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

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


Getting more women into leadership positions top priority: CEO

This June 23, 2018 photo, shows a general view of Riyadh, Saudi Arabia. (AP)
Updated 18 January 2020

Getting more women into leadership positions top priority: CEO

  • Saudi Arabia is focusing on the Business 20 (B20), making this one of the key engagement groups. Women in Business will be Saudi Arabia’s signature topic

RIYADH: The boss of one of Saudi Arabia’s biggest banks says that getting more women into leadership positions is a top priority.
Samba CEO Rania Nashar chairs the action council for Women in Business created by the Business Twenty (B20), which is the official G20 dialogue with the business community. It represents the global business community across all G20 member states and all economic sectors.
She said the council was set up to boost women’s particpation not only in business but also in global leadership positions.
During the launch of the B20 in Saudi Arabia this week, Nashar highlighted the under-representation of women in the economy.
“There is a gap of 27 percent between male and female workers; 75 percent of males are part of the labor force while only 48 percent of females are working,” she said.
She said it was important not to just talk about women as workers but as business owners.

FASTFACT

Saudi Arabia will host the 15th G20 Summit in Riyadh on Nov. 21-22, 2020.

“That’s why entrepreneurship is very fundamental to our task force,” she said.  “The majority of the finance development programs have incentives for giving loans to females; however, despite the fact that many large borrowers are females, the amount of loans granted to them is far below what is granted to males,” she added.
Nashar said that two-thirds of female business founders feel that they were not taken seriously by investors when they pitch for investments. They also feel that they are treated differently from their male counterparts.
Saudi Arabia will host the 15th G20 Summit in Riyadh on Nov. 21-22, 2020. The Kingdom is focusing on the Business 20 (B20), making this one of the key engagement groups. Women in Business will be Saudi Arabia’s signature topic.