How pressing is Lebanon’s financial challenge?

File photo showing A general view shows a street hosting banks and financial institutions, known as Banks Street, in Beirut Central District, Lebanon. (Reuters)
Updated 17 January 2019
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How pressing is Lebanon’s financial challenge?

  • Lebanon has a current account deficit because it imports more than it exports
  • Lebanese banking sector has been applying financial sanctions and anti-money laundering legislation

BEIRUT: Financial strains in Lebanon have been brought into focus by turbulence on markets where its dollar-denominated sovereign bonds suffered a heavy sell-off last week following comments by the finance minister about the public debt.
The bonds recovered this week on assurances the government is “absolutely not” planning to restructure the debt and is committed to paying its maturing debt and interest payments at predetermined dates.
But the episode has added to the debate of Lebanon’s debt sustainability after warnings from politicians, the IMF and World Bank over economic and financial conditions in a country that has suffered years of low economic growth.
Lebanon’s factional politics has led to years of policy paralysis and obstructed reforms needed to boost investor confidence. More than eight months after an election, politicians have been unable to agree to a new government.
Lebanon has one of the world’s biggest public debts compared to the size of its economy, largely generated by servicing existing debt and high state spending. It amounts to roughly 150 percent of GDP.
The World Bank has estimated that financial transfers to the state-owned power producer alone averaged 3.8 percent of GDP from 2008 to 2017. A public-sector wage increase in 2017 and higher interest rates have added to pressures on the budget deficit.
Lebanon also has a current account deficit because it imports far more than it exports.
Financing these two deficits has depended on critical financial transfers from its diaspora.
But questions over this model have grown.
“At the heart of concerns is the recent slowdown in remittance/deposit inflows, which have traditionally funded a large part- if not all of Lebanon’s financing requirement,” Goldman Sachs said in a December analysis.
The World Bank, in an October report, said Lebanon was exposed to significant refinancing risks. “Attracting sufficient capital, and in particular deposits, to finance significantly larger budgetary and current account deficits is proving challenging in light of slower deposit growth.”
Lower oil prices have been seen by economists as a major cause of the slowdown, with many Lebanese working in oil-producing Gulf Arab states. Political instability and lower growth in Lebanon have also been cited as factors.
Economic growth rates have fallen to 1-2% from 8-10% in the four years before Syria’s civil war began in 2011.
Central bank governor Riad Salameh said last month the banking sector was capable of financing the state’s foreign and domestic debt in 2019. The central bank’s net foreign assets stand at around $40 billion.
The financial system has proven resilient through political crises, assassinations, and war. The Lebanese pound peg against the US dollar has been stable for over two decades.
Often in the absence of effective government, the central bank has maintained stability using stimulus packages and unorthodox financial operations, made possible by large diaspora deposits into the banks.
But since 2016, the slowdown in non-resident inflows prompted the central bank to embark on “financial engineering” to draw more dollars to its reserves.
The World Bank and IMF have praised the central bank for a critical role. But the World Bank’s October report noted some central bank tools were becoming less effective and that Lebanon’s risk profile was rising sharply.
Confidence is critical to encouraging the inflows upon which the system rests. This would be boosted if a new government was agreed and moved quickly toward making reforms of the power sector.
This could unlock some $11 billion in funding pledged by foreign states and institutions last year for a capital investment program.
The power wielded by the Iran-backed Lebanese Shiite group Hezbollah is at the heart of tension between Lebanon and Gulf states such as Saudi Arabia that once supported Beirut but have turned their attention elsewhere in recent years.
Goldman Sachs noted that one cause of the slowdown in remittance and deposit growth was “the perceived reduced likelihood of external support in light of heightened tensions between Lebanon and the oil-rich Gulf countries.”
The heavily armed group is listed as a terrorist group by the United States and fought a war with Israel in 2006.
“We have warned for some time that if there was a fresh escalation of tensions with Gulf countries or Israel, that could lead to another period of capital flight that puts the dollar peg under pressure,” Jason Tuvey of Capital Economics said.
The United States has tightened financial sanctions against Hezbollah, part of its wider effort to counter Iran. The Lebanese banking sector has been applying these measures and anti-money laundering legislation.
Lebanon lobbied Washington in 2017 to balance its tough anti-Hezbollah stance with the need to preserve the country’s financial stability. Consequently, sanctions were altered enough to allay fears of major economic damage.
The application of such measures may have weighed on some inflows to Lebanon, though it is difficult to know to what extent, Tuvey said.
Once Prime Minister-designate Saad Al-Hariri manages to form a government, investors will be looking for follow-through on promises of reducing the budget deficit. But there are concerns that politics could get in the way of reforms once again.
“Lebanese and international stakeholders agree that the budget deficit needs to narrow, but a credible, actionable plan for achieving this is still lacking and it remains unclear if political dynamics will allow for a concerted fiscal adjustment,” Fitch Ratings said.


Civilians prompt delay in assault on last Daesh enclave: Kurd-led forces

Updated 16 February 2019
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Civilians prompt delay in assault on last Daesh enclave: Kurd-led forces

  • The last few hundred Daesh militants, many of them foreigners, had surrendered in the past two days to the Syrian Democratic Forces

OMAR OIL FIELD, Syria: “Large numbers” of civilians remain inside the last Daesh group enclave in Syria prompting a fresh delay in a final advance, Kurdish-led forces said on Saturday.

“There are still civilians inside in large numbers,” US-backed Syrian Democratic Forces spokesman Adnan Afrin said on the day President Donald Trump said he expected to announce the end of the militants’ “caliphate.”

“We weren’t expecting this number, otherwise we wouldn’t have resumed the campaign four days ago. This is why it’s been delayed,” Afrin said.

A second SDF spokesman said that the diehard militants remained in control of the tiny enclave around the village of Baghouz on the north bank of the Euphrates river.

“The pocket inside Baghouz is still controlled by the Daesh group,” spokesman Mustefa Bali said.

“There are still civilians inside Baghouz and we are working on getting them out.”

Neither spokesman would comment on the timeline set by Trump for a US announcement that the “caliphate” had been eradicated.

“We have a lot of great announcements having to do with Syria and our success with the eradication of the caliphate and that will be announced over the next 24 hours,” Trump told reporters at around 1600 GMT on Thursday.