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Lebanese Tycoon Pulls Candidacy for Premier as S&P Raises Alarm

Nadeem Hamid and Dana Khraiche

(Bloomberg) -- The withdrawal of a candidate to become Lebanon’s prime minister is once again threatening to drag out the process at a time the country faces calls to take urgent steps necessary to avoid economic collapse.

Mohammed Safadi, a wealthy Lebanese businessman and former finance minister, put an end to his bid just two days after winning the backing of Lebanon’s major political parties. Lebanon has been without a government since Saad Hariri resigned late last month in the face of protests over mismanagement that’s pushed the economy to the verge of bankruptcy.

“The risk of a protracted political vacuum increases policy uncertainty,” S&P Global Ratings said on Friday as it downgraded Lebanon deeper into junk. Warning over “the likelihood that a new government may seek to restructure its debt,” S&P said “the fragmented and confession-based political power-sharing system in Lebanon could delay a political solution.”

Safadi’s candidacy already faced opposition by anti-government protesters pressing for deeper reform. Three former prime ministers also came out against his nomination and called for Hariri to be reappointed. President Michel Aoun has yet to set a date for parliamentary consultations to name a new premier.

Local media reported that Hariri, Aoun, as well as the Iran-backed Hezbollah group and allies, have all agreed to name Safadi, a former lawmaker who’s also been a member in various governments for over a decade, to head the next cabinet.

‘Difficult to Form’

Instead, in a statement carried by the state-run National News Agency, Safadi, 75, said he realized “it will be difficult to form a harmonious government supported by all political sides that would enable it to take immediate rescue measures to stop the economic and financial deterioration and meet the aspirations of the people on the streets.”

The political logjam is leaving Lebanon with few options as it confronts one of the most serious crises in decades. Banks are closed, trade is stymied by a shortage of foreign currency and the pound has depreciated on the black market as concerns rise that the country is heading toward a debt crisis.

The squabbling has also stalled economic reform plans required to win back investor confidence and unlock some $11 billion in international aid pledged at a donor conference last year.

More protests are planned in Lebanon on Sunday. Demonstrators are calling for a government of experts that’s able to steer Lebanon through a financial crisis that has put pressure on its decades-old currency peg.

In response, local lenders have tightened restrictions on the movement of capital by banning transfers abroad and setting limits on withdrawals to avoid a run on the banks.

Police promised to boost patrols and security near banks after their employees union decided to go on strike until management provides them with needed protection against angry customers.

S&P’s Warnings

Meanwhile, S&P’s downgrade of Lebanon by two notches to CCC sets out the challenges facing the economy. The entire financial model that’s kept it afloat is unraveling as bank deposits from diaspora investors dwindle. S&P warned that it expects deposit outflow to accelerate in the rest of 2019, despite the restrictions imposed by banks.

Even as the central bank will likely “prioritize government debt repayments over other obligations,” a restructuring can no longer be ruled out, according to S&P.

“The recent imposition of restrictions on foreign-currency deposit withdrawals by banks raises questions about the monetary and banking regime,” it said. “Moreover, it will probably increase the likelihood of the imposition of official capital controls and, in a severe scenario, a possible end of the currency peg to the U.S. dollar.”

To contact the reporters on this story: Nadeem Hamid in Washington at nhamid3@bloomberg.net;Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Amy Teibel

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