The resignation of Lebanese Prime Minister Najib Mikati last week deepens the country's political divide and may delay upcoming parliamentary elections in June, Moody's Investors Service said.
Mikati's resignation, which followed his cabinet's refusal to extend the term of the head of the country's head of Internal Security Forces and appointment of commission to prepare for legislative polls, "is the most severe crisis" that has erupted since sectarian strife in May 2008, the rating agency said.
Mikati's decision to step down on March 22 and a lack of consensus on an electoral law that regulates upcoming legislative polls is likely to delay the elections.
A two-year rebellion against the Syrian regime of President Bashar Al-Assad has slowed Lebanon's economy. Gross domestic product has ebbed to about 1 percent after an aggregate of 8 percent growth over a three-year period starting in 2007. The number of tourists has declined by 3.7 percent, and construction permits by 10.8 percent, according to official figures.
"The decelerated growth and political drift have combined to put a halt to fiscal consolidation efforts," Moody's said. "The Syrian conflict has not only started to impact the asset quality and performance of Lebanese banks, but is now also undermining the government’s ability to finance its increasingly large deficits from the banking sector."
The budget deficit which has usually hovered at about US$3bn has climbed to about US$4bn as a result of a decline in economic activity and lower tax revenues. The fiscal deficit has increased to about 9.4 percent of GDP in 2012 from 6.1 percent a year earlier.