International ratings agency Standard & Poor’s said Monday that Lebanon’s high public debt burden and large current account deficit were among the factors that prompted it to downgrade the country’s outlook from stable to negative in May. “The ratings on the Republic of Lebanon are constrained by the country’s high public debt burden, large current account imbalances, and the divisive political environment,” S&P said in a report explaining the reasoning for its downgrade on May 28. It said Lebanon’s high public debt burden continues to hamper countercyclical fiscal policy and exacerbates a weak fiscal profile. The agency was also worried about the external vulnerabilities, as well as a large current account deficit, driven by considerable trade deficits and the dependence on oil. But S&P did not express concerns about the country’s monetary system thanks to the massive foreign currency reserves of the Central Bank and the huge deposits of commercial banks. “The ratings are supported by Lebanon’s stable resident and nonresident depositor base, which in our view supports the country’s comparatively strong and well-regulated financial system and meets both the banks’ and the government’s funding needs,” the agency said. “The ratings are also supported by our view of Lebanon’s political and macroeconomic resilience; it has withstood both domestic and geopolitical turmoil in recent years,” S&P said. It stressed that since the formation of the March 8-led government of Prime Minister Najib Mikati in June 2011, the Lebanese government has maintained a greater degree of stability than a number of its neighbors in the Middle East and North Africa region. “Heightened tensions stemming from ongoing unrest in Syria and internal political fissures [are] indicating increased and prolonged domestic and geopolitical risks,” S&P said. “The change in the outlook ... reflects our view that the balance of risks to the ratings on Lebanon has shifted to the downside as the Syrian conflict shows no sign of abating,” it said. “Heightened domestic tensions in Lebanon – as pro- and anti-Assad sectarian factions skirmish in the Tripoli region as well as in Beirut – indicate to us that Lebanon’s domestic stability has become increasingly more vulnerable to events in Syria.” It added that despite the government’s efforts to avoid getting drawn into neighboring conflicts, the agency sees an increasing possibility that the Syrian uprising could destabilize Lebanese society and politics. “At the ‘B’ rating level, we see Lebanon’s banking system and external position as key rating strengths. Bank deposits grew 2.6 percent in the first quarter of 2012, driven largely by nonresident deposit inflows, providing both balance-of-payments support and sources for additional government financing,” S&P said. It indicated that the Central Bank’s international reserves rose to $31 billion on March 31. “Combined with the external assets of the financial system, they [the international reserves] are 1.5x (1.5 times more than the) external debt. Combined with projected 2012 current account receipts (CARs), they exceed Lebanon’s projected 2012 gross external financing needs,” the report said. It added that deposits in Lebanon are traditionally sticky; a significant share of deposits comes from the Lebanese diaspora, which is well aware of the political risks in the country. But previous instances of acute domestic and regional turmoil have led to brief periods of deposit outflows (albeit in low single-digit percentages) including the collapse of the government in January 2011 ($1.1 billion withdrawn), the 2006 conflict with Israel ($3 billion), and the 2005 assassination of former Prime Minister Rafik Hariri ($2 billion). The Daily Star