Moody's Investors Service downgraded on Tuesday Lebanon's government bond ratings to B2 from B1 and maintained the negative outlook.
The key drivers of the rating action according to Moody's are the rise in the main government debt metrics, the harmful repercussions of the spillover from the Syrian crisis on government finances, economic growth and political stability.
Moody's forecast is that current debt trends are likely to continue to deteriorate in the next two years. A combination of lower growth and ongoing political paralysis, exacerbated by the spillover effects of the Syrian crisis, which led to a large increase in the fiscal deficit, in turn raising the debt burden.
Lebanon has managed with a very high debt burden for many years, having reached 175% of GDP in 2006, but domestic political turmoil poses a challenge to fiscal consolidation, the report said.
It attributed the downgrade to the vacuum in the presidential post as well. The report stated: “The country has been without a President since May 2014 due to lack of agreement among the main political groups. While the presidency lacks significant formal powers the inability to reach a consensus candidate highlights the current institutional challenges. And on November 5th the Lebanese parliament voted to extend its term and moved the next legislative election to May 2017. The election was originally due to be held on May 2013.”
The report added that the negative outlook reflects expectations that economic growth has declined sharply and there is little sign of a return to potential in the near term, and that slower economic conditions will pose additional fiscal challenges, which are likely to impede a reversal of worsening debt metrics.
It is worth noting that downgrading Lebanon’s government bond ratings affects the rating of its banks as well.
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