BEIRUT — Moody’s has changed its outlook on Lebanon's banking system to stable from negative, reflecting greater political stability and an improvement in economic growth. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Lebanon over the next 12-18 months.

"After years of deterioration, the operating environment is stabilising," said Alexios Philippides, an Assistant Vice President at Moody's. "However, economic output will continue to be constrained by deteriorating basic infrastructure and businesses will defer investment decisions until there is further clarity on the political situation." Therefore, the rating agency expects modest credit growth of 6% over the outlook period, similar to 2016, driven by the central bank's support packages.

Moody's forecasts real GDP growth of 2.8% in 2017 and 3.0% in 2018, up from 1.8% in 2016 because of the positive spillovers from renewed political stability.

Moody's expects Lebanese banks to continue attracting a steady flow of customer deposits. This will enable the banking sector to finance both the government deficit, which the agency expects will average 9% of GDP in 2017 and 2018, and the private sector.

•Banks' high sovereign exposure, around half of banks' assets in June 2017, will increase. This exposure links banks' creditworthiness to that of the government and also exposes them to high interest rate risk.

Lebanese banks' capital buffers will remain modest, however, in view of their very high exposure to the sovereign and the volatile operating environment in Lebanon.

Banks' profitability will be challenged by a higher effective tax rate and limited new business. However, Moody's expects new provisioning needs to be low because banks used large one-off revenues in 2016 to book substantial collective provisions.

“ We expect modest domestic loan growth of around 6% for banks over our outlook period, driven - as in previous years - by Banque du Liban's (BdL, the central bank) support packages,” Moody’s said.

While tourism is recovering, the performance of the construction and real estate sector remains well below historic levels.

Tourist arrivals rose by 14% year-on-year through June 2017, a seven-year high, supported by improved domestic security. — SG