Lebanon faces geopolitical and fiscal challenges following its recent election, which has not fundamentally shifted the political status quo, Fitch Ratings said in a report issued last week.
"The result underscores that policymaking will remain constrained by Lebanon's sectarian-based political system and highlights that Lebanon could be dragged further into Iran-related tensions," the report read.
"Overall, the result is consistent with our view that the election would not fundamentally alter the political status quo, despite last year's adoption of a new electoral law," the agency added, stressing that the immediate challenge is to form a new coalition government within a reasonable timeframe.
"We do not anticipate a return to the political paralysis of 2014-2016, but a repeat of the five months of negotiations that followed the 2009 election would prevent effective policymaking for much of 2018," the agency warned. "The quicker the process, the more supportive it will be for financial inflows."
The rating agency pointed out that the new government will face challenges managing geopolitical risks given Lebanon's vulnerability to regional spillovers.
"The other major challenge is to improve fiscal sustainability, especially given large infrastructure spending plans," it said.
The report explained that the outgoing parliament approved the 2018 budget in late March, targeting a deficit of 8.5% of forecast GDP. This would be smaller than the budgeted 2017 deficit, but 0.8pp larger than the actual 2017 deficit, and would not reverse the rise in government debt/GDP, which is already among the highest of all Fitch-rated sovereigns, at close to 150%.
Lebanon's 'B-'/Stable sovereign rating reflects weak public finances and economic growth, high political and security risks, the agency concluded, but also its resilient banking system and external liquidity and other structural strengths, and an unblemished track record of public debt repayment.