Libya's long-term ratings lowered on elevated political risk


Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Socialist People's Libyan Arab Jamahiriya (Libya) to 'BBB+' from 'A-'.

S&P also affirmed the short-term ratings at 'A-2'. We placed all ratings on CreditWatch with negative implications. S&P changed the Transfer and Convertibility Assessment to 'BBB+' from 'A-'.

The rating actions reflect S&P's reappraisal of political risks in Libya. With expectations that the violent outbreaks of civil unrest seen in Libya's eastern region, and particularly the city of Benghazi, of the past few days will persist. Also, media reports indicate that unrest has now spread to the capital Tripoli.

These developments are occurring despite the government's use of force to quell domestic unrest, which, thus far, some independent estimates suggest have resulted in more than 200 fatalities. The protesters appear to have many grievances, including demands for improved employment opportunities and living standards, increased political participation, and opposition to the regime of the leader, Colonel Muammar al-Qadhafi.

Colonel Qadhafi apparently continues to retain support in Tripoli. However, in our view, the longer the unrest continues, the higher the risk of political instability spreading across the country. As yet, the authorities have declined to engage the protesters in a national dialogue over economic and political reforms. The Libyan government has significant flexibility to expand its social spending; with a general government surplus which we estimate at 11.5 per cent of GDP in 2010 and the fiscal coffers benefiting currently from oil prices of over $100 per barrel. However, absent a swift resolution to the current crisis, we believe that risks to Libya's macroeconomic stability are likely to grow.

At present, the Libyan political system is defined internally as a "Jamahiriya" or Republic of the People, with representation governed via national and local congresses. Colonel Qadhafi is the effective head of state and is referred to as "the leader," although he holds no constitutional position. Discussion over introducing a constitution has thus far occurred in the context of preserving existing political institutions.

Standard & Poor's aims to resolve the CreditWatch listing within the next three months. At present, the extent of the risks to Libya's oil production, the key driver of the economy, while negative in our estimation, remain highly uncertain. A rapid resolution of domestic unrest, with limited economic impact, could lead us to affirm the current ratings. However, a more protracted political crisis, which we consider likely to greatly impair Libya's medium-term growth prospects, could lead us to lower the long- and short-term ratings further. In such a turn of events, and depending on the severity of the crisis, the ratings might be lowered by one or more notches.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W:

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