Rating agencies cite ‘cautious’ positive outlook for Lebanon after maritime demarcation deal with Israel

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Conclusions from two international credit rating agencies agreed on the positive initial outlook for Lebanon and its economy following the signing of the US-brokered maritime border agreement with Israel.

“The agreement is positive for Lebanon because it establishes the geopolitical security conditions necessary for international energy companies to begin the exploration and eventual recovery of Lebanon’s hydrocarbon resources,” Moody’s said in its latest report.

He said tapping the potential gas resources will help ease the country’s chronic energy deficit and kick-start an economic recovery.

Despite the improving geopolitical situation, domestic political risk remains ever-present, the agency warned.

“Lebanon’s rating is expected to remain unchanged without a full debt restructuring due to the scale of the country’s macroeconomic, financial and social challenges and our expectation of very large losses to private sector creditors exceeding 65%.”

Moody’s further noted that the final ratification of the deal by the Lebanese parliament enables exploration to begin on the Qana prospect on Block 9, part of which crosses the new maritime boundary boundary line.

The agency said exploration of the Qana field has yet to confirm any recoverable resources, noting that recovering any hydrocarbons in Lebanon would take around three to four years.

According to the report, the deal comes just as Lebanon’s electricity supply through the loss-making utility Electricité du Liban (EDL) is rapidly deteriorating due to its dwindling fuel supply, although the government is now counting on oil shipments from Iraq and trying to finalize bank financing to start importing gas from Egypt through the Arab Gas Pipeline.

The agency said Beirut’s ability to access World Bank financing depends on its implementation of reforms, including an audit of the EDL and a move towards more cost-effective tariffs.

The agency further viewed the April 7 International Monetary Fund (IMF) staff-level agreement for an expanded financing facility of $3 billion over four years as an opportunity for Lebanon to gain support. outside.

The specific reforms required to access the EFF include the adoption of appropriate legislation on capital controls, bank secrecy and bank resolution, as well as a decision to unify multiple exchange rate systems.

He underlined the slow progress of these reforms since the May 2022 parliamentary elections. “A new government has yet to be formed to succeed the interim government of Prime Minister Najib Mikati.”

He pointed out that parliament has yet to elect a new president to succeed President Michel Aoun, whose term ends on October 31.

Lebanon’s outstanding Eurobonds amount to almost $31 billion, without calculating suspended interest, all divided into annual tranches that extend until 2037.

In 2020, then-Prime Minister Hassan Diab said Lebanon would not pay a $1.2 billion Eurobond due March 9 because its foreign currency reserves reached critical levels and are necessary to meet the basic needs of the Lebanese people.

In a televised address, Diab said Lebanon was unable to pay maturing debt under “current circumstances” and would work to restructure its debt through negotiations with bondholders.

Consequently, the problem also became linked to the completion of the final agreement with the IMF.

Meanwhile, Fitch Ratings said the Oct. 11 deal between Israel and Lebanon could facilitate the development of gas fields in the region and improve long-term economic prospects for both nations.

The agency stressed that such benefits could be positive for Lebanon’s credit profile, in combination with a broader reform effort.

Nonetheless, at this stage, he warned that the outcome remains highly uncertain and the deal faces significant implementation risks.

Regarding the Qana field, Fitch said details of the deal have not been released, but officials’ statements indicate that Lebanon would get full rights to gas exploration and production there.

Israel would be paid for its rights to potential Qana reserves through the field operator, the agency noted.

He specifies that TotalEnergies leads a consortium which in 2018 obtained an exploration license for blocks 4 and 9, where a large part of the Qana field is located.

Following the deal, the agency said Lebanon’s interim prime minister called on TotalEnergies to begin gas exploration immediately.

He said the outlook for gas production remains unclear.

“The reserves of the Qana field are unknown. In 2020, drilling in Block 4 did not reveal commercially viable gas volumes.

He warned that while production is possible, it would take years to launch and the development of an appropriate legal framework could be hampered by Lebanon’s political environment.

Lebanon faces major short- and medium-term challenges in the meantime, he noted.

“The IMF board has not yet approved the disbursement of an EFF of $3 billion because the government has not implemented the required prior actions,” the agency explained.


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