Lebanon's credit ratings upgraded to B from B-

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Capital Intelligence, the international credit rating agency, said it had upgraded ratings of Lebanon and six of the country's banks mainly due to improved liquidity position.

The agency raised Lebanon's long-term foreign and local currency ratings to "B" from "B-" with stable outlook. The long-term foreign currency ratings of six Lebanese banks that were constrained by the sovereign's rating - Bank Audi-Audi Saradar GroupBank Audi-Audi Saradar Group, BBACBBAC, BLOM BankBLOM Bank, Byblos BankByblos Bank, Credit LibanaisCredit Libanais, and FransabankFransabank - have also been raised to "B" with a stable outlook.

The upgrade in the sovereigns ratings primarily reflects Lebanon's improved international liquidity position but also takes into account the reduction in near-term financing risks resulting from increased investor confidence and banking sector liquidity. Underlying the improvement in the sovereign's credit profile is the return of relative political normality over the past year

or so, evidenced most recently by peaceful and undisputed parliamentary elections in June.

The decrease in political risk perceptions coupled with favourable interest rate differentials has contributed to a pick up in financial inflows and greater demand for local currency denominated deposits, enabling the central bank to almost double its foreign exchange reserves between end-2007 and April 2009 to $19 billion (Dh70bn) - equivalent to 60 per cent of the GDP. Official reserves are currently about four times as high as annual government foreign currency debt service and, combined with the liquid foreign assets of the commercial banks, cover more than 70 per cent of short-term external debt.

Although the government's projected gross financing requirement for 2009 is high at about 45 per cent of the GDP, the majority of foreign currency amortisation has already been covered through a Eurobond exchange in March and strong deposit inflows should enable the government to tap the market again later in the year.

The government benefits from a largely passive and 'friendly' investor base dominated by local banks with large dollarised deposit bases relative to the size of the economy. The banking system has been little affected by the global financial crisis, confidence in the system is high and bank deposits have been remarkably 'sticky' in the face of economic and political shocks over the past decade. The authorities also have good relations with international donors, notably Gulf countries, who have proven willing and able to provide timely financial assistance at times of financial stress.

The sovereign's ratings remain constrained by its weak public finances and political risk factors.

Lebanon is highly vulnerable to shocks, and downside risks, if they were to materialise, could have a precipitous impact on the ratings of the sovereign and the banks.

The government is the most indebted of all sovereigns rated by Capital Intelligence, with gross debt equivalent to 162 per cent of the GDP or 672 per cent of budget revenue at end-2008, and the debt stock is unfavourably structured, resulting in heavy exposure to refinancing, interest rate and exchange rate risk.

The budget deficit is unsustainably high at about 10 per cent of the GDP and fiscal flexibility is constrained by weakness in revenue mobilisation and substantial expenditure rigidities, with interest expense alone accounting for more than one-third of public spending.

Progress on the reforms needed to reduce the large debt overhang and raise potential economic growth has been slow. There have been efforts to strengthen public finance management and contain the budget deficit, which have contributed to a decline in government debt ratios in the past two years.

By Staff Writer

© Emirates Business 24/7 2009