Lebanon at risk of default if government fails to act

Lebanon is currently the third most indebted country in the world, after Japan and Greece, with debt servicing eating up around half of the state's revenues.
by Georgi Azar

27 June 2019 | 14:38

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 27 June 2019 | 14:38

A file photo of Lebanon's Grand Serail located in downtown Beirut (AP)

BEIRUT: Moody's maintained Lebanon's stable outlook of its Caa1 credit profile, for the time being, reflecting the many challenges facing the state including its very large public debt burden. If unaddressed, slowing capital inflows and weaker deposit growth increase the risk of possible "debt rescheduling or another liability management exercise that may constitute a default," the report noted. 

Commenting on the latest assessment, Finance Minister Ali Hassan Khalil said that "everything is under control," despite Lebanon's Parliament failing to make good on its promise and ratify the 2019 draft budget, almost two months after it was first endorsed by the Cabinet. 

A credit rating analyzes the possibility of a financial obligation being honored as promised, mirroring both the likelihood of default and any financial loss suffered in the event of a default.

The agency was quick to note that Lebanon's public debt, which was equal to at 138.8 percent of GDP in 2018, is one of the largest in the world while its interest to revenue ratio of 46.9 percent surpasses all sovereigns currently being rated. 

The draft budget, which includes a number of fiscal consolidation measures, is seen as Lebanon's lifeline to secure the almost $11 billion soft loan package agreed upon in Paris last year. Although the government captured the capital investment program to boost below-trend growth last April, it has yet to see the light of day as fiscal reforms have yet to be implemented. 

Earlier this year, Moody's first downgraded Lebanon's credit rating to Caa1, revealing a higher risk that the government may implement a debt rescheduling plan "that may constitute a default." This came a month after it had affirmed the country's B3 credit ratings. 

A number of reports have recently rung the alarm over Lebanon's dire financial state, with the European Commission warning that Lebanon risks heading towards a combined currency, sovereign, and banking crisis if it fails to enact concrete reforms. 

Lebanon is currently the third most indebted country in the world, after Japan and Greece, with debt servicing eating up around half of the state's revenues. 

In an attempt to cut its servicing cost, the Finance Ministry is seeking to issue securities worth $7.3 billion at a rate of one percent but has drawn pushback from commercial banks and local lenders alike.

Its budget deficit hovers at around 11 percent of GDP, prompting officials to slash it to near the 7 percent mark in the upcoming budget. With the central bank and commercial banks holding around 50 percent of the government's public debt combined, concerns have arisen over how long this trend can continue.

Lebanon has usually stayed afloat as a result of remittances from expats residing in the Gulf and Africa, which commercial banks then use to fund the government's debt. 

These, however, have taken a hit as oil prices in the region have slipped while geopolitical tensions have flared up. 

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