News Analysis: Lebanese analysts divided over impact of Fitch's downgrading of Lebanon's credit rating

Source: Xinhua| 2019-08-28 00:02:14|Editor: yan
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by Dana Halawi

BEIRUT, Aug. 27 (Xinhua) -- Lebanese analysts are divided on assessing the economic impact of the recent move by Fitch Ratings to downgrade Lebanon's credit rating.

Fitch, one of the leading international credit rating agencies, downgraded on Friday Lebanon's rating from B- to CCC, while another major rating agency Standard & Poor's maintained the country's rating at B-.

"Fitch downgrading of Lebanon's rating to CCC will turn the Lebanese government's Eurobonds into Junk bonds," said Makram Rabah, a lecturer at Department of History of American University of Beirut.

Junk bonds means they carry a higher risk of default than most bonds issued by corporations and governments.

Rabah added that Fitch downgrading also impacts Lebanon's international reputation with regard to its plans to borrow money in the future.

Rabah also noted that he has doubts about France's willingness to support Lebanon through CEDRE, a French-hosted conference to support Lebanon's development and reforms, for the time being.

"I do not think that France would be willing to save Lebanon for the time being," he said.

Fitch's downgrading of Lebanon is attributed to the slowdown in the flow of deposits to the Lebanese banking sector and the slow implementation of a strategy that would solve the electricity crisis in Lebanon.

Fitch report stated that reform measures taken by the government are appreciated but a long-term strategy is needed to control the increase in Lebanon's public debt.

Meanwhile, Standard & Poor's maintained Lebanon's credit rating, citing that the country has started structural reforms and will continue adopting important measures in the 2020 budget which will gradually reduce the budget deficit to 4.8 percent of GDP from 7.6 percent in 2019.

Mohamad Abou El Hassan, a financial analyst, said he would rather adopt Standard and Poor's credit rating which takes into account Lebanon's future opportunities for reforms rather than the past failures.

"I believe that S&P's views are more realistic because Lebanon has started implementing reforms and it is about to get over with 2020 budget soon which will include more important changes," he said.

Hassan emphasized the importance of the electricity plan approved by the government which will save big amounts for the government.

He also noted that the CEDRE money will activate the economy and create job opportunities in Lebanon.

At the CEDRE conference held in Paris in 2018, international donors pledged to provide Lebanon with 11 billion U.S. dollars in loans and donations on condition that the country conducts serious reforms.

"CEDRE will not be impacted by the Fitch report. The international community will inject funds into the economy to improve infrastructure, regardless of the ratings of the country. When CEDRE was approved, the international community asked for the 2019 budget and reforms to make sure that the government will pay back its dues," Hassan said.

He insisted that Lebanon hasn't lost the trust of the international community as reflected in the report by Morgan Stanley, among other reports.

According to Morgan Stanley, the latest parliament's approval of the 2019 budget, targeting a fiscal deficit of 7.45 percent of GDP, would definitely help unlock some CEDRE funds and therefore restore investors' confidence and attract much needed capital inflows into Lebanon.

Hassan said the international community pays the most attention to the central bank and banks' stability.

"Our banks are stable and they are not risky while they are supporting the government, so ratings won't impact our financial sector," he said.

Lebanon is preparing the 2020 budget in hopes of cutting its budget deficit further by undertaking major structural reforms.

With a public debt equivalent to 138.8 percent of GDP in 2018, Lebanon is currently the third most indebted country in the world after Japan and Greece.