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Fitch Affirms Lebanon at 'B-'; Outlook Stable
February 7, 2017 / 12:00 PM / 10 months ago

Fitch Affirms Lebanon at 'B-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, February 07 (Fitch) Fitch Ratings has affirmed Lebanon's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B-' with Stable Outlook. The issue ratings on Lebanon's senior unsecured foreign currency bonds are also affirmed at 'B-'. The Country Ceiling is affirmed at 'B-' and the Short-Term Foreign and Local Currency IDRs at 'B'. KEY RATING DRIVERS The ratings for Lebanon reflect high political and security risks, very weak public finances and anaemic economic performance. The ratings also capture the country's strong external liquidity, resilient banking system and other structural strengths such as high GDP per capita and human development indicators. Political and security risk is high because of spillover effects from the ongoing war in neighbouring Syria, the delicate sectarian balance in Lebanese society and politics and other geopolitical risks, for example, of renewed conflict between Hizbollah and Israel. However, the election on 31 October of Michel Aoun as President of Lebanon after a more than two-year vacancy of the post was a boost to political stability and an important step towards potentially improving political effectiveness. Risks remain to cementing a more effective political environment. Saad Hariri, Prime Minister in 2009-11 and the leader of the Sunni Future Movement Party, again became Prime Minister and after some delay, on 18 December, formed a new broad-based government. Political factions are currently locked in negotiations over whether to use the existing electoral law or legislate a new electoral law. This is needed ahead of long-delayed parliamentary elections, now due to start in May 2017. If there is timely formation of a new government following the parliamentary elections, this would improve the prospects for policymaking. The war in Syria continues to cast a shadow over Lebanon, especially with the ongoing presence of a large number of refugees (between 1 million and 1.5 million, relative to a previous total population of around 4.5 million) and hindrance to trade. Despite the recent domestic political breakthrough in Lebanon, the main political actors remain divided over the Syrian conflict, which continues to present a threat to security and sectarian relations in Lebanon. Public finances are very weak. General government debt is the third highest among Fitch-rated sovereigns at an estimated 144.2% of GDP in 2016. High debt levels have contributed to an exceptionally high and rising interest bill, averaging 43% of government revenues in 2013-16. We estimate that the budget deficit widened to 8.1% of GDP in 2016. Despite the positive effect of lower oil prices on spending in 2015-16, large structural budget deficits will persist due to the lack of fiscal reforms and high current spending, together with mediocre economic growth. This will contribute to further increases in the public debt stock in 2017-18. Financing these needs has proven resilient. The banking system is still attracting sufficient deposits to fund government borrowing while ensuring growth of credit to the resident private sector (estimated at 6% in 2016); the latter helped by the central bank's ongoing stimulus programme. Deposit growth has slowed in recent years and in April 2016 dropped to a low of 3.7% yoy, from 5% in 2015 and an average of 7.7% in 2011-2014. However, since April, deposit growth accelerated, reaching 6.3% yoy in November. Banque du Liban (BdL, the central bank) conducted a substantial financial engineering operation 2H16 in response to declining foreign reserves and weakening deposit growth in the banking sector. BdL made sales of Eurobond holdings and FX CDs, worth USD13 billion in total, to banks over the course of several months up to December. At the same time BdL offered to discount at a premium equivalent amounts of LBP T-bills and LBP CDs held by banks. The operation had mixed results, in Fitch's view. It increased BdL's gross FX reserves, stimulated growth in non-resident deposits in the banking system as banks offered attractive conditions for FX deposits, will help banks' capitalisation ratios and has boosted LBP liquidity. However, at the same time it has increased the size and complexity of BdL's balance sheet and the carry costs associated with the operation imply that BdL will incur further losses. Lebanon has maintained strong external liquidity despite persistently large current account deficits (estimated at 17.8% of GDP in 2016). Its stock of foreign reserves was USD34.4 billion (excluding gold worth USD10.9 billion) at end-November - up 8.2% yoy. Excluding gold, foreign reserves accounted for 62% of LBP deposits in November (up from 57% in March). The dollarisation rate of deposits (at 65.3%) has remained broadly stable since the outbreak of the Syrian crisis. In keeping Lebanon's currency peg against the USD and financing model running, BdL seems to have been incurring annual losses on its foreign-currency operations and a worsening capital position as it receives minimal returns on its FX reserves due to low global interest rates, while paying out higher rates to attract US dollar deposits. The growth outlook for Lebanon has improved, but remains modest. We have improved our GDP growth forecasts, largely on the assumption that the restarting of the political machinery in Lebanon will improve government effectiveness somewhat and will boost consumer and investor confidence, including among the diaspora. This should underpin deposit and credit growth. Nevertheless, at an average of 3.3% in 2017-18 growth remains weak relative to historical trend. In 2000-2010 real GDP growth averaged 5.3%, for example, with several years of growth in the 8%-10% band. GDP per capita and broader human development indicators are well above 'B' category peers and more in line with the 'BBB' median, although governance indicators are weaker than peers'. The government also has an unblemished track record of public debt repayment. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Lebanon a score equivalent to a rating of 'B+' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: - Structural features: -1 notch, to reflect political and security risks not fully captured in the SRM, related to the ongoing war in Syria, the delicate sectarian balance in Lebanese society and politics and other geopolitical risks, for example, of renewed conflict between Hizbollah and Israel; - Public finances: -1 notch, to reflect the exceptionally high public debt/GDP levels in Lebanon and the lack of fiscal flexibility given the high share of total spending that goes on interest payments, personnel costs and transfers to Electricite du Liban. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently balanced. The main factors that could, individually or collectively, lead to positive rating action are: -Greater confidence in the sustainability of the domestic political environment and a sustained de-escalation of the war in Syria; -An improvement in public debt dynamics, whether through fiscal tightening or improved economic performance. The main factors that could, individually or collectively, lead to negative rating action are: -A major destabilisation of Lebanon induced by spill-overs from the Syrian conflict, terrorist attacks or a severe intensification of sectarian tensions; -Diminished ability of the domestic banking sector to continue to attract sufficient deposits to keep funding the government. KEY ASSUMPTIONS - Fitch assumes that sporadic security incidents will prevail as long as conflict in Syria continues, but that Lebanon will not itself descend into a full-scale civil conflict. - Fitch assumes that international oil prices will rise to an average of USD45/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Toby Iles Director +852 22639832 Fitch (Hong Kong) Limited 68 Des Voeux Road Central Hong Kong Secondary Analyst Douglas Winslow Director +44 203 530 1721 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018661 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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