S&P Upgrades Lebanon’s Local Currency Rating, Keeps Foreign Debt in Default

Ratings agency Standard & Poor’s (S&P) has raised Lebanon’s long-term local currency rating to CCC from CC, while maintaining its selective default (SD) status on foreign currency obligations, citing continued challenges in debt restructuring and external financing.

The agency said the upgrade reflects the government’s improved capacity to service commercial debt in local currency, supported by recent fiscal surpluses and incremental progress on reforms required for a potential new program with the International Monetary Fund (IMF).

S&P’s decision comes even as Lebanon remains classified in “selective default” on foreign debt, a category applied when an entity fails to meet certain obligations but continues servicing others.

Lebanon defaulted on its Eurobond payments in 2020, and while it has resumed servicing interest payments on local debt to the central bank since 2024, major steps toward a comprehensive debt restructuring remain elusive. S&P said it does not expect significant progress until after parliamentary elections scheduled for May 2026.

Lebanon’s local currency debt has shrunk dramatically to just 2% of GDP (less than $1 billion) by the end of 2024, compared to around 100% of GDP before the 2019 financial collapse. This was driven by a 98% depreciation of the Lebanese pound between 2019 and 2024.

Since the formation of Prime Minister Nawaf Salam’s government in early 2025 under President Joseph Aoun, parliament has passed amendments to the banking secrecy law and approved a long-awaited bank restructuring law. However, lawmakers have yet to enact the crucial “financial gap” law, needed to allocate past losses and compensate depositors.

The IMF has repeatedly stressed that such legislation, along with a credible 2026 budget that boosts revenues and rationalizes spending, is essential before a new bailout program can move forward.

Lebanon’s economy contracted by 6.5% in 2024, leaving GDP at around $28 billion, nearly half its size in 2018. S&P projects modest average growth of 2.3% in 2025–2026, assuming relative stability in the exchange rate, which has hovered at 89,500 liras per U.S. dollar since February 2024.

The agency also expects Lebanon’s net government debt to decline to 113% of GDP by end-2025, down from 240% in 2022, aided by improved fiscal performance, nominal GDP growth driven by inflation, and currency stabilization.

Still, external vulnerabilities persist. S&P forecasts the current account deficit to remain high at an average of 18% of GDP over the next few years, though lower than the 23% average recorded in 2023–2024.

Beyond financial hurdles, Lebanon’s outlook remains clouded by regional instability. Despite a ceasefire reached in late 2024, tensions between Israel and Hezbollah continue to weigh on investor sentiment and economic recovery prospects.