Standard & Poor’s Ratings Services has revised its outlook on the Republic of Lebanon to stable from positive. At the same time, Standard & Poor’s affirmed its ‘B-‘ long-term and ‘C’ short-term ratings on Lebanon.
“The outlook revision reflects our view that the draft budget for 2004 implies a postponement in fiscal consolidation and hence delays the envisaged reduction in the government’s debt burden,” says Standard & Poor’s credit analyst Ala’a Al-Yousuf.
The government’s net debt burden is projected to decline slightly by year-end 2003, to about 150% of GDP, compared with initial projections of 145%. The budget this year is likely to record a primary surplus of about 4.0% of GDP, compared with an official target of 4.8%, as a result of both expenditure overruns and revenue shortfalls.
The 2004 budget, when finally approved, is likely to target a primary surplus significantly lower than the initial ambitious target of 6-7% set in the medium-term fiscal program. The primary surplus next year is unlikely to be much higher than that expected this year. Moreover, much-delayed asset sales and securitization transactions are now unlikely to take place soon, thereby delaying debt reduction.
The economy, which is expected to grow at a relatively moderate rate of 3% in the near term, remains subject to negative shocks as a result of reliance on services, especially tourism and financial services. Interest rates remain high and could increase in the event of a loss of confidence in the government’s policies or a rise in global interest rates. In addition, the banking system remains vulnerable to a rise in the level of nonperforming loans.
The authorities are committed to implementing a broad-based medium-term adjustment program, but the pace of implementation has been slowed down by domestic political difficulties. Political pressures have already surfaced ahead of the presidential and parliamentary elections in early 2005, and are likely to intensify. Moreover, Lebanon remains vulnerable to regional tensions, which could affect its fragile domestic cohesion.
“Implementation of the government programme should accelerate after the elections and help to ease future debt-service obligations,” says Al-Yousuf. “A rating improvement would depend on a faster pace of implementation of fiscal reforms, privatisation, and securitisation operations, as well as strengthened domestic and regional political stability. Conversely, deterioration on these fronts within the next year could put downward pressure on the ratings.”