One of World's Worst Fiscal Offenders Could Be In for More Pain
A political stalemate that’s delayed formation of a government seven months after elections is undermining plans for reforms.
(Bloomberg) -- Lebanon, whose fiscal metrics are among the weakest of all the sovereigns rated by Moody’s Investors Service, may not have seen the worst of it yet.
Already one of the world’s most indebted countries, Lebanon saw the task of stabilizing its ailing economy become more difficult after Moody’s cut the outlook of its credit rating to negative. Last week’s move threatened to turn off investors just as the nation’s funding needs grow more dire, and Moody’s may reduce the grade further.
“Heightened political tensions and delay in fiscal consolidation jeopardize donor disbursements, weigh on investor sentiment,” the ratings company said in a statement.
A political stalemate that’s delayed formation of a government seven months after elections is undermining plans for reforms that would unlock $11 billion in aid. For now, Moody’s affirmed Lebanon’s credit rating at B3, six levels below investment grade, partly on the assumption that it would soon break the deadlock. That’s an outcome that has increasingly become hostage to the proxy confrontations between Saudi Arabia and Iran.
Saudi Arabia’s Foreign Minister Adel al-Jubeir said this month the kingdom rejects any role for Iranian-backed Hezbollah in the future government of Lebanon. The group has refused to back down over its demands to have a meaningful representation in the cabinet.
Lebanon is no stranger to political turmoil. But the impasse comes as the central bank’s ability to paper over the crisis has been constrained by years of anemic economic growth, slowing foreign inflows and a surge in borrowing costs. Lebanon’s credit risk, measured by credit default swaps, has jumped 288 basis points this year. It touched a record high of 829 points last month, according to data provider CMA.
While acting to reassure investors was possible now, “we may lose the chance to do so within months if the negative outlook remains,” Finance Minister Ali Hassan Khalil, whose political faction is allied with Hezbollah, said on Friday.
Other key points in the Moody’s report include:
- Without any government to implement fiscal reforms, the budget deficit will likely widen to 10.5 percent of gross domestic product this year, up from Moody’s previous expectation for 8.9 percent
- The debt-to-GDP ratio will exceed 150 percent by 2021 from a forecast level of 141 percent in 2018
- “Reflecting the government’s intention to issue domestic debt closer to market rates starting 2019,” debt affordability will become the weakest among all sovereigns rated by Moody’s
--With assistance from Alex Nicholson and Dana Khraiche.
To contact the reporter on this story: Alaa Shahine in Dubai at asalha@bloomberg.net
To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Abelsky, Amy Teibel
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