The headquarters of the General Directorate of Finance, in the Palais of Justice area of Beirut, on January 18, 2023. (Credit: Illustration photo P.H.B./L'Orient Today)
Less than a month after Fitch Ratings announced it could no longer measure Lebanon's creditworthiness, another major American agency, Standard & Poor’s (S&P), released its latest semi-annual report on Monday evening. In this report, S&P reiterates and clarifies its previous assessment of Lebanon, which it has considered in selective default for the past four years — Lebanon defaulted on its Eurobonds in March 2020.
Since then, Lebanon has received an "SD" (selective default) rating for its foreign currency debt in both the short and long terms. Its Lebanese lira Treasury bills have been rated "CC" and "C" with a negative outlook. Although the state continues to honor these bills, their value has significantly declined due to the lira's collapse over the past five years. S&P’s ratings align with those of Moody’s and Fitch until the latter's announcement last July. The situation in Lebanon has become even more uncertain since the outbreak of the Gaza war on Oct. 7, which has spilled over into the South of Lebanon, as noted in the report.
Debt service risks for Lebanese lira
"The negative outlook on the 'CC' long-term domestic currency rating reflects our view that the government could restructure its local currency debt as part of a broader program. The outlook also reflects that shortcomings in public sector administrative capacity could, in our opinion, present risks to timely debt service," the agency explained.
S&P adds that "the Lebanese government has resumed coupon payments to the BDL on its local currency-denominated debt, which it had previously stopped servicing in 2021," which we confirmed with a source at the central bank.
"Amounts have been allocated to this item in the 2024 budget, and they also cover the amounts due in respect of 2023," said the agency on condition of anonymity, as it is not authorized to speak to the press.
"We could lower the local currency rating to 'SD' if a debt restructuring program includes haircuts or maturity extensions on local currency debt. We could also lower the local currency rating to 'SD' if the government missed local currency principal or interest payments to a commercial creditor, for instance, due to administrative constraints. Although this is not our baseline scenario, we think the latter remains a possibility given the lingering domestic political instability," S&P added in its summary of previous assessments. A reduction in these risks and a strengthening of "national economic policy" might lead the agency to revise its rating on Treasury bonds. For dollar-denominated debts, any change is unlikely until a proper restructuring of the more than $30 billion in Eurobonds that the state needs to repay is in place.
No growth before 2027
In terms of projections, S&P estimates that Lebanese GDP will post a real growth rate (after deducting the impact of inflation) of 1.2% in 2024, following a 0.2% decline in 2023. The agency estimates nominal GDP at $20 billion. Given current conditions, the agency does not expect the Lebanese economy to return to growth before 2027, given the authorities' limited room for maneuver and the fact that they have delayed implementation of the reforms requested since 2022 by the International Monetary Fund. "Lebanon has a very high stock of public debt, a weak balance of payments and no monetary policy flexibility," summarizes S&P in one of the subtitles of its report.
S&P projects that Lebanon's GDP will grow by 1.2% in real terms (adjusted for inflation) in 2024, following a 0.2% decline in 2023.
The agency estimates nominal GDP at $20 billion. Due to the authorities' limited room for maneuver and delays in implementing the reforms requested by the International Monetary Fund since 2022, S&P does not expect the Lebanese economy to return to significant growth before 2027. "Lebanon has a very high stock of general government debt, weak balance of payments, and no monetary policy flexibility," S&P stated in its report.
Finally, the rating agency acknowledges that its analysis is based on flawed data, primarily due to a lack of human resources at the Finance Ministry and the numerous exchange rates used throughout the five-year crisis. This issue was a key factor in Fitch’s decision to suspend ratings for Lebanon until further notice. S&P describes the data as "subject to exceptionally high uncertainty, which is likely to persist for the foreseeable future," but notes that the government is working with the IMF to address these issues.
In a statement issued alongside the report, the caretaker Finance Minister said the ministry had done everything possible under the current circumstances to allow S&P "to assess the situation and provide a rating that accurately reflects the state of the country’s public finances, currency, and economy." He also acknowledged that this effort had not been extended to Fitch and noted that his teams had met multiple times with S&P experts before the report's publication.
Last week, the minister informed the Council of Ministers about the various exchange rates used by his Ministry to prepare public accounts since 2020. Meanwhile, the Central Administration of Statistics released the national accounts and details of Lebanese GDP for the 2021 fiscal year earlier this summer and aims to publish data for 2022 later this year.
This article was originally published in French in L'Orient-Le Jour.