Is the Lebanese currency at risk of devaluation?
The depreciation and banking restrictions last month prompted calls for strikes from gas station owners
credit rating “under observation” with the possibility of a downgrade within three months. The agency downgraded Lebanon from “B3” to “Caa1” in January, signalling “a very high credit risk.”
In August, Fitch downgraded Lebanon from “B-” to “CCC,” a category for countries where there is a “real possibility” of default. Standard & Poor’s (S&P) kept Lebanon’s “B-/B” rating but with a negative outlook, meaning it could slide over the next year, the agency’s associate director of sovereign ratings Zahabia Gupta told AFP.
The Lebanese economy has suffered for years from low growth and a public debt swelling to around $86 billion. At roughly 150 percent of GDP, this is one of the highest rates worldwide.
In a country where the political class is often accused of corruption and racketeering, analysts say trust in Lebanon’s system of governance is being tested.
For the past year, Beirut has been trying to introduce economic reforms in order to unlock pledges of $11.6 billion in loans and grants from the international community. This crucial aid has not been released due to delays in implementing reforms. Despite the worry, “there is no real risk today of a devaluation,” according to economist Nassib Ghobril.
The central bank “has the necessary tools” to maintain monetary stability, said the chief economist at Byblos Bank.
These tools include sufficient foreign currency reserves to allow the bank to buy and sell currency to maintain the rate of the Lebanese pound.
At the end of September, foreign reserves reached $38.5 billion, an increase of over $2 billion since June, according to official figures, about four times the amount the country had in reserve in 2005. Another positive indicator for analysts are deposit inflows that can replenish foreign currency reserves. The central bank’s inflows increased over three consecutive months between June and August, according to Marwan Barakat, chief economist at Bank Audi. But observers remain cautious.
The increase in deposit inflows and central bank reserves “are primarily linked to the (central bank’s) financial engineering and other one-off transactions and may not be sustained,” warned S&P’s Gupta.