Indebted Lebanon may struggle to refinance as austerity budget stalls

Shoppers in the old souk in Tripoli, Lebanon. The country must introduce economic reforms and a harsh budget to secure loans and eventually reduce its indebtedness. (Shutterstock)
Updated 17 May 2019
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Indebted Lebanon may struggle to refinance as austerity budget stalls

  • The government in February promised “difficult and painful” reforms to control spending
  • Many foreign funds said they would be reluctant to delve into new Lebanese Eurobonds

LONDON: Lebanon’s impasse in agreeing a credible fiscal reform plan and deteriorating global market conditions means it may struggle to refinance key foreign currency debts coming due this year, unnerving overseas investors.
Outright default can likely be averted in the short-term by a government financing maneuver involving the central bank and local banks, the main holders of its debt.
But this is only likely to be a stopgap and many foreign funds contacted said they would be reluctant to delve into new Lebanese Eurobonds until they assess reforms.
Lebanon’s cabinet talks may drag into next week after about a dozen sessions so far without a deal, against a backdrop of protests by public sector workers and retired soldiers over concerns about wage and pension cuts.
The government in February promised “difficult and painful” reforms to control spending. Prime Minister Saad Al-Hariri has said this may be the most austere budget in Lebanon’s history.
At stake is investor support for new debt sales needed to help meet maturing Eurobonds next week and again in November. Access to international markets has been compounded by fresh turbulence on emerging markets as the trade row between the US and China blew up again and geopolitical tensions involving Iran heightened.
Lebanon, with one of the world’s highest public debt burdens, has been buffeted by political paralysis and fallout from conflict in Syria and Iraq, which has weighed on regional trade, investment and travel. A small, open economy, it has also been hit by a fall in money flowing in from its scattered diaspora, which traditionally helped fund a large chunk of its financing needs.
“The government is not even able to get its act together to deliver a comprehensible transparent budget. Nor did it present or formulate a credible medium term fiscal adjustment plan that strikes the right balance between the imperative of growth and fiscal consolidation,” said Alia Moubayed, managing director at Jefferies, an international finance firm.
“Without a clear medium-term economic and fiscal policy framework that addresses large external imbalances, and given high levels of corruption and state capture, investors will not be convinced to buy Lebanon risk, as donors will look with extra scrutiny before committing further funding.”
The protracted budget process has pushed up the cost of insuring Lebanon’s debt in recent days to its highest level since Jan. 22, when it was struggling to form a government.
Lebanon should be able to muddle through to find a solution to its most immediate debt headache, a $650 million Eurobond maturing on May 20.
Lebanon can pay back investors in this bond drawing on a foreign exchange transaction with the central bank, a source familiar with the matter said.
The government has used the same unconventional approach to financing its deficit in the past.
The central bank would likely discount dollar denominated certificates of deposits for the banks to subscribe to in return for them buying long-term domestic bonds, said one banker familiar with the situation. In parallel, the central bank would do a swap with the finance ministry, the issuer of the international debt.
A source familiar with the matter told Reuters on Tuesday that Lebanon might wait until emerging market investors have more appetite and the government has approved its budget. The government is targeting international investors for around 20 percent of the new issue.
The government says it is committed to pay all maturing debt and interest payments on predetermined dates.
“Eurobond maturities this year would be met by issuing further eurobonds,” said Garbis Iradian, chief MENA economist at Institute of International Finance (IIF).
“First they have to send a strong signal to the market by approving strong fiscal measures.”
Nassib Ghobrial, chief economist at Lebanon’s Byblos Bank, said there was no risk to Lebanon’s foreign currency financing for this year because the central bank was committed to covering the hard currency needs.
But Lebanon’s economic challenges remain hefty.
Its fiscal deficit ballooned to 11.2 percent of gross domestic product (GDP) last year from 6.1 percent the year before and its international reserves fell to $39.7 billion, enough for 13 months of import coverage.
The government could adjust the deficit to 8 or 8.5 percent of GDP this year, a “significant” move that would help stabilize debt levels, said Iradian.
Still, that rebalancing could be tricky to achieve with anaemic economic growth — JPMorgan forecasts recently revised its growth forecast down to 1.3 percent in 2019, warning of “significant downside risks” surrounding fiscal reforms.
“While cabinet formation has supported sentiment, delays in the execution of much needed reforms could dent confidence against the background of large fiscal and external deficits and high debt,” Giyas Gokkent of JPMorgan Securities, wrote in a note.
Deep-seated fiscal reforms, including improving the business climate and fighting corruption, could help accelerate growth and unlock the $11 billion in funding pledged by the international community at a special conference in April 2018, according to the IIF. That money hinges on such reforms.
Qatar also said in January it will invest $500 million in Lebanese government dollar bonds. It is unclear whether that support has materialized.
Still, some prospective investors remain unconvinced.
“We are underweight Lebanon,” said Sergey Dergachev, senior portfolio manager at Germany-based Union Investment. “There’s very few items that make us feel confident about increasing our position as the problems haven’t been solved on the ground and the long-term plan remains quite weak.”
Dergachev said it would be tough for Lebanon to issue at the moment given uncertainty over the US-China trade spat.

Decoder

FASTFACTS


‘Fuel of the future’ comes of age as Aramco opens first hydrogen filling station

Updated 17 June 2019
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‘Fuel of the future’ comes of age as Aramco opens first hydrogen filling station

  • Fatih Birol’s comments were a deliberate poke at those experts who think that the sheer logistics of hydrogen make it always an unlikely solution to global energy challenges
  • Birol’s article was followed by a report from the IEA that put some meat on the bones of the argument that hydrogen is key to solving problems such as global warming

DUBAI: Fatih Birol, executive director of the International Energy Agency, cracked a joke in the Financial Times a couple of weeks ago.
“Hydrogen is the fuel of the future, and it always will be,” he wrote about the fuel that many experts agree could hold the key to the world’s energy problems.
It was a deliberate poke at those experts who think that the sheer logistics of hydrogen — generation, storage, and transportation — make it always an unlikely solution to global energy challenges.
Birol’s article was followed by a report from the IEA that put some meat on the bones of the argument that hydrogen is key to solving such problems as global warming and environmental degradation.
“The world has an important opportunity to tap into hydrogen’s vast potential to become a critical part of a more sustainable and secure energy future … The world should not miss this unique chance to make hydrogen an important part of our clean and secure energy future,” the report said.
That argument will get a critical boost today, when Saudi Aramco, the biggest oil company in the world, opens its first hydrogen fueling station in Dhahran Techno Valley, in the heart of the Kingdom’s oil producing region.
Aramco has partnered with Air Products, a US company that has been a pioneer in the use of industrial gases, to produce a filling station for hydrogen-fueled vehicles.

 

It is very much a test. “The collected data during this pilot phase of the project will provide valuable information for the assessment of future applications of this emerging transport technology in the local environment,” Aramco said when the project was first announced.
But it is something Aramco has been investigating for a long time. Ahmed Al-Khowaiter, Aramco’s chef technology officer, said: “The use of hydrogen derived from oil or gas to power fuel cell electric vehicles represents an exciting opportunity to expand the use of oil in clean transport.”
Hydrogen — essentially what is left when you take the oxygen out of water — has been recognized as a potential fuel source for many decades. Motor manufacturers developed a hydrogen motor engine 50 years ago, but the ease and accessibility of hydrocarbon fuels — oil, gas and coal — made it uneconomic to develop this technology beyond the prototype stage.
Now, as the debate over the role of hydrocarbons in the global environmental balance has become ever more intense, some experts, including Birol and other influential parts of the thought-leadership establishment, believe hydrogen is the next Big Thing in global energy trends.
The World Economic Forum (WEF) said recently that “green” hydrogen offers a solution to the world energy challenge, and that is the problem the theoreticians are struggling with: Hydrogen is released naturally in the process of burning hydrocarbons, but it is self-defeating, in an environmental sense. if you have to burn oil, gas or coal to produce it.
On the other hand, renewable sources, like sun, wind and water, do not produce enough hydrogen to be practically or commercially viable, and not at the right times, when people actually need it.
But, as the WEF noted recently “low-cost green hydrogen is coming”, as technology advances mean the cost of renewable energy falls dramatically each year. The Middle East already has a very big and very cost-efficient program for solar energy generation.
The other challenges lay in how to store and transport hydrogen. It can be loaded onto a tanker like LNG, or pushed through pipelines, but it would require a huge investment to change current logistics systems — essentially designed for oil and LNG — to handle hydrogen.
Many countries, including Saudi Arabia, already have the infrastructure associated with oil and gas refining and petrochemicals production to be able to equip “hydrogen hubs,” as long as there is government will and commercial incentive to do so.
For the Kingdom, it looks like a no-brainer for the future. As Birol said: “So, hydrogen offers tantalising promises of cleaner industry and emissions-free power. Turning it into energy produces only water, not greenhouse gases. It’s also the most abundant element in the universe. What’s not to like?”

FACTOID

Technological advances mean low-cost ‘green’ hydrogen offers a solution to the world energy challenge, according to the World Economic Forum.