BEIRUT: International rating agency Moody’s projected that Lebanon’s fiscal deficit would reach 11 percent of GDP in 2014 if public finances continued to deteriorate.
“Owing to slow growth, continued political uncertainty and delayed fiscal reforms, we expect Lebanon’s fiscal deficit to expand to 11 percent of GDP in 2014,” Moody’s said in its latest report on the sovereign outlook in the Middle East and North Africa.
Moody’s reported that Lebanon’s fiscal deficit reached an estimated 10.4 percent of GDP in 2013, up from 9 percent the year before.
The agency said Lebanon public finances remained weak and the country continued to run large current account deficits.
“Political uncertainty combined with spillover risks from Syria’s civil war limit investment and tourism activity,” the report said.
“Higher food imports to feed a growing number of refugees from the conflict in Syria also weigh on the current account deficit.
“Nevertheless, the Banque du Liban maintains a high level of foreign-exchange reserves, reinforcing confidence in the exchange-rate peg, while deposit flows continue to help the country finance its large current account deficits.”
Moody’s recently maintained its negative outlook for Lebanon’s sovereign rating and this has also been reflected in the ratings of the Lebanese banks.
“Nevertheless, Lebanon’s rating continues to be supported by strong deposit and remittance flows, which have proved resilient to political shocks,” the report said.
Despite the negative outlook, Lebanese banks continued to replace maturing government bonds at almost the same rates.
Lebanese bankers said the negative rating would not discourage them from subscribing to the bond issues, although they warned that the Finance Ministry would find it very difficult to market any bonds to foreign buyers.
Regionally, Moody’s saw a wide divergence in the overall financial health of governments.
“The sovereign ratings of countries in the Middle East and North Africa (MENA) region reflect sharp differences in the credit profiles between the oil-exporting Gulf Cooperation Council (GCC) and the rest of the MENA region,” the report said.
The report forecast strong growth for GCC states in 2014, but flagged the potential for inflation in the bloc.
“Although fiscal space is being squeezed, all GCC countries – except Bahrain – will record fiscal surpluses and stable debt ratios, amid manageable contingent risks from public-sector corporate debt,” the report said. “Significant sovereign wealth fund (SWF) assets are a large multiple of annual government expenditure and public debt.”
However, Moody’s outlook is gloomier for the rest of the region.
“Non-GCC MENA sovereigns face subdued growth and persistent fiscal challenges in 2014,” the report said. “The political upheaval caused by the Arab Spring continues to reverberate around the region, delaying economic recovery.”