BEIRUT: Fitch Ratings has affirmed Lebanon’s long-term foreign and local currency Issuer Default Ratings, short-term foreign currency IDR, and the Country Ceiling at “B.” The outlook is stable.

The agency said that the affirmation of the rating reflects the fact that Lebanon’s substantial and rising foreign exchange reserves, lower debt levels, and reduced interest costs – relative to the previous decade – mitigate the downside risks to political stability, growth and public finances in 2012.

“The already low rating embodies a degree of tolerance for political volatility. However, a major and sustained outbreak of conflict resulting from either internal sectarian strife or a spillover of tensions from neighboring Syria could put the rating under negative pressure,” Fitch added.

It stressed that the risk of sustained deposit flight prompted by political instability is the primary risk to Lebanon’s rating.

“Currently, there are no signs of this, and when deposits have fallen in the past, the fall has proved temporary. Sporadic violence over the past year has not become generalized or widespread, due to the lack of appetite for violence among the majority of the population and efforts by leaders of Lebanon’s sectarian groups to prevent it,” Fitch said.

Nevertheless, it said that the developments in Syria have the potential to inflame tensions. Although Fitch’s base case does not envisage the outbreak of sustained violence, such an outcome, if it were to happen, would adversely affect the rating.

Fitch explained that the economic impact of increased political tensions has so far mainly been felt in lower growth, whilst key financial variables – FX reserves and banking system deposits – continue to rise, and the public debt ratio declined again in 2011 to 135 percent of gross domestic product.

Latest official estimates suggest GDP rose by a faster than expected 5 percent in 2011, despite a slowdown in tourism and the property market – two key sectors of the economy. Importantly, non-resident deposit growth picked up during the year as a new government was installed in June and interest differentials remained attractive.

“For the year as a whole, non-resident deposit growth was 15 percent – a rate that was maintained in the year to April. Total banking system deposits grew 8 percent in the year to April 2012. Although credit growth has slowed, it remains a robust 13 percent to 14 percent,” Fitch said.

Growth is expected to slow further this year. Tourist arrivals are down 8 percent so far in 2012 and the summer season will be adversely affected by travel advisories announced by a number of Gulf Cooperation Council countries. Activity in the property sector has stagnated.

Debt dynamics are therefore set to weaken.