The Lebanese government has vowed to make urgent progress on reforms to help overcome a worsening economic crisis that prompted Fitch Ratings to cut the country’s credit rating on Friday.
Speaking after Fitch downgraded the sovereign to CCC on debt-servicing concerns, President Michel Aoun said the current crisis had been brewing for many years, but that “everyone” was now working to tackle its causes.
S&P Global, which on Friday affirmed Lebanon’s credit rating at B-/B with a negative outlook, said it considered Lebanon’s foreign exchange reserves sufficient to service government debt in the “near term”.
However, Finance Minister Ali Hassan Khalil said both ratings reports showed the urgency for reform, which the government has long put off. “There should be no slacking for a single moment,” he told Reuters on Friday.
“We will deal responsibly with the reports,” Khalil said. “We are confident we will be able to get out of the crisis.”
Lebanon is grappling with one of the world’s heaviest public debt burdens at 150% of GDP and years of low economic growth. Government finances, riddled with corruption and waste, are strained by a bloated public sector, debt-servicing costs and subsidising the state power producer.
Lebanese leaders have warned of a financial crisis without changes. The impetus to enact reforms has grown with the slowdown of deposits into its banking sector, a critical source of finance for the state.
The government is now trying to put public finances on a more sustainable path with a deficit cut in the 2019 budget and a plan to fix the state-run power sector, which bleeds funds while inflicting daily power cuts on Lebanese.
Fitch said its downgrade from B- reflected “intensifying pressure on Lebanon’s financing model and increasing risks to the government’s debt servicing capacity.”
Lebanon requires substantial capital inflows to fund its large twin budget and current account deficits, it added.
Friday’s report by S&P Global said it expected the country to make progress on reforms to improve investor confidence given the weakness of foreign currency inflows.
But it warned it could lower the sovereign’s rating in the coming six-12 months if bank deposits and central bank foreign exchange reserves continued to fall.
“Continued weakness in foreign currency inflows and the use of [the central bank’s foreign exchange] reserves to meet government debt-service could test the country’s ability to maintain the currency peg,” the report said.
The Lebanese pound is pegged to the dollar.
Moody’s downgraded Lebanon’s rating to Caa1 in January.
The head of parliament’s budget committee, Ibrahim Kanaan, called for the 2019 reforms and the timely adoption of a 2020 budget to be carried out in an atmosphere of “political stability”.
Years of intermittent government paralysis and political squabbling since the country’s civil war ended in 1990 have hindered infrastructure upgrades and the adoption of many of the reforms needed today. The country functioned without a government budget between 2005 and 2017.
Fitch said political instability and ineffective government continue to weigh on investor confidence in the country.
Markets had been pricing in the risk of a sovereign credit rating downgrade. Bond prices fell to new lows and five-year credit default swaps (CDS) — the cost of insuring against a Lebanese sovereign default — rose in recent days.
Friday’s downgrade will have no “material impact” on investor holdings of Lebanon’s bonds as the debt was already rated non-investment grade, said Jan Dehn, head of research at emerging markets investment manager Ashmore Group.
Economists have questioned whether the government’s efforts will be enough to meet its goals. The IMF said last month the deficit would likely be well above the government’s target of 7.6% of national output. In 2018, it was over 11%.
Nassib Ghobril, chief economist at Byblos Bank, said the situation should be a “wake-up call” for politicians to form a credible plan that would result in an investment grade rating.
“They have to restructure the public sector; they have to fight tax and customs evasion, not in words but in actions.”