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Moody’s downgrades Lebanon’s credit, stresses need to implement privatization plan (Daily Star)

Ratings agency says outlook update reflects constraints on government’s economic plan

In a further blow to Lebanon’s economic credibility, international rating agency Moody’s downgraded the country’s credit to negative due to the government’s failure to implement privatization and securitization.

Moody’s opinion update, which was released last month, said the negative rating outlook for Lebanon reflects the severe constraints on the targets laid down in its economic program.

“Moody’s believes that the government’s economic program is admirable in view of the competitive and fractious nature of domestic politics. However, we note that the margin for error in achieving these targets is practically zero, and success hinges on the stop-gap financing provided by privatization and leases of state-owned companies,” the report said.

Other rating agencies such as Standards and Poor’s and Fitch also expressed concern about the performance of the economy and the government’s inability to achieve any of the targets.

The government of Prime Minister Rafik Hariri won $4.4 billion in soft loan pledges from the donor states that met in Paris in November 2002.

But the sharp differences between President Emile Lahoud and Hariri over every major issue has jeopardized all attempts to carry out any of the administrative reforms agreed to during the Paris II conference.

The Finance Ministry was forced to tap the local market for more T-bills to cover the increased spending in October of this year after a lull of almost nine months. Moody’s rated both Lebanon’s foreign currency debt and foreign currency bank B2/NP.

It also gave negative marks to the government’s domestic and foreign debt bonds. “The highly speculative B2 ratings for the Republic of Lebanon’s country ceilings for foreign currency debt and deposits and the B3 domestic debt rating reflect the country’s significant public sector debt ­ equivalent to 160.7 percent of GDP at the end of 2002 ­ and the associated debt service burden. Furthermore, the structurally high level of the budget deficit is placing constraints on the private sector,” the report said.

Moody’s said that Lebanon’s external liquidity had improved since the 2002 “Paris II” conference, as official reserves had increased while the fiscal deficit had decreased since 2001. In addition, comprehensive tax reforms, financial sector reforms and the completion of the EU free trade agreement represented a serious effort to regain control of the debt dynamics, according to Moody’s.

“The main source of financing in both foreign and domestic currencies is the domestic banking system, which has extremely large assets relative to the size of the Lebanese economy,” Moody’s said. It added that increased dollarization of deposits had shifted banks’ preference into dollar-denominated government paper, coinciding with the government’s drive to obtain lower-cost, longer-term financing, but raising the vulnerability of the economy to pressure on the exchange rate.

Moody’s said that a continuous and sustainable decrease of debt-servicing costs through privatization would improve the credit rating of Lebanon. However, it warned that regional instability could result in a return of exchange-rate pressure, as was the case prior to the Paris II conference. But Moody’s added that the country benefited to some extent from the developments following Sept. 11. “Following Sept. 11, Lebanon has become the destination of some Gulf money, resulting in the balance of payments shifting from a deficit to a surplus.”

Moreover, the number of tourists increased by 5.6 percent in the first nine months of 2003, with Arab nationals accounting for 41.3 percent of the tourists visiting during the year until the end of Sept.

Meanwhile, reserves reached $12.17 million in mid-October of this year (equivalent to 22 months of imports) against $4.125 million in October 2002, which was before Paris II.

Moody’s said that due to the situation in Iraq and the United States’ stance on Syria and Hizbullah, the Syrian government was not interested in seeing further instability in Lebanon as this could hamper the progress of unpopular reforms.

“Effectively, we have seen further postponements of privatization. The sale of the two mobile phone licenses is now expected to take place in the spring of 2004. On the other hand, fiscal discipline has been eased. We are expecting it to ease further in 2004 as the 2004 budget shows a further increase of fiscal expenditures.” Moody’s said that despite these developments, it still expected the budget deficit to decrease slightly in 2003.

The September 2002 to September 2003 data showed a deficit totaling 37.2 percent of expenditures against 39.7 percent last year. It said that any improvement would only become credible and sustainable if the privatization and securitization programs were advanced. “Without these privatization or securitization receipts, the Lebanese Central Bank has forecast a public debt of $32 billion by the end of 2003.”

Beirut 07-12-2003
Osama Habib
The Daily Star

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