Lebanon's public finances unsustainable says Fitch

Fitch Ratings, the international rating agency, stated in a comment released today that Lebanon’s public finances are unsustainable but that the country is not likely facing imminent default.

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By  Massoud Derhally Published  April 11, 2002

Fitch Ratings, the international rating agency, stated in a comment released today that Lebanon’s public finances are unsustainable but that the country is not likely facing imminent default. "The Lebanese pound has come under periodic pressure and bank deposit growth is slowing. Time is running short for the government, and it must act to avoid a financial crisis," says James McCormack, senior director of Fitch.

The Long-term foreign and local currency ratings are 'B-' (B minus), the Short-term rating is 'B' and the Outlook is Stable. At end-2001, Lebanon’s government debt reached 168% of GDP, the highest of any rated sovereign. The 2002 budget projects a deficit of 15% of GDP (about 21% of GDP using Fitch methodology, which adjusts official data for comparability with other rated sovereigns) with debt service accounting for 82% of revenues. Notwithstanding several new initiatives to address the debt-deficit spiral, including the introduction of a VAT in February, Fitch believes that public finances remain on an unsustainable path.

Sources of financing for the government appear limited. Privatisation is moving ahead very slowly and the willingness and ability of domestic banks – the government's largest creditor – to continue to purchase more government securities is not without limit. As bank deposits shift from local to foreign currency (because of concerns about the exchange rate), banks are reducing their holdings of LBP-denominated government securities. Concerns within the banks themselves regarding the exchange rate are affecting their desire to hold sovereign eurobonds as well. The government is relying increasingly on the Banque du Liban for financing, essentially monetising its debt.

Foreign exchange reserves fell by 20% last year and are currently about USD4.9 billion. An increase in the current account deficit to about 34% of GDP and market intervention by the Banque du Liban to support the Lebanese pound drew reserves down. Fitch judges the current policy mix of targeting the nominal exchange rate as well as nominal interest rates in the context of falling foreign exchange reserves and rising government debt as unlikely to be sustainable.

Despite the very difficult state of Lebanon’s public finances, Fitch does not believe that the sovereign is necessarily facing imminent default. Public sector external amortisation payments this year is only USD300 million and the country’s external liquidity ratio – measuring liquid external assets as a share of amortisations plus short-term liabilities – is comfortably over 100%. And, although the currency composition of bank deposits is changing, the deposit base is still growing, albeit slowly. The agency warns, however, that time is running short for the government, and with the risks of devaluation and a further slowdown in growth of the banks’ deposit base, the authorities must act to avoid a financial crisis.

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