Goldman: investors hit if Lebanon slips into financial crisis

US lender Goldman Sachs said Lebanon is unlikely to need an immediate debt restructuring, but foreign investors would only be able to recover 35 cents on the dollar if one of the world’s most indebted countries slips into a financial crisis.

Lebanon’s banking sector has high exposure to sovereign debt, which will make the actual recovery value significantly different from fiscal sustainability calculations to minimise the damage to local banks, according to a new Goldman Sachs report on Lebanon’s debt recovery analysis.

“The symbiotic relationship between the Lebanese government and the banking sector, with the latter’s exposure to sovereign debt standing at almost twice its capital base, is likely to influence the outcome of any potential restructuring in a manner that would vary substantially from that implied by a dispassionate application of the fiscal sustainability analysis alone,” economist Farouk Soussa said in the report.

The lender raised questions about how much foreign investors could recover in the still-unlikely scenario where Lebanon would be forced to restructure debt. Political instability and one of the world’s highest ratios of debt to GDP are prompting concern about how long Lebanon can fend off a financial crisis.

Lebanon’s mounting debt is unlikely to become sustainable through fiscal consolidation because that would require significant economic growth and a steep drop in interest rates. Both are outside the control of policymakers and dependent on geopolitical developments, according to Mr Soussa.

An influx of more than 1 million Syrian refugees into Lebanon over the years has exacerbated economic slowdown. The World Bank forecast Lebanon’s economy will grow 1 per cent and its debt-to-GDP ratio would reach 155 per cent by the end of 2018.

Lebanon is caught in the midst of political wrangling as rival factions are unable to form a new government since parliamentary elections in May. The political deadlock is stalling fiscal reforms that could unlock $11 billion (Dh40.39bn) in pledged donor loans.