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Protests Continue to Paralyze Lebanon, S&P Says Saver Confidence Tested

Protests Continue to Paralyze Lebanon, S&P Says Saver Confidence Tested

Friday, 25 October, 2019 - 09:00
Protesters with Lebanese flags in Beirut

Lebanese protesters remained on the streets for a ninth day on Friday and a global credit ratings agency said the government's limited capacity to address demonstrator demands could further test depositor confidence and weigh on foreign exchange reserves.

The protests have cut roadways, closed schools and shut banks nationwide. Banks are set to remain closed until the situation stabilizes out of safety concerns, the banking association said on Thursday.

Emergency reform measures and an offer of dialogue with protest representatives by the president have so far failed to defuse anger or move people from the street.

The protests have been fueled by dire economic conditions and anger at the political elite accused of plundering state resources for personal gain, bringing turmoil to the streets of a nation already in deep economic crisis.

As politicians ponder ways out, the clock is ticking because of financial strains in Lebanon.

Exacerbating the economic situation, capital inflows vital to financing the state deficit and imports have been slowing down, generating financial pressures not seen in decades, including the emergence of a black market for dollars.

In a report issued on Thursday, credit ratings agency Standard & Poor's placed Lebanon's ratings on "creditwatch negative".

It said this "reflects our view that declining foreign currency inflows could exacerbate fiscal and monetary pressures while limiting the government's response to pressing societal demands".

While the central bank's usable foreign currency reserves were sufficient to service government debt in the near term, risks to government creditworthiness have risen, it said.

There was "at least a one-in-two chance" S&P could lower the government's ratings following a review within the next three months into how the government responds to current pressures and its effectiveness in restoring depositor confidence.

It also said that despite reasonably high levels of gross foreign exchange reserves, including gold, of almost $50 billion the imposition of "soft capital controls raise questions about the monetary regime".

"We understand that banks have imposed restrictions on US dollar withdrawals," S&P said.

Deposit outflows totaled $2.1 billion for the first eight months of the year. The central bank's usable foreign exchange reserves are estimated to stand at $19 billion at the end of 2019, it said.

The government this week announced reforms that include a one-time tax on bank profits and cuts to salaries of top officials, saying the measures would narrow the 2020 budget deficit to 0.6 percent.

"In our view, recent widespread protests suggest that the government's dual aim of maintaining social stability and implementing reforms to reduce the general government deficit could be difficult to reconcile," the S&P report said.

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