however, continue to support lukewarm real GDP growth of about 3% in 2015-2018, the ratings agency forecasts. The c-bank’s $1bn stimulus package for 2015, aimed at supporting private-sector growth and small and midsize enterprises will also help lift GDP growth.

As to fiscal outlook, S&P expects Lebanon’s general government deficit to widen in 2015 to close to 10% of GDP, despite expected savings of about 1.5%-2% of GDP as low oil prices reduce transfers to the electricity company Electricite du Liban (EdL). Transfers to Edl had peaked to 4% of GDP in recent years.

Public finances and fiscal flexibility will likewise remain constrained by structural expenditure pressures, including transfers to EdL, as well as by high interest payments, which account for about 40% of general government revenue, according to S&P.

Lebanon's financial system remains strong, supported by the c-bank’s policy of maintaining high FX reserves that cover about 80% of the local currency money supply, as well as a favourable interest rate differential versus the US dollar, S&P said.

The central bank's foreign assets reached $39bn at the end of August 2015 and total foreign assets, including gold, totalled $49bn.

S&P forecasts that the current account (CA) deficit will hover around 25% of GDP in 2015 and narrow gradually over the medium term, mainly on lower imports amid falling oil costs. The strengthening US dollar will also reduce the cost of imports from the Eurozone, which accounts for 34% of Lebanon's imports.