Standard & Poor’s Ratings Services has assigned its ‘B-‘ foreign currency senior unsecured debt rating to the Republic of Lebanon’s upcoming US dollar-denominated notes, issued in two tranches due 2008 and 2013, respectively, under the sovereign’s global MTN programme.
The issues are intended to secure the treasury’s foreign financing needs and to lengthen the maturity of Lebanon’s outstanding debt in the international capital markets.
At the same time, the ‘B-‘ long-term and ‘C’ short-term foreign and local currency sovereign credit ratings on the republic were affirmed. The outlook is stable.
“The ratings on Lebanon reflect the government’s weak fiscal position and the vulnerability of the country’s economy to adverse domestic and external shocks,” says Standard & Poor’s credit analyst Farouk Soussa. “Despite a better-than-expected budget deficit, a reduction in the central government debt-to-GDP ratio, and stronger-than-expected economic growth, fiscal flexibility is constrained by interest payments that equate to 52% of revenues.”
“At a projected 174% of GDP at year-end 2005, Lebanon’s central government debt-to-GDP ratio is among the highest of all rated sovereigns,” adds Soussa.
Since the assassination of former Prime Minister Hariri in February, Lebanon has witnessed significant political change, notably the withdrawal of Syrian troops. Political uncertainty is not likely to ease in the near term with the conclusion of parliamentary elections, which have become a surprisingly close race between the anti- and pro-Syrian alliances.
Nevertheless, capital flows from Arab countries continue to benefit Lebanon, enabling the central bank to strengthen external liquidity and to ease pressure on the exchange-rate peg of the Lebanese pound to the US dollar. Against this backdrop, official gross foreign exchange reserves amounted to an estimated US$13.8bn at year-end 2004, providing almost 11 months of import coverage.
A favorable external environment has boosted economic activity, and the real economy expanded by an estimated 5.0% in 2004. Growth in economic activity is centered on the confidence-sensitive tourism and financial services sectors, however, and is expected to have slowed since the events of February 2005.
“We expect the country to weather the continued hiatus in key structural reforms and near-term political uncertainty,” adds Soussa. “Nevertheless, over the medium term, a government committed to fiscal restraint and structural reforms will be crucial to ensure market confidence and maintain recent improvements in Lebanon’s debt dynamics. Should the political impasse continue to persist for a prolonged period, the ensuing downturn in confidence could precipitate a financial crisis, pressuring the ratings.”