Fitch Ratings: Lebanon Finances Point to Debt Restructuring

Lebanon’s financial situation points to a likely restructuring of the country’s massive debt and financial sector to preserve declining foreign currency reserves, Fitch Ratings said Tuesday.
The credit rating agency’s report comes as Lebanese officials are debating whether to pay back $1.2 billion worth of Eurobonds that mature on March 9 amid a severe economic and financial crisis, the worst since the country’s 1975-90 civil war. Lebanon has never defaulted before, and the decision is causing much anxiety in the crisis-hit country. Many have argued the priority should be to use shrinking foreign currency to pay for imports of basic needs such as wheat, medicine and fuel.
A delegation from the International Monetary Fund was expected to visit Lebanon this week to meet officials and give an assessment on what is needed to save the plummeting economy.
Lebanese banks have imposed capital controls to manage depleting foreign currency. Lebanon’s economy has depended heavily on U.S. dollars since the 15-year civil war ended in 1990.
Fitch said the Lebanese central bank’s declining gross foreign currency assets remain sufficient on paper for the country to pay its external debt service in 2020 and into 2021, “provided de facto capital controls are maintained.”
It added that Lebanon’s gross external financing requirement stands at less than $10 billion annually in 2020 and 2021, while the central bank has $29 billion of gross foreign currency reserves at its disposal.
“However, this capacity to pay will become increasingly stretched and it would be unrealistic, both economically and politically, to run these assets to zero,” Fitch said.
Lebanon has one of the highest debt to GDP ratios in the world, standing at about $87 billion or more than 150% of the country’s GDP. Most of the debt is held by local lenders but there are concerns that if Lebanon defaults, some foreign investors might take legal action against the tiny country.
The economic and financial crisis has worsened since mid-October, when nationwide protests began against the ruling elite that is blamed for years of corruption and mismanagement.
President Michel Aoun said Tuesday the government is working to limit the effects of the crisis, adding that the IMF delegation will give the government its technical experience.

Associated Press