Lebanon's credit rating takes another hit

BEIRUT: Lebanon's economic outlook took another hit Wednesday after another global rating agency revised its standing from stable to negative amid the government's increasing twin deficit. 

Fitch Ratings, one of the big three credit rating agencies alongside Moody's and Standard & Poor's, also reaffirmed Lebanon's B- appraisal, a sign of the "government deficit and debt dynamics."

It also laid the blame on the rising pressures hindering Lebanon's financing model, including a "decline in deposit growth" while relying on unorthodox measures on behalf of the central bank. 

Lebanon's budget deficit was already rising to alarming levels over the past 5 years, averaging 8.2 percent from 2012 to 2017. Now, the agency predicts it skyrocket to 10.6 percent as a result of a "hike in public sector wages, higher electricity subsidies and interest payments and a pick-up in capital spending."

It also expects the debt to GDP ratio to continue this upward trend, reaching 169 percent of GDP by 2023.

The root cause of this ever-increasing ailment is the salary scale adjustment passed in September 2017, it said, with the cost of the adjustment outweighing "revenue-raising measures introduced in 2018."

Government interest payments grew by around 8% yoy in January-September, held in check by the fact that Banque du Liban (BdL, the central bank) agreed in May to buy the equivalent of USD5.5 billion in Lebanese pound T-bonds at a rate of just percent, it said. 

Given that interest rates are expected to increase in 2019, expectations are that government interets payments will equate to 49 percent of government revenue. 

It also called for the new government to implement fiscal consolidation and reforms that would unlock the CEDRE public investment package. 

Lebanese officials managed to secure over $11 billion in soft loans and grants in Paris last April to help kickstart its ailing economy. These funds, however, have yet to see the light of day as their release is conditional on the government carrying out sectoral reforms to put a lid on corruption. Mainly, Lebanon has to reduce its budget deficit by 5 percent of GDP over five years by reforming subsidies to EDL and improving tax compliance. 

The Central Bank has continuously undertaken drastic operations to weather fiscal challenges, with the latest being a swap of Treasury bills held by BDL with newly MoF-issued Eurobonds in the amount of $5.5 billion, around $3 billion of which were subsequently sold (along with enticements) to banks.

This was done to raise BDL's foreign exchange reserves, which reached around $44 billion by the end of June.