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UPDATE 1-Moody's sees risk of Lebanon debt rescheduling despite budget

(Adds finance minister reaction, background)

BEIRUT, June 27 (Reuters) - Slowing capital inflows to Lebanon and weaker deposit growth increase the risk of a government response that will include a debt rescheduling or another liability management exercise that may constitute a default, Moody's Investors Service said.

This was despite fiscal consolidation measures included in the draft 2019 budget that is being debated in parliament, Moody's said in a June 25 credit analysis.

Asked about the report, Finance Minister Ali Hassan Khalil said on Thursday "matters are under control".

The draft budget aims to cut the deficit to 7.6% of gross domestic product from 11.5% last year, with Lebanese leaders warning the country faces financial crisis without reform.

Lebanon's public debt is 150% of GDP, among the largest in the world. State finances are strained by a bloated public sector, high debt-servicing costs and subsidies for power.

The Moody's report said: "Despite the inclusion of fiscal consolidation measures in the draft 2019 budget, slowing capital inflows and weaker deposit growth increase the risk that the government's response will include a debt rescheduling or another liability management exercise that may constitute a default under our definition."

Lebanon has long depended on financial transfers from its diaspora to meet the economy's financing needs, chiefly the state budget deficit and the current account deficit of an economy that imports heavily and exports little by comparison. (Writing by Tom Perry; Editing by Alison Williams)

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