Fi­nan­cial crunch time for Le­banon?

Econ­omy re­mains frag­ile with pro­longed low growth and a per­sis­tent cur­rent ac­count deficit

Arab News - - BUSINESS - WAEL MAHDI SPE­CIAL TO ARAB NEWS

Le­banon, among oth­ers, spends about a third of gov­ern­ment rev­enue on ser­vic­ing debt, ac­cord­ing to a re­port a fort­night ago from char­ity, the Ju­bilee Debt Cam­paign.

Ti­mothy Ash, emerg­ing mar­ket sov­er­eign strate­gist at Lon­don­based BlueBay As­set Man­age­ment, told Arab News that now was pos­si­bly “a crit­i­cal time” for the Le­banese econ­omy.

He said: “Ba­si­cally the cen­tral bank has done as much as it can, and now it’s up to politi­cians and pol­i­cy­mak­ers to de­liver some of the hard ad­just­ments on the fis­cal and re­form side.”

He added that it was re­mark­able that Le­banon had been able to ride through so many prob­lems and crises. He thought a lot of that was down to the skills of Le­banon’s cen­tral bank chief Riad Salameh, who was named the Mid­dle East’s best cen­tral bank gov­er­nor by Euromoney in 2005. Salameh has been in his cur­rent po­si­tion since 1993.

Le­banon’s for­eign ex­change re­serves are reg­u­larly boosted by re­mit­tances from the Le­banese di­as­pora, which eas­ily out­num­bers the coun­try’s pop­u­la­tion of 4.5 mil­lion at be­tween 8 to 20 mil­lion, ac­cord­ing to var­i­ous es­ti­mates.

Last year, Salameh skil­fully de­fended the Le­banese pound’s peg to the dol­lar to pre­serve the coun­try’s for­eign re­serve buf­fer of around $44 bil­lion.

“The ques­tion now is whether Salameh can con­tinue to pull off this fi­nan­cial alchemy,” Ash said.

He added: “Paris is all about try­ing to gen­er­ate more growth and in­vestor com­mit­ment.”

But Paris is just ahead of elec­tions in Le­banon in May and there are ques­tions about what fis­cal com­mit­ments Beirut can make ahead of the poll. Equally, the IMF and World Bank may, too, want to wait for the out­come, along with GCC coun­tries which will want to see if the col­ors of the new gov­ern­ment con­tain any el­e­ments of Hezbol­lah.

Nev­er­the­less, in the wake of Le­banon pass­ing its first bud­get in 12 years last Oc­to­ber, ten­ta­tive agree­ments for soft loans of a few bil­lion dol­lars could mark the start of ma­jor in­jec­tion of for­eign funds, sug­gested Fawaz Gerges, pro­fes­sor of in­ter­na­tional re­la­tions at the Lon­don School of Eco­nom­ics.

He told Arab News: “The Le­banese econ­omy is not do­ing well. In­ter­est on the debt is spi­ralling out con­trol. Le­banon faces a se­vere cri­sis.”

The rel­a­tive sta­bil­ity that Le­banon has main­tained through years of re­gional strife rests on one thing: Its cur­rency peg, said a re­port in the Fi­nan­cial Times. This has kept the Le­banese pound at about 1,500 to the US dol­lar for al­most 20 years.

Con­fi­dence in the peg is sus­tained by the for­eign ex­change re­serves. But sus­tain­ing the re­serves re­quire a con­stant flow of de­posits into the bank­ing sys­tem. In this, Le­banon is blessed like no other coun­try by its di­as­pora, which last year sent home re­mit­tances of $7.6 bil­lion, the FT said. Th­ese ex­pat in­flows have oiled the gov­ern­ment’s re­quests for sov­er­eign debt in­vest­ment be­cause money pour­ing into Le­banese banks (about 60 per­cent of it in

Ev­i­dently, when Riyadh de­cided to put the mar­ket in or­der, it did. The past seven months showed what Riyadh can do to save the mar­ket. But Saudi Ara­bia can’t do every­thing alone. Russia has po­lit­i­cal in­flu­ence over many pro­duc­ers such as Azer­bai­jan, Kaza­khstan and Iran. The pres­ence of Russia made many com­mit to the deal.

In or­der for the deal to suc­ceed, the pres­ence of Saudi Ara­bia and Russia must con­tinue. And with the suc­cess of the deal so far, pro­duc­ers who are en­joy­ing bet­ter in­comes are happy to ex­tend it. Now, will the co­op­er­a­tion last for a “very long” time and ful­fil its goals? This rests on other fac­tors.

The orig­i­nal deal was an ad hoc one to lower global in­ven­to­ries and bring prices up to a level to spur in­vest­ment in the in­dus­try. A new frame­work will be needed if it is to last for decades.

The deal shouldn’t only be about cut­ting pro­duc­tion when oil prices are low, but should con­sider more flex­i­ble pro­duc­tion mech­a­nisms to al­low pro­duc­ers to in­crease out­put at times of dol­lars) al­lows those very same banks to pur­chase Le­banese gov­ern­ment bonds.

But now, there is a prob­lem. About two thirds of th­ese re­mit­tances, ac­cord­ing to the FT, come from ex­pats in the Gulf and could be at risk from ten­sions be­tween Beirut and Riyadh that stem from Iran’s sup­port for Hezbol­lah in Le­banon.

Mean­while, a re­cent re­port from Bloomberg said that the cen­tral bank “needs to mit­i­gate a slow­down in bank de­posits, whose growth has helped sup­port soar­ing pub­lic debt.” In 2017, pri­vate sec­tor de­posit growth was 3.8 per­cent — be­low the av­er­age 7 per­cent growth in pre­vi­ous years, it said.

Growth and bet­ter gov­er­nance are the key to fu­ture pros­per­ity, the IMF said.

Le­banon’s prob­lems come af­ter a boom in lend­ing, a fall in com­mod­ity prices, a rise in the US dol­lar and now in­creas­ing dol­lar in­ter­est rates.

FT off­shoot, fDi Mar­kets, also made the point that no in­vest­ment has come from the UAE since 2014. Saudi Ara­bia has not in­vested since 2011. Kuwait has in­vested just $15 mil­lion since the start of the Syr­ian civil war.

The IMF, in its lat­est 2018 re­port on Le­banon, said that the over­all eco­nomic sit­u­a­tion “re­mains frag­ile with pro­longed low growth and a per­sis­tent cur­rent ac­count deficit of more than 20 per­cent of GDP.”

So what to do? The IMF sug­gested any scal­ing-up of pub­lic in­vest­ment will need to be pre­ceded by strength­en­ing of the pub­lic in­vest­ment man­age­ment frame­work. Sec­ond, fi­nan­cial sta­bil­ity risks should be con­tained, in­clud­ing by in­cen­tivis­ing banks to grad­u­ally strengthen their buf­fers and by tak­ing fur­ther ac­tions de­signed to strengthen credit qual­ity. Third, to pro­mote sus­tain­able growth and im­prove eq­uity and com­pet­i­tive­ness, the elec­tric­ity sec­tor needs to be re­formed and the anti-cor­rup­tion reg­u­la­tory frame­work en­hanced.

The fi­nan­cial stakes seem high enough. But Le­banese bonds still of­fer at­trac­tive yields of be­tween 6 and 10 per­cent. And cen­tral bank head Salameh and his team have pulled it off be­fore.

Can he do so again? With luck, per­haps so. higher oil prices that in turn can threaten mar­ket sta­bil­ity.

Co­op­er­a­tion be­tween OPEC and non-OPEC coun­tries should ex­tend to ar­eas such as joint ven­tures and in­vest­ments to cre­ate real part­ner­ship.

The pro­duc­tion tar­gets of all OPEC na­tions (in­clud­ing Iraq that has very am­bi­tious tar­gets) should be in line with the agree­ment’s goals. And last but not least, fo­cus­ing on stocks alone should not be the only gauge for mea­sur­ing the suc­cess. The deal should fo­cus on pro­mot­ing de­mand and sup­ply and keep­ing healthy global GDP through rea­son­able en­ergy costs for con­sum­ing na­tions.

Now, de­spite the time frame of the deal, what we will see if Russia and OPEC agrees to long run­ning co­op­er­a­tion is a new in­sti­tu­tion that will shape the world or­der, and that in­sti­tu­tion will be a “Su­per OPEC.”

Wael Mahdi is an en­ergy re­porter who spe­cial­izes on OPEC. He is co-au­thor of “OPEC in a Shale Oil World: Where to Next?” Twit­ter: @waelmahdi

A man rides on a mo­tor­bike in­side a refugee camp near Si­don in south­ern Le­banon. The coun­try needs bil­lions of dol­lars in funds to help re­build war­dam­aged and negelcted in­fra­struc­ture. (Reuters)

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