International ratings agency Standard & Poor's (S&P's) has lowered its long-term ratings on the republic of Lebanon to single-'B'-minus from single-'B'. This reflects concerns over Lebanon's mounting public debt burden and diminishing prospects that the government will be able to take strong fiscal adjustment measures and to secure financial support from official donors in the near term. At the same time, S&P's lowered its short-term ratings on Lebanon to single-'C' from single-'B'. The outlook is negative.
"There are concerns over the government's ability to reverse the growth of the public debt burden, estimated at 178 percent of Gross Domestic Product (GDP) this year, in a timely and effective fashion," said S&P's credit analyst Navaid Farooq. "Unless the government implements a credible fiscal program soon, prospects for substantial concessional financing from the international community will remain elusive, and a restructuring of public debt will become increasingly likely," he added.
Lebanon's central bank, the Banque du Liban, has so far successfully defended the exchange-rate peg to the US dollar, but its room for maneuver is being eroded as reserves are depleted. Central bank reserves will probably decline further unless Lebanon's longstanding fiscal difficulties are decisively tackled.
The introduction of Value Added Tax (VAT) in 2002 and expenditure-reducing measures are modest steps in the right direction, but they are insufficient to reduce Lebanon's very high fiscal deficit, which is estimated at 16.8 percent of GDP in 2002. As in the past, Lebanon's complex political dynamics make decisive policy steps extremely difficult.
The government's ability to secure sufficient budgetary financing in 2002 and 2003 without significantly increasing debt-service costs is increasingly in doubt. The financing capacity of Lebanon's banking sector is tied to deposit growth, which has been slowing steadily and will probably be minimal this year. In light of growing domestic financing constraints, implementation of asset sales and securing international financial support are becoming increasingly important to buy the government time to implement sustained fiscal adjustment measures. The deteriorating regional geopolitical environment makes the Lebanese economy more vulnerable, increasing the urgency of reforms.
"The ratings on Lebanon will remain under pressure until there is a fiscal correction substantial enough to reverse the growth in the public debt burden," concluded Farooq. "In the remainder of 2002 and especially in 2003, it is crucial that the government strives to secure substantial privatization receipts and to meet the preconditions for a second international donors' conference in Paris." — (menareport.com)
© 2002 Mena Report (www.menareport.com)
