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French Version


Moody's gives Lebanon poor notes on inflation sensitivity index

Moody's Investors Service's Inflation Sensibility Index ranked Lebanon as the third most sensitive country among 11 Arab economies the firm rates in the Middle East and North Africa region. The index measures the extent to which a country's vulnerability to inflation shocks could damage its creditworthiness and sovereign ratings.

The agency said high rates of inflation can have indirect consequences on the sovereign ratings of a country through fiscal, political and economic channels. First, on the fiscal front, governments can find it difficult to maintain fiscal discipline during inflationary periods, as citizens demand compensatory increases in salaries, subsidies and welfare payments to offset their decreasing purchasing power.

Second, regarding politics, high rates of inflation often raise social tensions as governments and private employers are sometimes reluctant to raise wages, subsidies and welfare payments quickly enough in order to offset inflation.

Third, on the economic front, high rates of inflation can jeopardize growth by deterring productive investment, distorting market incentives, encouraging wage hikes and disrupting activity through strikes or more serious political unrest.

The free functioning of markets can also be hampered by the introduction of unusual economic measures such as price controls as governments attempt to contain inflation through alternative means.

Moody's considered that Lebanon was less vulnerable to inflation shocks than Egypt and Jordan, but more vulnerable to such events than Morocco, Tunisia, Saudi Arabia, Oman, Qatar, the UAE, Bahrain and Kuwait.

Lebanon received a score of 13 points, below the regional average of 16.5 points. It added that Lebanon's very low rating of "B3" already incorporates a high degree of political and economic risk.

The Inflation Sensibility Index is the average of a country's rank in five variables grouped in three different categories considered to be meaningful indicators of inflationary impact on sovereign ratings. The indicators are GDP-per-capita in purchasing-power parity terms, the level of human development, the fiscal balance, the net government debt, and the annual change in inflation rate.

Lebanon also ranked in fourth on the Social Vulnerability Sub-Index. This category measures social vulnerability in terms of GDP-per-capita in purchasing-power parity terms and its rank on the UN's Human Development Index. Lebanon had the seventh highest GDP-per-capita and the eighth highest level of human development among the 11 countries. As a result, Lebanon was considered less socially vulnerable than Tunisia, Jordan, Egypt and Morocco, and more vulnerable than Saudi Arabia and Oman.

Also, Lebanon ranked in first on the Fiscal Flexibility Sub-Index, which means that it is the country with the least fiscal flexibility among the 11 Arab economies included in the survey.

Beirut 24-06-2008
Redaction
The Daily Star



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