Moody’s rating agency this week issued two warnings to the Lebanese economy and banking sector. On Tuesday they changed the outlook for government bonds from stable to negative and the following day they did the same for the deposits ratings of the country’s three biggest banks — Bank Audi, Blom Bank and Byblos Bank.
The official reason the banks were dragged into this is their overexposure to government credit risk — investments in government securities and central bank certificates of deposits. But these ratios have been incredibly high for years and Moody’s has had little concern. What has changed, then, is the ratings agency’s confidence in the government to fulfill its obligations.
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While it must be stressed that this was a change in outlook rather than a downgrade, it should be taken as a warning that the latter will follow will in the coming months if there is no improvement in the country’s economic fortunes. Any such downgrade would make it more difficult and expensive for Lebanon to borrow money and also would further reduce the chance of luring investors to the country.
In order to avoid this fate, Moody’s said, the government would have to stop the country’s increasing debt to GDP ratio, currently above 140 percent,
Powerless to resist
Realistically Lebanon’s chances of doing this and thus alleviating Moody’s concerns are almost none. Ignoring the fact that the country is between governments — with both a caretaker prime minister and prime minister elect — even a fully functioning, efficient government would be unable to significantly improve the country’s economic situation.
This is partly because there are few options left to pursue. Additional austerity measures, which have been the weapon of choice for German Chancellor Angela Merkel and her European counterparts since the Eurozone crisis began, are unrealistic. Lebanon has been cutting back on public sector pay since the 1990s and, as the strikes in recent months have shown, there is little left to squeeze out.
The other option — to stimulate the economy by pumping money in — was tried in January, but the effects so far have been marginal at best. While the housing sector has seen a partial resurgence, there are few signs that the $1.46 billion stimulus will significantly improve the country’s fortunes.
More fundamentally, even if there were policy tools available they would be unlikely to succeed as the real reason for Lebanon’s woes has nothing to do with what is going on inside the country but with the crisis across the border.
Moody’s cited two reasons for the government bond downgrade, both related to the Syrian crisis. The first stated that the impact of the Syrian civil war on Lebanon “will suppress economic growth and increase fiscal deficits, and in turn lead to an increase in the sovereign’s already high debt burden in 2013 and 2014,” while the second stipulated that the deepening of the Syrian crisis could “lead to political instability in Lebanon.”
While Lebanese politicians could help assuage the political crisis (perhaps starting by stopping sending fighters across the border to die) there is little they can do about the economic effect of the war.
One silver lining, perhaps, is that while Moody’s and other leading ratings agencies are incredibly influential in Western markets, they are less so in Lebanon. Investors in the country are used to taking high risks and so any downgrade would have less of an impact than in more developed economies.
But either way, Lebanon should expect more bad news in the coming months and understand there is little any government can do. Traditional trade routes have been blocked, tourism has nosedived and confidence in the Lebanese economy has been shattered. No economic policy, no matter how brilliant, could avoid that.