Fitch Ratings has affirmed the Republic of Lebanon's long-term foreign currency and local currency ratings at B-. The short-term rating was affirmed at B, and the outlook is stable. Faced with one of the highest government debt burdens of any sovereign - estimated by Fitch at 161 percent of gross domestic product (GDP) at end-2002 - the Lebanese authorities have launched and implemented a series of initiatives to improve public finances.
A value-added tax was successfully introduced last year, a tax regularization program was established, gasoline taxes have been increased, non-interest expenditures have been curtailed and a more vigorous debt management strategy has been adopted. As a result, the general government primary balance improved by 10 percentage points of GDP between 2000 and 2002, with the surplus reaching 2.3 percent of GDP last year.
In addition, there is considerable momentum behind privatization and securitization proposals, the proceeds of which - projected officially at five billion dollars - must by law be applied to debt reduction. Finally, in recognition of the Lebanese authorities' efforts, international donors committed at the Paris II conference last year to provide $ 4.4billion in assistance, most of which will be in place in the first quarter and directed at reducing the debt service burden and extending the maturity of public debt.
Fitch indicated that it was strongly encouraged by the debt reduction initiatives and results to date, underpinning the ratings and stable outlook. Nevertheless, considerable risks to the stability of public finances remained. "We are less optimistic about this year's privatization receipts and have concerns regarding the external debt repayment burden in the medium term," said Senior Director of Sovereigns, James McCormack.
The agency pointed out that its two to three billion dollar forecast for privatization and securitization receipts would result in higher debt servicing costs than budgeted and thus a higher fiscal deficit in 2003. "Government debt should stabilize relative to GDP this year," added McCormack, "but it needs to fall before Lebanon compares more favorably with higher rated sovereigns."
The Paris II financing reduces the overall sovereign debt service burden since the issuance of more costly domestic debt will decline and Paris II funds are on concessional terms, but it augments a trend in which the share of sovereign debt denominated in foreign currencies has been rising. By year-end, more than half of government debt will be in foreign currencies, forecast to be equivalent to 85 percent of GDP.
In 2004 Lebanon's external debt service as a share of foreign exchange earnings is expected to be the highest of any rated sovereign. Privatization and Paris II inflows will mitigate the short-term risk. At the same time, however, it will be essential to maintain confidence in the exchange rate and to stimulate export and other foreign exchange earnings, said Fitch, with the former requiring further replenishment of previously depleted foreign exchange reserves at the Banque du Liban. Ideally, both will materialize in the new more fiscally prudent policy environment, but the risks to public finances associated with the sharp increase in foreign currency obligations will remain substantial. — (menareport.com)
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© 2003 Mena Report (www.menareport.com)
