Moody’s global ratings agency has downgraded Lebanon to its lowest possible grade, “C”, predicting on Monday that international and local Eurobond holders will lose more than two-thirds of their investments.
“The C rating reflects Moody’s assessment that the losses incurred by bondholders through Lebanon’s current default are likely to exceed 65%,” the agency said, adding that its decision not to assign a future outlook was due to “the fact that C is the lowest rating in Moody’s rating scale.”
Lebanon’s government, faced with dwindling foreign reserves and growing public discontent, voted unanimously in March not to pay a US$1.2 billion Eurobond maturity in March – marking the first default in Lebanese history.
Foreign funds such as the London-headquartered Ashmore, which was said to have bought up more than 25% of shares in each of the three Eurobonds meant to have matured this year, are among the investors affected. So, too, are Lebanese citizens who put their trust in the bonds for retirement.
An import-dependent country of six million people, Lebanon’s GDP fell 6.9% in 2019, according to Moody’s. Economic growth is expected to contract even more this year, with the currency rapidly depreciating in value and foreign reserves described by Prime Minister Hassan Diab as running dangerously low.
“The continued drawdown of Lebanon’s foreign exchange reserves is reflected in the acute devaluation of the local currency in the parallel market by over 80%. This is fueling significant import compression and contributing to a spike in inflation readings to almost 90% year-over-year as of June 2020 from 6.7% at the end of 2019,” said Moody’s.
The Middle Eastern country appears to be on an even worse financial footing than Venezuela, which also has a C credit rating but maintains a higher, “b2” grade for economic strength due to its moderate-sized economy. Lebanon has no such counterbalance.
Lebanon’s longstanding currency peg of 1,500 Lebanese pounds (LBP) to the US dollar began slipping last September, with warning signs having appeared well before that, as reported by Asia Times. The peg depended on a steady inflow of dollars from the large Lebanese diaspora, which quietly began withdrawing its deposits after the forced shock resignation of former Prime Minister Saad Hariri by Saudi Arabia in the fall of 2017.
Prices of all manner of goods have tripled since last fall, with basics such as rice increasingly difficult for the poor to secure. A monthly paycheck of 1.5 million Lebanese pounds, equivalent to $1,000 for the past two decades, is now worth less than $200. Small and large business owners alike are struggling to source dollars to import goods, which fewer and fewer consumers have the purchasing power to afford.
Some taxi drivers say they are staying off the road for anything but reservations for fear of any kind of an accident, because they do not have the money to replace imported parts.
The erosion of the Lebanese citizenry’s purchasing power coupled with a total lack of investment are expected to deepen an expected double-digit economic slump in 2020 and set the stage for severe social disruptions, Moody’s said.