November 10, 2017 / 10:07 AM / in a year

Fitch: PM's Resignation Raises Lebanon Political, Economic Risks

(The following statement was released by the rating agency) LONDON, November 10 (Fitch) The surprise resignation on 4 November of Lebanon's Prime Minister Saad Hariri jeopardises the country's gradual political progress made over the last year and could place renewed pressure on its economy and financial system, Fitch Ratings says. It also highlights Lebanon's vulnerability to spillovers from regional tensions. Lebanon's 'B-/Stable' sovereign rating already incorporates a high degree of political risk and the financial system has proved resilient during previous periods of political uncertainty. Mr Hariri's resignation is a blow to the relative improvement in Lebanon's policymaking environment since the election of Michel Aoun as president in October 2016 and the formation of a new government in December. Notably, the government and parliament have agreed on a new electoral law and a date for the first elections since 2009, and finally passed the 2017 budget in mid-October - the first budget approved since 2005. Although largely symbolic, this raised the prospect of a more timely process for the 2018 budget; this now looks less likely. Fresh political uncertainty will slow policymaking once again. The president has said he will not accept Mr Hariri's resignation until he returns to Lebanon from Saudi Arabia to explain it. Assuming he does so, Lebanon could either form a new government under a new Sunni prime minister or proceed with a caretaker government until the parliamentary elections scheduled for May 2018. Further delays to the elections are possible, and would risk another prolonged period of policy inaction. Regional tensions threaten the climate of cautious compromise among Lebanon's political factions. Mr Hariri has long-standing family and business ties in Saudi Arabia, from where he announced his resignation. He claimed he was at risk of assassination and criticised Hizbollah and Iranian influence in Lebanon. President Aoun has called for calm, as has Hizbollah leader Hassan Nasrallah. A prolonged political crisis would again test the resilience of deposit growth and diaspora inflows into the Lebanese banking system, which are key to government funding. Government debt/GDP, at around 150%, is one of the highest among Fitch-rated sovereigns and interest spending consumed 48% of budget revenue in 2016. Bank deposit growth, in part from diaspora inflows, is currently robust enough to meet the government's considerable financing needs, and FX reserves are high (the central bank maintains a high stock of reserves to underpin the Lebanese pound's US dollar peg). But these metrics can weaken quickly. If reserves or deposits came under pressure, we believe the central bank would respond. Banque Du Liban (BDL) has increasingly supported the economy and financial system in the face of low growth and bouts of political uncertainty since 2011, including via unorthodox financial operations and stimulus programmes. Most recently, since June, BDL has been supporting its stock of foreign assets by offering attractive interest rates to banks for medium- to long-term dollar deposits. BDL then lends the banks Lebanese pounds worth 1.25x the dollar amount deposited, at a lower interest rate (around 2%). This money has to be placed in Lebanese government securities. However, in its effort to maintain the currency peg and support the government's financing model, BDL seems to have been incurring annual losses on its foreign-currency operations, worsening its capital position (it receives minimal returns on its FX reserves, while paying out higher rates to attract dollar deposits). If there were a loss of confidence in the peg, the sustainability of the government's debt profile would also be materially weakened. We identified the banking sector's ability to attract sufficient deposits to keep funding the government as a rating sensitivity when we affirmed Lebanon's 'B-/Stable' rating at the start of September. The low rating reflects very weak public finances, high political and security risks and anaemic economic performance. Contact: Toby Iles Director, Sovereigns +852 2263 9832 Fitch (Hong Kong) Limited 68 Des Voeux Road Central Hong Kong Jan Friederich Senior Director, Sovereigns +852 2263 9910 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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