Lebanon, One of World’s Worst Fiscal Offenders Could Be In for More Pain

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Lebanon, whose fiscal metrics are among the weakest of all the sovereigns rated by Moody’s Investors Service, may not have seen the worst of it yet.

Already one of the world’s most indebted countries, Lebanon saw the task of stabilizing its ailing economy become more difficult after Moody’s cut the outlook of its credit rating to negative. Last week’s move threatened to turn off investors just as the nation’s funding needs grow more dire, and Moody’s may reduce the grade further.

“Heightened political tensions and delay in fiscal consolidation jeopardize donor disbursements, weigh on investor sentiment,” the ratings company said in a statement.

A political stalemate that’s delayed formation of a government seven months after elections is undermining plans for reforms that would unlock $11 billion in aid. For now, Moody’s affirmed Lebanon’s credit rating at B3, six levels below investment grade, partly on the assumption that it would soon break the deadlock. That’s an outcome that has increasingly become hostage to the proxy confrontations between Saudi Arabia and Iran.

Saudi Arabia’s Foreign Minister Adel al-Jubeir said this month the kingdom rejects any role for Iranian-backed Hezbollah in the future government of Lebanon. The group has refused to back down over its demands to have a meaningful representation in the cabinet.

Lebanon is no stranger to political turmoil. But the impasse comes as the central bank’s ability to paper over the crisis has been constrained by years of anemic economic growth, slowing foreign inflows and a surge in borrowing costs. Lebanon’s credit risk, measured by credit default swaps, has jumped 288 basis points this year. It touched a record high of 829 points last month, according to data provider CMA.

While acting to reassure investors was possible now, “we may lose the chance to do so within months if the negative outlook remains,” Finance Minister Ali Hassan Khalil, whose political faction is allied with Hezbollah, said on Friday.

Other key points in the Moody’s report include:

— With assistance by Alexander Nicholson, and Dana Khraiche

Bloomberg