Fitch: Lebanon is becoming less capable of paying back its debt

Last weekend, Fitch maintained Lebanon’s long-term and short-term foreign currency issuer default rating at “RD” (restricted or partial default), a score mark before total insolvency, while creditors still await debt restructuring.

These ratings have not changed since the Hassan Diab cabinet announced in March 2020 its decision to default on the payment of its Eurobond maturing — the first sovereign default in the country’s history.

This decision dropped the price of Eurobonds, which became among the cheapest in the world. For over a year, their price has languished between 6 and 7 cents on the parallel market.

However, Fitch, the US rating agency, has downgraded the Long-Term Local-Currency (LTLC) IDR for Beirut to “RD” from “CC” and the Short-Term Local-Currency (STLC) IDR to “RD” from “C.”

Fitch justified this rating by the fact that “the government is not paying interest” on its debt in lira to Banque du Liban (BDL).

In its last rating review of Lebanon in August 2022, Fitch viewed the accumulation by the government of arrears to the BDL, in a context of the “unusually complex relationship” and “financial engineering between the government and central bank” as consistent with affirming the “CC” and “C” ratings based on the maturities of these debts.

But given the “prolonged accumulation” of these arrears, Fitch now views this situation “as an event of default,” further downgrading the rating of this debt. The authorities have still not requested a debt restructuring.

Fitch believes that political divisions and sectarian interests have hindered the necessary reforms. Given the political status quo, Fitch does not expect significant progress neither on the reforms demanded by the International Monetary Fund — from whom Lebanon is trying to obtain $3 billion in aid — nor the debt restructuring.

The IMF made a list of 10 reforms for Lebanon to implement before granting the country access to this aid. Only four have so far been adopted.

The implementation of reforms and debt restructuring, the election of a new president and the cabinet formation will largely determine the economic conditions from2024 onwards, Fitch estimated.

Fitch relied largely on the IMF’s figures to establish its findings. They estimated in particular the debt-to-GDP ratio to exceed 500 percent in 2023 and range between 450 to 550 percent in the medium term in the absence of reforms and restructuring.

The IMF estimated, however, that this ratio would gradually decrease to about 80 percent in 2027 if Lebanon initiates a debt restructuring in 2024 and implements the necessary reforms.

This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.