Supporters of Lebanon's Shiite Hezbollah and Amal groups clash with riot police on December 12 2019 in central Beirut. Picture: AFP/ANWAR AMRO
Supporters of Lebanon's Shiite Hezbollah and Amal groups clash with riot police on December 12 2019 in central Beirut. Picture: AFP/ANWAR AMRO

London  — Fitch cut Lebanon’s credit rating for third time in a year on Thursday, warning it now expects the crisis-hit country to restructure or default on its debt.

Fitch said its decision to chop the rating to CC from CCC reflected its view that a restructuring or default is now “probable, owing to acute political uncertainty, de facto capital controls, and damaged confidence in the banking sector”.

This will deter capital flows vital to meeting its financing needs, while the emergence of a parallel exchange rate and the failure of the central bank to fully service its foreign currency obligations also highlighted the strains, Fitch said.

“Indications of recession, together with restricted access to bank deposits and goods shortages magnify the risk of further social unrest. Rationing of US dollars to prioritise repayment of government debt may become a more politically charged issue.”

Lebanon’s public debt burden, equivalent to about 150% of GDP, is one of the heaviest in the world. 2018’s deficit was equal to about 11.5% of GDP, and economic growth rates have been weak for years.

This week, the country’s caretaker finance minister warned that a sharp fall-off in government revenues, as a result of its worst financial crisis since the 1975-1990 civil war, meant 2019’s deficit will also be much bigger than expected.

Fitch said rising dollarisation — in which citizens exchange their money for dollars — and the emergence of a parallel exchange rate also pointed to growing pressure on the peg of the Lebanese pound to the dollar, which has existed since 1997.

Soon after Fitch’s cut, the office of Lebanon’s caretaker prime minister Saad al-Hariri said he had discussed possible “technical assistance” with the International Monetary Fund (IMF) and World Bank.

In a statement, Hariri’s office said he told World Bank president David Malpass and IMF head Kristalina Georgieva that he is committed to preparing an urgent plan that can be implemented once a new government is formed.

The news saw Lebanon’s government bonds rally. Its eurobonds due in March 2020 rose to trade at 88.4c at 3.30pm in London, according to data.

Lebanon has been without a fully functioning government since Al-Hariri resigned in late October in the face of mass protests against corruption and economic mismanagement. He wants a full, technocratic government if he returns to government.

The country’s main political blocs have struggled to agree on alternative candidates. His only rival, businessman Samir Khatib, withdrew his candidacy to lead a government on December 8, reports said, putting Al-Hariri back in the running for prime minister. 

Reuters