31 July 2010

BEIRUT: Japanese rating agency Rating and Investment Information, Inc. (R&I) affirmed Lebanon’s Foreign Currency Issuer ratings at “B+” and revised the outlook to “positive” from “stable.” It also affirmed the Short-Term Foreign Currency Debt at “B,” as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The agency said the formation of a national unity government in November 2009 has so far put an end to the period of political turmoil that plagued Lebanon since 2005. It noted that the Lebanese economy has been growing solidly, thanks to the expansion of construction investments and the tourism and trade boom. Also, the International Monetary Fund expects real GDP growth to continue to exceed 9 percent in 2010, following 9.3 percent and 9 percent growth in 2008 and 2009, respectively.

Driven by GDP growth and tax policies adopted by the government, such as uncapping gasoline taxes and the introduction of fuel taxes, tax revenue has been increasing, diminishing concerns about fiscal deterioration.

In spite of the favorable situation, R&I has affirmed the Foreign Currency Issuer Rating at “B+,” taking the view that the “national unity government” has yet to show convincingly its political footing is solid. Since this administration needs to accommodate interests of all political parties, it has taken a long time to build consensus.

It is recognized as a difficulty to overcome persistent social tensions shown until recently among various ethnic and religious groups. Therefore, R&I needs to watch carefully whether this administration will be able to manage effectively and of being cohesive enough to deserve the label of “national unity government.”

R&I also positively evaluates the fact that Lebanon’s deposit-rich banking sector enables the government to smoothly refinance the government debt, which has reached 148 percent of GDP at the end of 2009. However, this kind of financing structure is not presumed to be solid enough since it relies heavily on non-resident deposits whose stickiness are generally assumed to be inferior to resident deposits. This suggests that there always remains the risk of deposit outflow, but sustained political stability can serve as a key factor to minimize such risk.

R&I has changed the Rating Outlook to “Positive,” reflecting its view that this administration has started to function and taken steps toward fiscal consolidation on the back of the favorable political and economic situation. At the end of June, the Lebanese Cabinet endorsed a budget plan for the current fiscal year, which is expected to be ratified by the Parliament for the first time in five years. Among tax increase measures, while a proposal to raise the value-added tax rates has been postponed, tax increases on deposit interest income and real-estate registration fees are approved.

R&I said the budget also contains a plan for sizable expansion of electricity-generating capacity and improvement in electricity transmission and distribution efficiency through the use of private capital. At a little over 10 percent of GDP, the projected fiscal deficit for 2010 remains large, and the government has yet to show a path toward reduction of structural fiscal deficit in face of problems. A rating upgrade may come into sight if the political and economic situation continues to remain stable. – The Daily Star