Report says “soft-exit” from Lebanese debt possible, but only with tough reforms

According to IIF analysts, developments in 2018 and early 2019 exposed the significant vulnerabilities of the Lebanese economy, “The heavy public debt overhang, large fiscal and current account deficits, and reliance on deposit inflows for deficit financing remain the core vulnerabilities.
by TK Maloy

5 February 2019 | 13:38

Source: by Annahar

  • by TK Maloy
  • Source: Annahar
  • Last update: 5 February 2019 | 13:38

Last year's Arabnet conference which highlighted the startup economy, which is a bright spot amid other slowed sectors. (Annahar)

BEIRUT: The nine-months of political horse-trading are over, now comes perhaps the even more difficult task of economic reform including enacting some sort of austerity spending program and improving tax collections, according to the Washington DC-based Institute of International Finance.

The IIF issued a report over the weekend focusing on detailed scenarios for the Lebanese economy based on the possible reforms.

According to IIF analysts, developments in 2018 and early 2019 exposed the vulnerabilities of the Lebanese economy. The group noted in their executive summary statement: “The heavy public debt overhang, large fiscal and current account deficits, and reliance on deposit inflows for deficit financing remain the core vulnerabilities. The risks associated with these imbalances have increased in recent years in the face difficult external environment.”

The IIF report said that the long-awaiting formation of the new cabinet last week "will most likely facilitate" Lebanon’s faster access to the $11 billion of concessional loans and grants that were pledged by the international community at the April 2018 CEDRE conference to develop the country’s infrastructure. But added that "such lending is contingent on the implementation of deep fiscal and structural reforms to improve long-term fiscal sustainability, rebuild confidence, and foster higher growth. "

“A soft exit out of the debt overhang is possible and the (Lebanese) authorities now recognize the urgency of committing to meaningful and widespread reforms to improve long- term fiscal sustainability and rebuild confidence."

Based on the circumstances of Lebanon’s challenged economy, the IIF prepared two possible scenarios.

Scenario A assumes substantive fiscal adjustment and structural reforms (including improvement in the business climate, and addressing corruption decisively), which would unlock the funding pledged by the international community. Scenario B presumes that the government makes limited reforms.

Under Scenario A, growth is expected to accelerate to 2 percent in 2019 and 5 percent by 2023, the fiscal deficit will narrow gradually from 11 percent of GDP to 8.1 percent in 2019 and 4.3 percent by 2023.

Additionally, the debt will be placed on a steady downward trajectory, nonresident capital inflows will improve significantly, and official reserves could increase to $54 billion by 2023.

Such a scenario will help to restore confidence and support the Lira peg, the IIF said.

Under scenario B, growth could pick up gradually to 3 percent by 2023, official reserves may continue their decline (but remain adequate for the next two years), and public debt will remain around 150 percent of GDP. In this case, Lebanon may continue to be highly vulnerable to volatile swings in investor confidence.

The IIF added with a note of cautious optimisms that “Resilience in the face of financial strain is nothing new for Lebanon.”

Adding: “While the country has faced several episodes of severe financial pressure in the past 30 years, triggered by political events and external shocks, it has continued to service its debt on the back of: implicit support from international donors; the priority of up- holding its track record of having never defaulted on foreign-currency debt and deposits; a creditor base dominated by domestic commercial banks and the BdL; and a loyal and vibrant diaspora.”

It noted that foreign currency reserves excluding gold stood at $39.7 billion at the end of 2018 (equivalent to 71 percent of GDP and enough to cover 13 months of imports). Gold holdings of $11.8 billion, the second highest in the MENA region after Saudi Arabia, provided an additional buffer.

When final data is compiled for 2018, the GDP growth rate is expected to mark at slightly below 1 percent.

As the cabinet assumes powers, the Lebanese citizenry still remains pessimistic of any near-terms fix or of the long-term political will of new leaders to make the hard but necessary reforms. At risk, is a government debt that could continue upward above 150 percent and would lead to a possibly collapsing economy, and a markedly devaluing Lira. Numerous crisis warnings on this front were issued by economists and the international rating agencies who downgraded Lebanon's sovereign debt bonds.

The Institute of International Finance is the global association of the financial industry, with close to 450 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth.

IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.


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