Bloomberg/Sima Diab

Economy

Lebanon may cross distress threshold with downgrade, says Goldman Sachs

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The US-based bank also lowered its forecast for Lebanon’s economic growth this year to one per cent from 2.2 per cent.

Tuesday 20, August 2019

Lebanon’s sovereign ranking will probably be cut deeper into junk by S&P Global Ratings within days, putting its bonds into a category considered vulnerable to non-payment as the country struggles to claw back enough foreign currency, according to Bloomberg.

The world’s most indebted nation is on negative outlook at S&P, which is due to publish a review this week and currently rates Lebanon B-, six steps below investment grade and one notch higher than Moody’s.

Farouk Soussa, Goldman Analysts, said, “The steady deterioration in Lebanon’s foreign exchange liquidity position indicates a likely downgrade to CCC.”

Issuers in the CCC category are deemed dependent on favourable conditions to make good on their debt.

To keep its lenders stable and defend the dollar peg, Lebanon relies on bank deposits, mainly from the millions of Lebanese living abroad, with the central bank using what it describes as ‘financial engineering’ to keep up an inflow of hard currency.

According to Goldman Sachs, while the latest such effort in late June may have helped to shore up foreign assets in reserves, deposit growth turned negative in May for the first time in more than a decade.

Additionally, recent political tensions threaten to derail the economic agenda and further depress appetite for Lebanese risk, added Goldman.

Investor worry about Lebanon’s prospects has played out in the market. Its credit risk, measured by credit-default swaps, has jumped 327 basis points since the start of the year and surged past 1,000 points for the first time ever in August.

The average extra yield investors demand to hold its debt over US Treasuries also surpassed 1,000 basis points last week, the most in over a decade.

Similarly, the International Monetary Fund projected the Lebanese public debt burden to rise further to near 180 per cent of economic output by 2023.

When S&P cut Lebanon’s outlook to negative in March, it said the country’s rating could be lowered within the next year if political stasis causes fiscal deficits to rise while banking system deposit inflows—the government’s key funding source—slow further.

TAGS : junk territory, Goldman Sachs, S&P Global Ratings, IMF

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