Ratings agency Moody’s upgraded Lebanon’s government bond ratings by one notch to B1 from B2 on 13 April, citing an improvement in the country’s external liquidity and its resilient banking system.

The bonds remain junk status, which means they are non-investment grade.

“The sustained improvement in external liquidity, the strengthened ability of the country’s resilient banking system to finance fiscal deficits, and an amelioration of the domestic political situation following the formation of a consensus government last November [helped in the upgrade],” says Moody’s.  

Moody’s outlook for Lebanon’s five rated banks is stable, as announced on 17 March this year.

The agency also pointed out that confidence in Lebanon’s financial system has been bolstered by the central bank’s large cushion of foreign exchange reserves and its effective regulation of domestic banks.

It notes that the central bank’s foreign exchange reserves rose from $9.8bn at the end of 2007 to $26.9bn in February 2010, while its gold reserves stood at $10.1bn.

“This places the country in a more favourable position to absorb financial shocks, while also providing ample cover for the government’s maturing foreign currency debt,” says Moody’s.      

But despite the recent improving trends, the agency noted Lebanon’s “significant political and economic vulnerabilities”, which include wide twin deficits, a very high public debt overhang and a tense domestic political environment. It is also concerned by the slow implementation of much-needed economic reforms.