Lebanon on debt tightrope as S&P sets clock ticking to downgrade

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Fitch Ratings downgraded Lebanon’s credit ranking last month to CCC, one level lower than Moody’s.

Sunday 08, September 2019

Lebanon bought itself some time with the market and won a reprieve from a downgrade deeper into junk by S&P Global Ratings, reported Bloomberg.

While some investors are turning more confident that Lebanon will maintain its unblemished record of paying creditors, S&P has highlighted vulnerabilities that could still put one of the world’s most indebted countries to a test.

S&P global gave Lebanon up to a year to stabilise its finances, however, the rating agency said that a continued decline in bank deposits—a key source of the government’s funding—could trigger a downgrade to the CCC category in the next six months.

Zahabia Gupta, S&P analysts, said, “While Lebanon’s foreign currency reserves remain sufficient for immediate financing obligations, they may not be adequate to cover significant outflows of non-resident and resident deposits.”

Lebanese dollar bonds, the worst performers across emerging markets this year after crisis-hit Argentina and Zambia, rallied in the first week of September, fuelled by a renewed government commitment to urgently repair public finances and an addition of $1.4 billion to central bank reserves.

S&P’s countdown will expire days before the first of four Lebanese eurobond issues comes due in March, the next pressure point for a government whose options to raise money are limited.

Although Governor Riad Salameh said the central bank had already set aside $1.5 billion to cover in cash on behalf of the government the next maturing eurobond in November, Lebanon also has to repay a total of about $4 billion in 2020.

Under S&P’s definition of usable reserves—which excludes assets not readily available for balance-of-payments purposes –Lebanon only has enough to cover about 42 per cent of short-term debt, far short of the 100 per cent threshold that the rating firm said is the generally accepted minimum adequacy requirement.

TAGS : CCC, junk status, downgraded, S&P Global Ratings, Lebanon dollar bonds, Governor Riad Salameh

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