Citibank warns of Lebanon's "unsustainable long-term fiscal path"

Lebanon's financial strains can be easily traced back to its double deficit, the debt to GDP ratio on one hand, and the lopsidedness of its imports and exports.
by Georgi Azar

19 January 2019 | 15:07

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 19 January 2019 | 15:07

Workers wash windows on the downtown building where Lebanese lawmakers have their offices, in Beirut, Lebanon, Monday, May 21, 2018.

BEIRUT: Citibank is the latest major financial institution sounding the alarm over Lebanon's dire economic state, warning of its "unsustainable long-term fiscal path."

In a report issued Friday, Citibank noted that Lebanese bonds remain under pressure, as front-end yields "stay very close to cyclical highs" amid contested news of a debt restructuring plan. 

Last week, markets were rattled after the unsuspecting comments of caretaker Finance Minister Ali Hassan Khalil made rounds before other senior officials including President Michel Aoun scrambled to alleviate concerns and prop up investors' confidence. 

Lebanon's financial strains can be easily traced back to its double deficit, the debt to GDP ratio on one hand, and the lopsidedness of its imports and exports. 

Despite remittances falling steadily, Citibank credits the Central Bank's buildup of FX reserves, "which has quadrupled in the past 10 years" to value around $40 billion, for partly offsetting Lebanon's "vulnerability and mismatches in the public sector."

Yet the public debt remains unsustainable in the long run, it warns, with large primary surpluses required to stabilize the public debt path. 

Ideally, Lebanon would have to achieve the target of a real GDP growth rate of 4 percent, which "might be quite ambitious considering domestic political upheaval and global economic slowdown."

Talk of capital controls to be followed by haircuts have also gained traction in recent weeks, yet Citibank remains adamant up to this point that "authorities will try as much as they can to deviate from a USD debt restructuring decision."

To bring Lebanon's debt/GDP ratio to a sustainable level in case the macro environment forced it's hand, an "implied haircut of 38 percent would be necessary given a primary surplus of five percent and a real GDP growth rate of one percent."

"There are other less painful routes to be explored [in regards to possible debt restructuring]," the report notes, "in particular the route of an USD11bn  CEDRE international donor investment package conditional on the formation of a new government and fiscal reform implementation."

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