Announcement: Moody's: Lebanon's rating balances resilient liquidity against high debt burden and fiscal deficit

Lebanon's B2 government issuer rating with a negative outlook reflects the country's resilient liquidity position, very high debt burden and deteriorating fiscal deficit, Moody's Investors Service said in a report.

The annual update, "Government of Lebanon -- B2 Negative: Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The appointment of a new cabinet and renewed reform momentum support growth and investor confidence, but they are unlikely to prevent a material increase in the government's debt burden," said Mathias Angonin, a Moody's Analyst and co-author of the report.

The negative outlook on Lebanon's rating recognizes the delay in policy action that has led to a gradual deterioration in the fiscal balance and infrastructure.

Moody's expects Lebanon's real GDP growth to accelerate to 2.8% and 3.0% in 2017 and 2018, up from an annual average of 1.9% in 2011-16.

Although Lebanon's political agreement to restore and reinforce institutions will likely lead to a rebound in tourism and investment, trend growth is unlikely to return to pre-2011 levels without structural reforms. Moody's growth forecasts would be subject to risks if violence were to escalate in the country or geopolitical tensions worsen, undermining tourism and investment.

The Central Bank's foreign exchange reserves have continued to increase and support Lebanon's rating by bolstering confidence in the exchange rate peg and the financial system, despite weak public finances.

Lebanon's fiscal performance deteriorated in 2016 and Moody's estimates that the fiscal deficit will average 9% of GDP in 2017 and 2018, reflecting higher outlays on current spending and debt servicing but lower transfers to municipalities.

Going forward, Moody's expects expenditures to rise again due to higher interest rates, a mild recovery in oil prices and the salary-scale adjustment for public-sector employees.

Government debt is expected to reach 137.9% of GDP in 2018, the fifth-highest level in the rating agency's rated sovereign universe.

Lebanon's exposure to political risk is categorised as "Moderate (+)", reflecting unresolved sectarian tensions that have been exacerbated by regional conflicts. The intensifying conflict in Syria has sharpened the divide between parties in Lebanon that either support or oppose the Syrian regime.

However, political risks are partly offset by a consensus among factions to prevent violent spillovers from Syria.

The Local Market analyst for this rating is Mathias Angonin, 00 971 4 237 9536.