S&P predicting deficit of 17.6% in BB- rating

The first international rating report to be issued in the wake of Rafik Hariri’s exit from government has maintained the negative outlook for the country.

Traders took comfort from Standard & Poor’s affirmation of Lebanon’s BB- credit rating which “reflects the size of the budget deficit in both absolute terms and relative to GDP,” said the agency.

S&P credited Hariri for narrowing the deficit from 26 percent of GDP in 1998 but expected the deficit to finish the year at 17.6 percent compared with a 14 percent estimate by other rating agencies Thomson BankWatch and Moody’s, and respected local forecasters such as Banque Audi.

“Lebanon’s deficit to GDP ratio is among the very highest of similarly rated sovereigns, although few other countries have had to recover from civil war,” Standard & Poor’s said.

Nabil Chaya, head of treasury at Banque Audi, predicted that the market would be pleased with the new report, which did not downgrade the country in an adverse international environment. He expected the uncertainty created by Mr. Hariri’s exit to subside in the coming few days.

“It is widely expected we’ll see demand for dollars in the next couple of days. However I would not be surprised to see people switch back to Lebanese pounds next week after they see Hoss and his team.”

Traders reported more demand for the dollar than at the start of the week when the markets did not have sufficient time to react to the political news. They said that the situation was “well contained” by the Central Bank which intervened and supplied the market with an estimated $50 million compared with $20 million-$30 million on Monday.

Treasury bill prices, especially short-term, dropped slightly and yields rose by an average of 1.5 percent. Traders reported no foreign selling.

Outside investments in Treasury bills amounted to $600 million at the end of September compared to $1.8 billion 14 months earlier. Supply of long-term paper was limited.

Mr. Chaya said that the selling pressure was quickly met by bargain-hunters who usually buy at lower prices and higher yields and cash profit by selling when prices go up.

“Demand came from investors who are quick to pull the trigger as always,” Mr. Chaya said. “They are concerned and switched to dollars. The market absorbed the Treasury-bill supply. The dollar market is limited and the Central Bank is holding the fort there.”





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