RIYADH: A rally in Lebanon’s dollar-denominated bonds a day after Syrian militant groups removed President Bashar Assad from power shows growing optimism for economic and governance reforms in the region, according to an expert.
Makram Makarem, a senior director at Beirut-based Investment and Capital Bank, told Arab News that the prospect of reduced external influence in Lebanon through Iranian proxies in Syria, as well as the weakening of Hezbollah, has boosted investor confidence.
Lebanon’s dollar-denominated bonds surged by 30 percent in 10 days, reaching 13 cents to the dollar on Dec. 9, data from Bloomberg Terminal showed.
At least nine of the country’s dollar bonds, maturing between 2026 and 2037, traded above 12 cents, a significant rise from their average for much of the year.
The 2029 bonds saw the largest increase, rising 2.03 cents to 12.76 cents on the dollar — the highest since December 2022, Reuters reported.
Although still significantly below face value, the bonds have rallied multiple times since Israel’s recent military strikes in Lebanon.
“This optimism stems from expectations of reduced political interference and greater focus on governance,” said Makarem.
The financial adviser at the Lebanese institution explained that the bond surge is driven by a combination of geopolitical and economic factors.
The removal of President Assad’s government has disrupted a crucial supply route for Hezbollah, the Iran-backed Lebanese militia designated as a terrorist group by the US.
He pointed out that this, coupled with growing expectations of a breakthrough in Lebanon’s long-stalled presidential election, has improved investor sentiment.
While the outlook is promising, Lebanon’s entrenched corruption and political inefficiencies pose challenges, requiring strong reforms and sustained international support for meaningful progress, he added.
On the economic front, Makarem underlined that ongoing state debt restructuring efforts and historical recovery rates for defaulted bonds, which typically range from 20 percent to 50 percent, “indicate that current bond levels are undervalued, with recovery estimates projected between 20 percent and 30 percent.”
Additionally, rising gold prices — which are positively correlated with Lebanon’s recovery prospects due to the country’s gold reserves — along with restructuring efforts in the banking sector, have raised growth expectations.
“However, sustaining this sentiment will depend on Lebanon’s ability to implement reforms and navigate its entrenched political and economic challenges,” he added.
Since Lebanon defaulted on its international debt in 2020, the nation has endured a severe economic crisis marked by hyperinflation, poverty, and political deadlock. With a caretaker government in place since 2022 and ongoing presidential election failures, significant reforms still need to be made.
The bond rally has laid the groundwork for potential economic recovery by boosting confidence in Lebanon’s financial markets.
“Lebanon’s broader recovery hinges on addressing systemic challenges like hyperinflation, a weak currency, and fragile institutions,” Makarem said, warning that without structural reforms and effective governance, the rally is unlikely to translate into sustained economic improvement.
Despite Lebanon’s dollar bonds nearly doubling from the average, as highlighted by Makarem, they remain almost 50 percent below their post-default highs, reflecting ongoing concerns about the country’s ability to achieve lasting financial stability and implement necessary reforms.
