Lebanon Liquidity Faces Challenges

Frontier Friday: Liquidity Position Strong, Inaction a Risk

Lebanon’s economy will likely remain “resilient” through 2016 and 2017, according to global ratings agency Moody’s Investor Service (MIS). But continued delays in policy action “pose increasing challenges,” the agency stated in a report published this week.

The report, “Government of Lebanon — B2 Negative,” was published solely as an update, and was not due to any new ratings action regarding the Mideast nation.

“The country [Lebanon] has demonstrated a strong liquidity position. However, downside risks are associated with the delay in economic and fiscal reforms,” Mathias Angonin, a Moody’s analyst, wrote in the report.

Moody’s expects that, in the absence of any policy action, the Lebanese government’s fiscal deficit and debt burden will continue to deteriorate. The agency also estimates that the fiscal deficit will average 8.1% of GDP in 2016 and 2017, reflecting lower transfers to Electricité du Liban, but higher outlays on current spending and debt servicing.

Political polarization has weakened policy effectiveness, and consensus on fiscal reforms remains elusive.

Despite the situation, Moody’s expects growth in Lebanon to remain positive, at or around 1.7 percent in 2016, which will represent a small notch up from the estimated 1.3 percent in 2015. This improvement will be partly due to—and largely driven by—low oil prices and continued private sector credit growth, “although tourism and construction activities will remain subdued.”

In addition, Lebanon’s large foreign exchange reserves and effective regulations “support Lebanon’s rating by bolstering confidence in the exchange rate peg and the financial system despite weak public finances,” the report said.

Moreover, Lebanese commercial banks remain willing and able to purchase and roll over government debt.