Recently Lebanon's (B2 negative) parliament convened after a one-year lapse to pass several pending pieces of legislation, allowing the government to proceed with its debt management strategy and improve its debt structure. This development is credit positive even as urgent economic policy issues languish amid the country's political paralysis. The new legislation allows the government to issue new Eurobonds in 2016 and draw down more than $3 billion to cover its operational expenditures in 2016 and pay public sector wages. Parliament also approved multilateral loans and key banking laws. Several years of persistent fiscal and current account deficits pushed Lebanon's debt to 123% of GDP as of year-end 2014, among the highest in our rated sovereign universe. Until now, domestic creditors have shouldered most of the increase in debt, with external debt making up only 16% of total debt as of year-end 2014. The new legislation allows further Eurobond issuance. Although Lebanon successfully issued a $2.2 billion Eurobond in February and another $1.6 billion in November, it reached a self-imposed ceiling on foreign borrowing and required parliamentary approval to issue additional foreign- currency debt. As part of its Medium Term Debt Management Strategy 2014-16, the Ministry of Finance plans to increase reliance on foreign borrowing, which will help reduce the crowding-out effect of government borrowing on private-sector credit. Eurobond issuance also allows the government to extend the public debt maturity and reduce interest-rate and roll-over risks. These risks are exacerbated by the government's very large financing needs, which we estimate at 29% of GDP for this year. The weighted average maturity of outstanding Eurobonds was 5.8 years compared to just 3.3 years for local-currency debt as of June 2015. Among other multilateral loans, Lebanon's parliament also ratified a $474 million World Bank project finance loan for the construction of the Bisri dam to address water shortages in Beirut and Mount Lebanon. In the absence of parliamentary approval by the end of 2016, the country would have forfeited?the financing. Still, longer-term improvements in government effectiveness remain hampered by sectarian divisions, which have left the country without a president since May 2014 – the president traditionally facilitates cross-party negotiations. In the absence of a president, all legislation requires unanimous Cabinet approval to pass, which gives each of the main rival factions a veto over cabinet decisions and hinders the decision-making process. Other fiscal reforms have been delayed, such as the restructuring of Electricité du Liban (unrated), tax reforms, and various budget approvals. Nevertheless, the passed legislation indicates a degree of political consensus necessary to spur government action.
