Is the Lebanese currency at risk of devaluation?

At the end of September, Lebanon’s foreign reserves reached $38.5 billion, an increase of over $2 billion since June, according to official figures. (AFP/File)
Updated 06 October 2019

Is the Lebanese currency at risk of devaluation?

  • The depreciation and banking restrictions last month prompted calls for strikes from gas station owners

BEIRUT: Fears of a monetary devaluation in Lebanon, where the exchange rate has been fixed for more than two decades, are on the increase following a dollar shortage and the downgrading of the country’s sovereign credit rating.

Panic has gripped Lebanon in recent weeks when it became nearly impossible to withdraw dollars from ATMs or to change large sums in banks.

Since 1997, when the exchange rate was fixed at 1,500 Lebanese pounds to the dollar, the greenback has been used interchangeably with Lebanese pounds in everyday transactions.

That measure was adopted after several rounds of devaluations in the 1980s and after Lebanon 1975-1990 civil war.

But on the parallel market, exchange rates reached 1,600 Lebanese pounds to the dollar in September.

This depreciation and banking restrictions prompted calls for strikes, notably from gas station owners who receive pounds but would have to pay suppliers in dollars. The action was called off under a deal allowing payments in dollars. After initially denying a dollar shortage, the central bank blamed the fluctuating exchange rate on increased imports, which observers say could be partly due to smuggling to neighboring war-torn Syria.

But Lebanese economist Jad Chaaban points to a decision by banking authorities to control the flow of capital, including central bank “oversight to limit anyone exchanging dollars in banks, but also withdrawing large dollar amounts.”

The original rationale for banking restrictions was worry over revised ratings to Lebanon by the three major international credit agencies.

On Tuesday, Moody’s announced it had put Lebanon’s credit rating “under observation” with the possibility of a downgrade within three months. The agency downgraded Lebanon from “B3” to “Caa1” in January, signalling “a very high credit risk.”

In August, Fitch downgraded Lebanon from “B-” to “CCC,” a category for countries where there is a “real possibility” of default.

Standard & Poor’s (S&P) kept Lebanon’s “B-/B” rating but with a negative outlook, meaning it could slide over the next year, the agency’s associate director of sovereign ratings Zahabia Gupta told AFP.

The Lebanese economy has suffered for years from low growth and a public debt swelling to around $86 billion. At roughly 150 percent of GDP, this is one of the highest rates worldwide.

In a country where the political class is often accused of corruption and racketeering, analysts say trust in Lebanon’s system of governance is being tested.

For the past year, Beirut has been trying to introduce economic reforms in order to unlock pledges of $11.6 billion in loans and grants from the international community.

This crucial aid has not been released due to delays in implementing reforms.

Despite the worry, “there is no real risk today of a devaluation,” according to economist Nassib Ghobril.

The central bank “has the necessary tools” to maintain monetary stability, said the chief economist at Byblos Bank.

These tools include sufficient foreign currency reserves to allow the bank to buy and sell currency to maintain the rate of the Lebanese pound.

At the end of September, foreign reserves reached $38.5 billion, an increase of over $2 billion since June, according to official figures, about four times the amount the country had in reserve in 2005.

Another positive indicator for analysts are deposit inflows that can replenish foreign currency reserves. The central bank’s inflows increased over three consecutive months between June and August, according to Marwan Barakat, chief economist at Bank Audi. But observers remain cautious.

The increase in deposit inflows and central bank reserves “are primarily linked to the (central bank’s) financial engineering and other one-off transactions and may not be sustained,” warned S&P’s Gupta.


Lufthansa accepts tweaked demands by Brussels over state bailout

Updated 30 May 2020

Lufthansa accepts tweaked demands by Brussels over state bailout

  • Lufthansa and the rest of the airline sector have been hard hit by what is expected to be a protracted travel slump

BERLIN/FRANKFURT: Lufthansa’s management board has accepted a more favorable set of demands from the European Commission in exchange for approval of a $10 billion government bailout, the carrier said on Saturday, paving the way for its rescue.
The agreement comes after the airline’s supervisory board on Wednesday rejected an initial deal with Brussels including conditions that were significantly more painful.
Lufthansa and the rest of the airline sector have been hard hit by what is expected to be a protracted travel slump due to the coronavirus pandemic.
Under the latest agreement, Lufthansa said it will be obliged to transfer up to 24 takeoff and landing slots for up to four aircraft to one rival each at the Frankfurt and Munich airports.
This translates into three take-off and three landing rights per aircraft and day, it said, confirming what sources had earlier told Reuters.
“For one-and-a-half years, this option is only available to new competitors at the Frankfurt and Munich airports,” Lufthansa said, initially excluding budget carrier Ryanair. “If no new competitor makes use of this option, it will be extended to existing competitors at the respective airports.”
The previous deal had included forfeiting 72 slots used by 12 of 300 jets based at the Frankfurt and Munich airports, a source familiar with the matter said.
The slots, to be allocated in a bidding process, can be taken over only by a European peer that has not received any substantial state aid during the pandemic, Lufthansa said.
The Commission said once it has been officially notified by Germany on the aid package it will assess the issue as a matter of priority.
“(Lufthansa’s remedies will) enable a viable entry or expansion of activities by other airlines at these airports to the benefit of consumers and effective competition,” it said in a statement.
The airline’s supervisory board needs to approve the deal, Lufthansa said, adding it would convene an extraordinary general meeting to obtain shareholder approval for the bailout.
The largest German corporate rescue since the coronavirus crisis struck will see the government get a 20 percent stake in Lufthansa, which could rise to 25 percent plus one share in the event of a takeover attempt. A deal would also give the government two seats on Lufthansa’s supervisory board.
Rivals such as Franco-Dutch group Air France-KLM and US carriers American Airlines, United Airlines and Delta Air Lines are all seeking state aid due to the economic effects of the pandemic.
Germany, which has set up a $110 billion fund to take stakes in companies hit by the pandemic, said it plans to sell the Lufthansa stake by the end of 2023.
“The German government, Lufthansa and the European Commission have reached an important intermediate step in the aid negotiations,” the Economy Ministry said in a statement.
It said talks with the Commission over state aid would continue.