In an update to its February assessment of Lebanon's macroeconomic prospects, Moody's Investors Service indicated that Lebanon's 'Ca' government bond rating reflects the country's unsustainable debt trajectory and the agency's expectation that domestic and international private creditors will likely incur significant losses under the government's debt restructuring plan. Also, it said that the coronavirus pandemic is exacerbating the ongoing deterioration in Lebanon's economic and financial conditions, which will increase social risks. It added that the 'stable' outlook takes into account the agency's assumption that the restructuring of the public debt could take place in coordination with creditors and under the umbrella of an economic adjustment program with the International Monetary Fund, which would unlock external funding. However, it factored-in the possibility that external funding may not materialize given the government's weak track record of policy implementation, which would result in larger losses for investors.
 
The agency said that Lebanon's 'b2' Economic Strength score reflects the credit crunch that the economy is facing and the anticipated protracted economic contraction. It projected real GDP to shrink by 13.8% in 2020 and by 4.4% in 2021 following a contraction of 6.9% in 2019, and expected the slowdown in economic activity to reduce GDP per capita in the 2020-21 period. Also, it noted that Lebanon's 'caa1' Institutions and Governance Strength score reflects the country's weak governance framework, with very weak fiscal policy effectiveness, as well as a deteriorating monetary and financial policy effectiveness amid rising economic and external challenges. 
 
In addition, Moody's indicated that Lebanon's 'ca' Fiscal Strength score points to the country's elevated debt burden, which it forecast to rise from 178.4% of GDP at the end of 2019 to 205% of GDP at end-2020. It added that the debt trajectory is sensitive to a contraction in economic activity and to interest rate shocks, while it considered that a potential adjustment to the peg of the Lebanese pound to the US dollar will entail a significant increase in the debt burden, given that 40% of the debt stock is denominated in foreign currency. It estimated that the cost of servicing the debt was equivalent to 48.4% of public revenues in 2019 and projected it to decrease to 14.1% of receipts by 2021, in case authorities restructure the public debt. However, it expected this ratio to increase further over time if authorities do not restructure the debt. 
 
Further, the agency noted that Lebanon's 'ca' Susceptibility to Event Risk score, which assesses a country's vulnerability to sudden events that would materially impact the government's creditworthiness, is driven by the government's liquidity risk and its impact on other drivers of event risk. It said that the country's 'ca' Government Liquidity Risk score reflects the government's limited traditional funding sources, such as deposits at commercial banks, as well as the country's closed access to international capital markets, and the authorities' sustained drawdown of usable foreign currency reserves at Banque du Liban. Also, it noted that the 'caa' External Vulnerability Risk score points to reduced confidence in the sustainability of the currency peg due to persistent external imbalances and declining foreign currency buffers to support the exchange rate, while ensuring at the same time the necessary funding of key imports. It added that Lebanon's 'caa' Banking Sector Risk score reflects the interconnectedness between the sovereign and the banking system, which increases the reliance of the government on the financial health of the banking sector.