Fitch Ratings on Wednesday said that it is not expecting full implementation of the fiscal consolidation targeted by Lebanon's draft 2019 budget, adding that additional fiscal and structural reforms would be required to stabilise government debt/GDP.
"Proposals to issue T bonds at below-market rates, most likely to the central bank, reflect the difficulty of cutting spending and tight liquidity in the financial system," Fitch Ratings said in a report on Lebanon.
"Lebanon's external finances also remain under pressure, illustrated by declines in foreign reserves and bank deposits in the four months to April."
The agency noted that revenue projections for tax measures may be optimistic given minimal economic growth and inefficient tax collection, noting that expenditure controls relating to new hiring and bonuses may prove difficult to enact.
"We will reduce our deficit forecast for 2019 by about 1.5pp, to around 9% of GDP. Even if the budget plan were fully realised, it would only be a first step towards stabilising government debt/GDP (151% at end-2018), which would require the deficit to narrow to at least 5.5%."
Turning to the suggestion that commercial banks buy low-interest-rate T bonds, the report noted that borrowing at an artificially low rate would save the government money (interest costs are 30% of total government spending), while also indicating a degree of financial stress.
"This raises questions about the government's debt sustainability, especially given the greater reliance on the central bank for financing," it said.
"It remains to be seen whether the government's budget, or its electricity sector reforms announced in April, will bolster confidence among depositors or foreign investors. Prospects for the authorities' ability to execute plans to reduce financing and external vulnerabilities without further damaging confidence and undermining the government's funding model will be key to resolving the Negative Outlook."
"Reserves will likely have decreased in May following a USD650 million Eurobond repayment. Lebanon's next Eurobond maturities are USD1.5 billion in November and USD2.5 billion in 1H20," the report explained.
"BdL has the gross reserves to meet these repayments if Lebanon cannot issue fresh Eurobonds. But continuing reserve declines could further erode confidence in the financial system," Fitch ratings warned.