Hariri's resignation could kickoff economic downturn

by TK Maloy-

7 November 2017 | 17:11

Source: by Annahar

  • by TK Maloy-
  • Source: Annahar
  • Last update: 7 November 2017 | 17:11

This undated photo shows Beirut Souks in heart of the country's downtown capital. (Photo Courtesy of Solidere)

BEIRUT: While its a little early in the game to make definitive economic forecast, a number of indicators - the falling value of Lebanese bonds, account conversions, capital outflows and possible drops in consumer confidence -suggest as the political crisis over the Hariri resignation continues, the Lebanese economy may find itself on a steeper downward path. 

Experts note, the central issue is not so much the value of the Lebanese pound, but the ripple effects across the general economy.

Bankers interviewed by Annahar on Monday and Tuesday - whom requested anonymity as they were not permitted to speak to press - said their phones were ringing off the hook on Monday, but slowed on Tuesday. Some depositors, in Lebanon and expatriates, have been converting lira accounts into dollars, an expected move.

"Monday was chaotic, my phone did not stop ringing," said one banking executive. "And a variety of depositors got right to the subject, they wanted to convert any Lebanese holding into dollars."

The bank manager added, "Tuesday has been very calm - perhaps a little too calm."

More troubling, bankers report, is capital outflows, which is when depositors remove their account from Lebanon entirely, out of concerns for the economic and political stability of the country. In banking, an institution never wants depositors to remove accounts, it diminishes total assets.

A few depositors, bankers reported, wanted their assets moved out of Lebanon forthwith.

But of even greater economic ramification is the possibility of a marked drop in investor and consumer confidence.

If an expatriate or a Lebanese depositor doesn't want their deposits in Lebanon - its begs the rhetorical question, what else don't they want in Lebanon?

Perhaps they don't want to invest in real estate - either land, residential or commercial - tanking further an already knackered sector. Or they don't want to establish a small business right now. Or go out to the shopping mall to blow money on overpriced brand apparel.

Counter-arguments are that this is just a phase and that the Lebanese are adaptable, and they have seen this all before. But these "phases" have been going on decades, depending on where one wants to set the baseline.

Byblos Bank chief economist Nassib Ghobril noted Monday night that while outflows can be potentially problematic to Lebanon's foreign reserves, the historical context suggests the current crisis would not be on par with the level of earlier upheavals.

The Byblos senior economist noted that capital outflows were about 5 percent in the two months after the 2005 Rafic Hariri assassination; 3 percent in the near term resulting from the 2006 Israeli war; and 1 percent resulting from the 2011 Saad Hariri ouster. He added that in each case the downturn ultimately reversed.

"It takes a major shock of the magnitude of the assassination of Prime Minister Rafic Hariri in 2005 or the Israeli war in 2006 to trigger deposit outflows from the country. The impact of the resignation of PM Saad Hariri is nowhere near these levels."

He said, "no one describes this as a panic as of yet, " adding that it would take a considerable amount of withdrawals and account conversions to actually put a dent in the $35 billion in gross foreign currency reserves.

"Of greater concern, however, would be a drop in consumer confidence," he warned, echoing the comments of other analysts.

Byblos Bank's most recent consumer confidence report released at the end of October was on the upside, showing a dramatic improvement in the first half of 2017, surging in June to a score of 70.6 following a dip in the first quarter.

Consumer confidence in Lebanon improved dramatically in the first half of 2017, surging in June to a score of 70.6 following a dip in the first quarter, according to the latest results of the Byblos Bank/American University of Beirut (AUB) consumer confidence index (CCI).

The fact sheet released in collaboration between Byblos Bank and AUB revealed that Lebanese consumers’ confidence dwindled from 69.9 in January to 48.9 in March 2017, citing the political bickering surrounding the parliamentary electoral law, which had yet to be resolved at the time, as well as the government’s focus on tax increases.

As a result, that hindered the progress witnessed at the end of 2016, with household sentiment continuing to decrease in each of the first three months of 2017, before gaining momentum in June following the renewal of the term of Banque du Liban’s Governor Riad Salameh and the approval of the long-awaited parliamentary electoral law.

The value of Lebanese dollar-denominated bonds fell Tuesday, while the price of credit default swaps - the cost of insuring against drops in the value of debt - jumped.

Also, the Moody's rating agency said Tuesday that the Hariri resignation could result in damage to Lebanon's credit rating.

"A drawn-out political stalemate less than a month after the government passed its first budget in 12 years would undermine recent institutional improvements and expose the banking system to a loss of confidence," the rating agency said in an emailed note.

"Any loss of confidence in the banking system or in the stability of Lebanon's institutions leading to a significant slowdown in private sector deposit inflows or outright outflows would be credit negative," it added.

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