Lebanon hit by double rating downgrades as likely debt restructuring looms

S&P Global and Moody's Investors Service downgraded Lebanon deeper into junk territory, as the united states facing its worst monetary crisis in three decades, is on the edge of default and can most likely need to restructure its debt.

S&P lowered Lebanon's ratings to CC/C from CCC/C with a negative outlook.

"We are lowering our ratings because we believe restructuring or non-payment of Lebanon's government debt is virtually certain, regardless of the specific time to default," said Zahabia Gupta, S&P's primary credit analyst. "The government's funding model has collapsed following substantial deposit outflows from the bank operating system."

Lebanon could escape the 2008 global credit crisis relatively unscathed due to a high interest regime, which lured more than $1 billion (Dh3.67bn) a month in capital flows that financed its fiscal and current account deficits. The country's economy, which includes long suffered because of domestic politics, rapidly deteriorated following the outbreak of war in neighbouring Syria in 2011, which slowed the flow of funds and resulted in negative deposit growth at Lebanese lenders.

"The deposit dollarisation rate rose to 76 per cent at year-end 2019, from 71 % a year earlier, as residents sought to convert local currency to dollars amid evaporating confidence in the economic climate and the currency peg," S&P Global said. "The operate on deposits might have been more serious, if not for the restrictions on FX [foreign currency] withdrawals and transfers imposed by banks."

Moody's cut Lebanon's government issuer rating on Friday to Ca from Caa2. The rating agency also downgraded Lebanon's senior unsecured medium term note programme rating to (P)Ca from (P)Caa2. The country's long-term forex bond and deposit ceilings have both been lowered to Ca from Caa1 and Caa3, respectively.

The downgrade further into non-investment grade or junk territory reflects expectations that “domestic and external private creditors will probably incur substantial losses in what seems to be an all but inevitable near-term government debt restructuring”, Moody’s said. Rapidly deteriorating economic and financial conditions are increasingly “threatening the sustainability of the government's debt and [the country’s] currency peg”.

Moody's estimates the restructuring may likely entail losses for private domestic and external creditors in the 35 % to 65 % range. The agency's stable outlook classification for Lebanon reflects its assumption so far a debt restructuring you can do in coordination with creditors and beneath the umbrella of an monetary adjustment programme agreed with the International Monetary Fund, which sent a team to the united states over the weekend.

Fitch Ratings on Tuesday also said Lebanon's financial position points to a likely restructuring of its debt and the country’s financial sector.

The Lebanese economy has entered its third consecutive year of negative growth and its own public debt has increased to unsustainable levels. In the time from 2011-19, real GDP growth averaged only 0.5 %, the current account deficit exceeded 21 % of GDP and the fiscal deficit reached 9 per cent of the economy's output.

Public debt increased from 131 % of GDP in 2012 to 164 % of GDP at end-2019, according to the latest estimates from the Institute of International Finance. The country's public debt increased 7.6 % to $91.64b year-on-year as of the finish of December 2019.

The Lebanese pound has recently lost more than a third of its value against the US dollar in the black market amid mass protests against the government that commenced in October this past year as lenders implements capital flows and restricted the withdrawal of dollars. Last month, the IIF estimated Lebanon will demand at least an $8.5bn bailout package from the IMF to break its economical impasse, make it meet financing needs and restore growth. However, the political elite of the country is against an IMF bailout package that may require a devaluation of the currency and the implementation of taxes along with a string of other measures.

An IMF team is in Lebanon until February 23 for technical consultations to measure the policy response to the ongoing crisis, although the united states has so far not formally asked for a bailout from the IMF. Lebanon reached out to the fund earlier this month seeking technical advice as it faces a looming deadline to repay $1.2bn in eurobonds that hit maturity on March 9. Another $700 million arrives in April and an additional $600m in June.

If the existing crisis continues for another six months, the government might not exactly have a choice but to require a bailout, Garbis Iradian, chief economist for the IIF said in Riyadh on Friday.

Regardless of the informal capital controls implemented by commercial banks starting November, bank deposits by the end of this past year had declined by $15.7bn - almost 30 % of GDP - from a year earlier, which $11.4bn within the last quarter alone.

The country’s forex reserves have fallen below $30bn and Moody’s estimates only about $5bn to $10bn of the full total are usable reserves to meet future forex debt servicing requirements at $4.7bn in 2020, accompanied by over $4bn in 2021 including the country’s eurobond maturities.

"Considering that Lebanon's debt is mostly held by residents, a potential debt restructuring will have ripple effects across the domestic economic climate, including depositors, and the economy," S&P said. "We expect that social unrest, a contracting economy, and intensifying liquidity pressures in the private sector will make it politically difficult to repay creditors in 2020 ... deep sectarian divisions in the political system and high regional security risks will continue steadily to hamper policymaking, in our view."