The credit rating agency said the bond ratings were raised to B2 from B3 and that it also raised Lebanon's country ceiling for foreign currency bank deposits to B2 from B3. Lebanon's local currency ceilings remain at Ba1.

''Lebanon's public finances have proven remarkably resistant to serious political and economic shocks in recent years,'' Tristan Cooper, lead sovereign analyst for Lebanon within Moody's Sovereign Risk Group. ``This is due to the resilience of the country's banking system, which is the government's primary creditor.''

Lebanese officials have often voiced confidence in a nation known for its ability to rebuild after decades of sectarian strife, wars and political assassinations would emerge largely unscathed from the global financial crisis. Strict banking laws have limited the country's exposure to the kind of toxic assets that have hammered other nations.

Lebanon Central Bank may cut loan reserve requirement

In a related development Lebanon central bank Governor Riad Salameh ( pictured) said he plans to cut the loan reserve requirement for banks to help push down borrowing costs as economic growth slumps.

“The bank will allow the funding of any new project in 2009 or the extension of existing projects to be funded in the medium term and banks will have an exemption on their obligatory reserves against these types of credit,” Banque du Liban Governor Salameh said in an interview yesterday in Beirut. The move should help push lending rates to about 7.5 percent from 10 percent, he said.

Economic growth will probably slow to 4 percent this year after 8 percent in 2008, Salameh said. Lebanese banks have avoided the worst of the global credit crunch because of central bank guidelines that prohibited banks from investing in U.S. subprime mortgages. Banks are required to hold a third of their foreign currency deposits in cash and to have a capital adequacy that is more than 11 percent on average.

The central bank measures “are much-needed and will hopefully stimulate demand for loans and support economic growth,” said Nassib Ghobril, head of research at Byblos Bank in Beirut.

Salameh said so far there has been no noticeable slowdown in inflow of capital or remittances from Lebanese working in the Persian Gulf. Lebanon’s economy gets as much as $6 billion in remittances a year from about 10 million Lebanese living abroad. That represents about 20 percent of gross domestic product, according to a March 24 report by Standard Chartered Bank.

IMF Report

In a report last month, the International Monetary Fund said that as the global financial crisis takes its toll on the oil-rich economies of the Persian Gulf, capital inflows to Lebanon may weaken and the growth in commercial bank deposits slow.

So far, that hasn’t happened and the country’s credit market has been functioning “without any interruption,” said Salameh, 58. Deposits have been rising and may increase between 7 percent and 10 percent in 2009 from last year, he said.

Lebanon’s bank deposits rose by about 15 percent to $82 billion in 2008 from the year before, he said. More people are shifting their deposits from U.S. dollars to the Lebanese pound which has prompted the central bank to buy about $5 billion in dollars between October and March. The proportion of deposits denominated in dollars fell to 68 percent today from about 77 percent last year, said Salameh, who has served as central bank governor since 1993.

Fierce Competition

“Competition for deposits has become fierce in the region and across the world since last September,” Ghobril said. “Lebanese banks need to continue to attract deposits in order to maintain their high level of liquidity and meet the financing needs of the private and public sectors.”

Inflation will slow to below 4 percent from an average of 10.8 percent last year, the International Monetary Fund said in a report last month.

Moody’s Investors Service upgraded Lebanon’s local and foreign currency government bond ratings yesterday to B2, five levels below investment grade, from B3. The agency said the adjustment was due to “substantial improvement in external liquidity, the proven resistance of the public finances to shocks, and the willingness and ability of the country’s resilient banking system to finance fiscal deficits.”

Parliamentary Elections

In June, the country will hold parliamentary elections, after which a new government will be formed. Lebanon’s new cabinet will need to reduce a public debt of more than $47 billion that was amassed during reconstruction after the end of a 15-year civil war in 1990 and a monthlong conflict with Israel in 2006.

Salameh said the new government formed after the elections should rein in spending and bring the budget deficit under control.

“The government needs first of all to reduce the deficits in its budget,” said Salameh. “The recurring deficit is the point of vulnerability. We hope that the government will put its act together to bring that deficit gradually lower.”

Lebanon’s 2009 budget, which has not yet been approved, has a projected fiscal deficit of $4 billion or about 10.5 percent of GDP.

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