BEIRUT: Lebanon might be faced with the real possibility of a currency devaluation coupled with another credit downgrade if FX reserves continue dropping, according to a latest S&P report.
According to S&P's estimates, Lebanon's usable FX reserves could fall to $19.2 billion by the end of 2019, down from $25.5 billion a year earlier. In 2017, Lebanon had at its disposable $32.5 billion in usable FX reserves.
Although Lebanon currently holds some $38.66 billion in foreign reserves, excluding gold, according to the latest figures released by the Central Bank, S&P argues that these figures are inflated given BDL's different financial engineering operations.
"The government has directly issued Eurobonds to BdL--including $1.75 billion in November 2017 and $5.5 billion in May 2018--and swapped local currency treasury bills on BdL's accounts for the U.S.-dollar equivalent. We view these transactions as an accounting procedure that does not generate foreign currency until the Eurobonds are issued to investors," the report notes.
Last month, rating agency Fitch downgraded Lebanon to CCC while Standard and Poor maintained their rating of B-.
“We believe there is a risk that customer deposit flows, particularly by non-residents, could continue to decline, resulting in an accelerated drawdown of FX reserves that would test the country’s ability to maintain the currency peg to the U.S. dollar,” S&P said in a new report
“A continuation of these trends during the next six months could trigger a downgrade to ‘CCC’ rating category."
To counter that trend, S&P calls on the government to significantly reduce the deficit from 11 percent of GDP, which might urge some donors to disburse the already pledged CEDRE funds.
Passing the 2020 budget on time would also boost confidence and attract both deposits and investments, the report notes, after officials vowed to ratify the budget within the constitutional timeline. "Authorities have indicated that the new budget will encompass major changes to the pension system and public sector, as well as new procurement, customs, and tax evasion laws."
Revamping the country's power sector and limiting state-owned Electricite Du LIban's huge financial losses are also advised. EDL currently costs the state around $2 billion per annum in subsidies.
Lebanon's Lira has been pegged to the dollar at a rate hovering around 1,500 since 1997, with the central bank traditionally boasting high levels of FC reserves to maintain confidence in the peg.
"It is difficult to assess what level of FX reserves would cause confidence in Lebanon's currency peg to collapse, resulting in a widespread run on deposits," S&P notes.
In the event of a currency devaluation or an end to the dollar peg, S&P predicts "Lebanon's debt levels and debt-servicing requirements would soar substantially, significantly increasing the risk of payment default."
A de-peg would also carry other material economic and social costs, it says.
Speaking on Wednesday during a televised interview with CNBC, Prime Minister Saad Hariri said that maintaining the current Lira peg "is the only stable way to proceed with the government's reforms," before highlighting a noteworthy difference of opinion with the International Monetary Fund (IMF).
According to Hariri, the IMF prefers a "Lebanese pound where the market decides what kind of Lebanese pound we have," in reference to the IMF's apparent push for Lebanon to abandon the peg.
"I think the IMF has certain criteria that we do not, especially when it comes to the Lebanese pound. This is something that we feel extremely sensitive about," Hariri said
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