Financial crunch time for Lebanon?

Financial crunch time for Lebanon?
A man rides on a motorbike inside a refugee camp near Sidon in southern Lebanon. The country needs billions of dollars in funds to help rebuild war-damaged and negelcted infrastructure. (Reuters)
Updated 31 March 2018

Financial crunch time for Lebanon?

Financial crunch time for Lebanon?

LONDON: The Lebanese government will this week seek pledges worth billions of dollars of low-interest-bearing loans from international bodies at a summit in Paris on April 6. Ministers and investors from around the world will head to the gathering that has been organized by French President Emmanuel Macron as part of efforts to rebuild Lebanon’s shattered economy.
The country has not fully recovered from the civil war of 1975-1990 or the military onslaught from Israel after its conflict with Hezbollah in 2006. Lebanon must also cope with the strain of taking in 1.5 million Syrian refugees.
The idea behind Paris is to garner global financial support for crumbing infrastructure amid concern about the country’s ability to withstand further external shocks. Beirut is said to be seeking $16 billion in loans and grants, according to Bloomberg.
Additionally, like other emerging markets, hikes in US interest rates are fueling worries about Beirut’s ability to withstand a level of indebtedness that is almost on a par with Greece’s following an international bail-out in 2012.
Dubbed the Cedar Conference, otherwise known as Paris IV, this week’s meeting is one of several planned in Europe this year. It comes at a time when the International Monetary Fund (IMF) is pushing Beirut to implement fiscal reforms to reduce its high debt to GDP ratio that stands at about 150 percent and could rocket beyond 180 percent, the IMF said.
Simon Quijano-Evans, emerging markets strategist at Legal and General Investment Management, told Arab News: “I think for emerging markets in general there is a vulnerability, especially in the local currency space, if the US dollar were to turn around and strengthen. Lebanon is one of the countries more exposed in the hard currency space, especially given its high debt-GDP ratio.” (A more highly valued dollar weakens local currency debt and makes dollar-denominated debt harder to finance.)
Lebanon, among others, spends about a third of government revenue on servicing debt, according to a report a fortnight ago from charity, the Jubilee Debt Campaign.
Timothy Ash, emerging market sovereign strategist at London-based BlueBay Asset Management, told Arab News that now was possibly “a critical time” for the Lebanese economy.
He said: “Basically the central bank has done as much as it can, and now it’s up to politicians and policymakers to deliver some of the hard adjustments on the fiscal and reform side.”
He added that it was remarkable that Lebanon had been able to ride through so many problems and crises. He thought a lot of that was down to the skills of Lebanon’s central bank chief Riad Salameh, who was named the Middle East’s best central bank governor by Euromoney in 2005. Salameh has been in his current position since 1993.
Lebanon’s foreign exchange reserves are regularly boosted by remittances from the Lebanese diaspora, which easily outnumbers the country’s population of 4.5 million at between 8 to 20 million, according to various estimates.
Last year, Salameh skilfully defended the Lebanese pound’s peg to the dollar to preserve the country’s foreign reserve buffer of around $44 billion.
“The question now is whether Salameh can continue to pull off this financial alchemy,” Ash said.
He added: “Paris is all about trying to generate more growth and investor commitment.”
But Paris is just ahead of elections in Lebanon in May and there are questions about what fiscal commitments Beirut can make ahead of the poll. Equally, the IMF and World Bank may, too, want to wait for the outcome, along with GCC countries which will want to see if the colors of the new government contain any elements of Hezbollah.
Nevertheless, in the wake of Lebanon passing its first budget in 12 years last October, tentative agreements for soft loans of a few billion dollars could mark the start of major injection of foreign funds, suggested Fawaz Gerges, professor of international relations at the London School of Economics.
He told Arab News: “The Lebanese economy is not doing well. Interest on the debt is spiralling out control. Lebanon faces a severe crisis.”
The relative stability that Lebanon has maintained through years of regional strife rests on one thing: Its currency peg, said a report in the Financial Times. This has kept the Lebanese pound at about 1,500 to the US dollar for almost 20 years.
Confidence in the peg is sustained by the foreign exchange reserves. But sustaining the reserves require a constant flow of deposits into the banking system. In this, Lebanon is blessed like no other country by its diaspora, which last year sent home remittances of $7.6 billion, the FT said. These expat inflows have oiled the government’s requests for sovereign debt investment because money pouring into Lebanese banks (about 60 percent of it in dollars) allows those very same banks to purchase Lebanese government bonds.
But now, there is a problem. About two thirds of these remittances, according to the FT, come from expats in the Gulf and could be at risk from tensions between Beirut and Riyadh that stem from Iran’s support for Hezbollah in Lebanon.
Meanwhile, a recent report from Bloomberg said that the central bank “needs to mitigate a slowdown in bank deposits, whose growth has helped support soaring public debt.” In 2017, private sector deposit growth was 3.8 percent — below the average 7 percent growth in previous years, it said.
Growth and better governance are the key to future prosperity, the IMF said.
Lebanon’s problems come after a boom in lending, a fall in commodity prices, a rise in the US dollar and now increasing dollar interest rates.
FT offshoot, fDi Markets, also made the point that no investment has come from the UAE since 2014. Saudi Arabia has not invested since 2011. Kuwait has invested just $15 million since the start of the Syrian civil war.
The IMF, in its latest 2018 report on Lebanon, said that the overall economic situation “remains fragile with prolonged low growth and a persistent current account deficit of more than 20 percent of GDP.”
So what to do? The IMF suggested any scaling-up of public investment will need to be preceded by strengthening of the public investment management framework. Second, financial stability risks should be contained, including by incentivising banks to gradually strengthen their buffers and by taking further actions designed to strengthen credit quality. Third, to promote sustainable growth and improve equity and competitiveness, the electricity sector needs to be reformed and the anti-corruption regulatory framework enhanced.
The financial stakes seem high enough. But Lebanese bonds still offer attractive yields of between 6 and 10 percent. And central bank head Salameh and his team have pulled it off before.
Can he do so again? With luck, perhaps so.