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International ratings agency Moody’s on Tuesday upgraded Lebanon’s government bond ratings by one notch to B1 from B2, citing the country’s resilient banking system and an improved political climate.

Moody’s said it was also upgrading foreign currency bank deposits to B1 from B2 and foreign currency bonds to Ba3 from B1.

The new rating, it said, could be attributed to the sustained improvement in external liquidity, the strengthened ability of the banking system to finance fiscal deficits and an amelioration of the domestic political situation following the formation of a consensus government last November.

“Lebanon’s public finances have proven resistant to serious political and economic shocks in recent years,” said Tristan Cooper, vice president and senior credit officer in Moody’s Sovereign Risk Group.

“This is due to the strengthened resilience of the country’s banking system, which is the government’s primary creditor.

“Confidence in Lebanon’s financial system has been bolstered by the central bank’s large cushion of foreign exchange reserves and its effective regulation of domestic banks,” he added.

The statement said the outlook on Lebanon’s sovereign ratings is now stable.

It noted that Lebanon’s central bank foreign exchange reserves rose to 26.9 billion dollars in February from 9.8 billion dollars at the end of 2007.

The central bank’s gold reserves in February were also worth 10.1 billion dollars.

“This places the country in a more favorable position to absorb financial shocks, while also providing ample cover for the government’s maturing foreign currency debt,” the statement said.

It warned, however, that despite the improved ratings Lebanon still suffers from a very high public debt estimated at more than 50 billion dollars as well as the slow implementation of much-needed economic reforms and a vulnerable political climate.

“Despite the recent improving trends, Moody’s notes Lebanon’s significant political and economic vulnerabilities,” Cooper said. “These include wide twin deficits, a very high public debt overhang, a tense domestic political environment and the persistent threat of an escalation with Israel.”

Lebanon’s Shiite Hezbollah party fought a devastating war with Israel in 2006 and there are persistent fears of another conflict erupting. AFP

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