Moody’s latest review of Lebanon’s sovereign rating left the country unchanged at “C” with a stable outlook, underscoring what the agency described as Lebanon’s ongoing economic collapse, unresolved sovereign default, and mounting pressures from the war between Hezbollah and Israel.

The agency said the rating — its lowest possible level — reflects Lebanon’s continued default since March 2020, prolonged political paralysis, and severely weakened state finances, while warning that creditors are likely to face losses exceeding 65% once the country restructures its debt.

In its periodic review issued after a May 7 rating committee meeting, Moody’s said Lebanon’s economic and financial outlook remains heavily constrained by the conflict, institutional dysfunction, and the absence of comprehensive reforms.

“The conflict between Hezbollah and Israel has triggered a deep and broad-based economic shock,” the report said, pointing to population displacement, collapsing tourism revenues, disruptions to agriculture and manufacturing, and widespread infrastructure destruction.

Moody’s projected Lebanon’s economy would contract by 14% in 2026, following modest growth of around 4% the previous year. The forecast was significantly more pessimistic than recent estimates by Finance Minister Yassine Jaber, who said the economy could shrink between 7% and 10% because of the war.

Jaber has also estimated total war-related losses at more than $20 billion, though he said the final figure would depend on Gulf financial inflows and the performance of Lebanon’s tourism season.

The agency warned that the economic downturn is expected to further strain public finances, weaken consumption, damage productive sectors, and increase reliance on foreign currency reserves and external support.

Despite the deterioration in economic activity, Moody’s estimated Lebanon could still record a primary fiscal surplus — excluding debt servicing costs — equivalent to 0.5% of gross domestic product this year, largely because of austerity measures and spending cuts.

However, once debt servicing costs are included, the agency expects the country to post an overall fiscal deficit of 0.5% of GDP. Similar levels are forecast for 2027.

Lebanon’s debt burden is also expected to worsen sharply. Moody’s projected public debt would rise to around 160% of GDP this year, compared with 143.9% in 2025, driven by the shrinking economy and continued accumulation of foreign-currency interest obligations.

The report said debt levels could eventually decline more substantially after negotiations with Eurobond holders over restructuring Lebanon’s sovereign debt, a process expected to involve major losses for creditors through deep reductions in bond values and interest payments.

Moody’s said any sustainable recovery would depend on a comprehensive restructuring of sovereign debt, the balance sheet of Lebanon’s central bank, Banque du Liban, and the commercial banking sector.

The agency also projected annual inflation at around 11% this year, compared with approximately 14.6% in 2025 and 45.2% in 2024, although those estimates were more conservative than recent figures released by Lebanon’s Central Administration of Statistics.

According to official statistics, annual inflation reached 20.02% by the end of April, up from 17.26% in March. Moody’s attributed inflationary pressures primarily to rising import costs linked to the global energy crisis, as well as disruptions to domestic production caused by the war.

In its broader assessment, Moody’s said Lebanon’s economic strength remained at “caa1,” reflecting years of economic contraction since 2019, the collapse of the country’s previous growth model based on foreign inflows, and increasing social vulnerability.

Institutional and governance strength was rated at “ca,” which the agency said reflected exceptionally weak public institutions, persistent governance failures, and Lebanon’s prolonged sovereign default.

Fiscal strength was also assessed at “ca” because of the country’s unsustainable debt burden and the expectation of heavy creditor losses during restructuring.

Meanwhile, Lebanon’s vulnerability to event risk was rated at “ca,” reflecting weak government liquidity, fragilities in the banking sector, heavy external financing needs, and exposure to regional instability.

Moody’s warned that Lebanon remains highly dependent on imports despite partial support from tourism revenues and remittances from the Lebanese diaspora, both of which could deteriorate further amid continued instability and rising oil prices.

The agency noted that temporary measures — including a potential extension of the ceasefire and discussions with the International Monetary Fund over emergency financing — could provide limited short-term relief by supporting liquidity and easing fiscal pressures.

However, Moody’s stressed that such measures would not resolve Lebanon’s deeper structural problems.

“While such developments would help mitigate the immediate effects of the conflict, they would not address Lebanon’s deep-seated structural weaknesses,” the report said, citing the unresolved sovereign default, the absence of a comprehensive debt restructuring plan, and longstanding institutional failures.

The agency added that any future upgrade to Lebanon’s sovereign rating would depend on meaningful fiscal and institutional reforms, improved state revenue generation, sustainable economic growth, and a durable reduction in debt risks.