Lebanon's markets enjoy short relief, pending reforms

After grueling negotiations spanning nine months, Lebanese officials reached a consensus Thursday evening over the makeup of a new government.
by Georgi Azar

1 February 2019 | 17:20

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 1 February 2019 | 17:20

Prime Minister Saad Hariri pictured alongside Minister of Interior Raya Al-Hassan pictured moments after Lebanon's new Cabinet was formed on Thursday, January 31, 2019 (Annahar)

BEIRUT: News of the Cabinet formation improved investor risk appetite while easing concerns over a possible debt-restructuring plan, albeit momentarily. 

After grueling negotiations spanning nine months, Lebanese officials reached a consensus Thursday evening over the makeup of a new government. 

"The government formation is a welcomed step by the market and the international community," leading senior debt specialist Jamil Hallak told Annahar. 

The now resolved government crisis had rattled investor confidence and cast doubt on Lebanon's ability to meet its debt requirements. This was further aggravated after Finance Minister Ali Hassan Khalil hinted at a possible debt restructuring plan before backtracking on his comments. 

With news of the Cabinet formation gaining traction, the yield on bonds maturing in 2024 began trading at 9.38 percent while the CDS dropped 70 bps to reach 700, down from 900 bps at the height of the crisis. 

This indicates a mild improvement, said Hallak, yet still reflects an issuer credit rating of "triple C or single B." 

Last week, both Moody's and Fitch downgraded a number of Lebanese banks' credit ratings as well as country's credit rating to Caa1, with Hallak calling on the government to make the most of its new lease on life to resolve the underlying problematics it faces. 

Lebanon's debt to GDP ratio has ballooned to over 150 percent, only behind Greece and Japan, while its imports lopsidedly exceed its exports to constitute a significant trade and balance of payment deficit.

Despite the new breathing room Lebanon is now offered, "much work still needs to be done to avoid short term pressure on its debt profile," Hallak said. 

This was echoed by Moody's as well, who said Friday that the new government will find it "very challenging" to bring down its debt levels. Its fiscal deficit averaged 10 percent and its current account deficit averaged 17 percent of GDP, with the servicing cost on this debt is expected to absorb 44 percent of the government's revenues. 

During the nine months power struggle between the different political players over the allocation of shares, Lebanon seemingly dug itself into a hole made even worse by its inability to access the $11 billion international aid package. 

Now lawmakers face the burdensome task of lifting Lebanon out this slump and enact harsh reforms to unlock at least part of the soft loans and grants secured at the Cedre IV conference in Paris last year. 

"It is of the utmost importance for these elected officials to collect these funds," said Elie Yachoui, a Beirut based economist, before casting doubt on their ability to properly manage this immense budget. 

"This might further increase Lebanon's debt burden," he said, pointing out to the preceding Cedre I, II, and III conferences which failed to bring about desired change. 

Yachoui argued, however, that the need to curb the twin deficit, implement radical sectoral reforms to rein in government spending, and put it a lid on corruption supersede Lebanon's unduly reliance on international aid. 


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