October 1, 2019 / 9:10 AM / 19 days ago

UPDATE 3-Lebanon c.bank introduces steps to provide dollars for key imports

(Adds Moody’s statement)

BEIRUT, Oct 1 (Reuters) - Lebanon’s central bank introduced new steps on Tuesday to provide commercial banks with U.S. dollars to support imports of fuel, wheat and medicine, after some importers complained they had been unable to meet their needs at the pegged exchange rate.

The move led the Lebanese pound to strengthen against the U.S. dollar on a black market that has emerged of late, three sources familiar with the market said. Lebanon’s dollar-denominated government bonds also climbed.

But Moody’s credit rating agency put Lebanon’s Caa1 rating under review for downgrade, saying anticipated external financial assistance had not yet been forthcoming.

It said the government’s greater reliance on central bank foreign currency reserves to meet upcoming foreign currency bond maturities risked “destabilizing the (central bank’s) ability to sustain the currency peg”.

Lebanon has a $1.5 billion Eurobond maturity in November.

Saddled with one of the world’s heaviest public debt burdens at 150% of annual gross domestic product, the government has declared an economic emergency to try to get its finances under control.

Gas stations closed last month in a one-day strike because their operators said they could not secure dollars at the official exchange rate and were being forced to pay more in the parallel market. Millers complained of the same problem.

The central bank said in a communique that commercial lenders must ensure the credit lines were used exclusively for imports of fuel, wheat and medicine. Special accounts must be opened with the central bank for each purchase and it would get copies of all documents related to each transaction.

PARALLEL MARKET

The move led the Lebanese pound to strengthen against the U.S. dollar on the parallel market, where the local currency has recently weakened below the official pegged rate, said Marwan Mikhael, head of research at Blominvest Bank.

The parallel market rates on Tuesday were 1,540 and 1,550 pounds to the dollar, Mikhael said. A second source gave a rate of 1,555. On Monday, two sources put the rate at 1,570. Last week it changed hands at 1,600 pounds or higher.

The official exchange rate is 1,507.5 to the dollar.

The emergence of the parallel market for U.S. dollars has reflected wider economic problems afflicting Lebanon, which has suffered years of low economic growth and a slowdown in capital inflows from abroad.

Moody’s said its rating review may extend beyond the usual 90 days and would allow the agency to “take stock of the government’s progress in adopting the 2020 budget as planned before the end of the year”.

It would also allow it to take stock of the extent to which that “unlocks confidence-enhancing external support packages” via CEDRE - a reference to billions of dollars of international finance pledged to Lebanon last year, conditional on reforms.

Moody’s said the review would also assess whether Lebanon could secure financial support from Gulf Arab states “which in turn would ease immediate liquidity risks and be conducive to a broader growth recovery over the longer term”.

Reflecting the increased pressure on Lebanon’s finances, Fitch ratings agency recently downgraded it deep into junk territory.

Rival ratings agency S&P Global kept Lebanon’s credit rating at B-/B but warned that it could be lowered, saying it considered its foreign exchange reserves sufficient to service government debt in the “near term”. (Reporing by Tom Perry, Laila Bassam in Beirut, Nadia El-Goweily in Cairo and Tom Arnold in London; Editing by Chizu Nomiyama and Ed Osmond)

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