IIF: political unrest in Lebanon drives away capital inflows

Lebanon saw an outflow of capital estimated at about $3 billion (Dh11bn) in the first nine months of the year, due to its deteriorating economic climate and heightened political tensions, according to the Institute of International Finance. It also forecasts that the Middle East and North Africa will attract 21 per cent more in inflows this year, compared with 2018.

Largely in the form of foreign direct investment and non-resident deposits, capital inflows to Lebanon slowed sharply in the past 18 months, leading to a significant decline in official reserves and the emergence of a black market, Garbis Iradian,

IIF’s Mena chief economist said in a report released yesterday.

With protests demanding reforms continuing since October 17, yields on 10-year dollar-denominated sovereign bonds of Lebanon have increased further to around 19 per cent. “Dollarisation of deposits has increased to around 80 per cent, and capital flight in the first nine months of this year is estimated at about $3bn [equivalent to 5 per cent of GDP]”, Mr Iradian said.

“Prospects for recovery of non-resident capital inflows hinge on achieving political stability and implementation of deep reforms, which would support confidence at home and abroad”.

Lebanese banks resumed operations on Friday after being closed for two weeks due to nationwide protests seeking changes in governance.

The Mena region is set to attract as much as $200bn in capital inflows by the end of this year from $165bn in 2018, mainly driven by global benchmark index upgrades in Kuwait and Saudi Arabia, which have bucked the trend in other emerging markets.

Capital inflows are expected to moderate to $173bn in 2020, however, with the ongoing economic reforms in the region and inclusions into global equities benchmark for regional indexes, the Mena region “is taking a more prominent place on the emerging market investment map”, Mr Iradian said.

Within the Mena region, capital inflows to Saudi Arabia, the biggest Arab economy, are expected to reach a record $57bn this year, as investors buy into the kingdom’s equities market after its inclusion in the MSCI Emerging Market Index earlier this year.

Going forward, IIF expects equity inflows to dissipate somewhat but remain sizable.

“From the perspective of debt flows, declining interest rates and large fiscal financing needs in the context of lower oil prices will keep Eurobond issuance at high levels,” it said.

The total foreign portfolio inflows for the oil exporting nations in Mena are projected to rise significantly to $157bn this year from $115bn in 2018 and taper to $133bn in 2020.

In contrast to oil exporters, capital flows to Mena oil importers are projected to decline to $43bn in 2019 and $40bn in 2020 from $50bn last year, IIF said. While twin deficits and trying political environments appear as common themes, the ability of individual countries to handle these challenges and attract foreign capital differs considerably, it said.

“With the IMF programme ending in November, a narrowing fiscal deficit, and comfortable levels of official reserves, Egypt’s financing needs are diminishing, leading to lower borrowing and thus a decline in capital inflows,” the IIF said.

The UAE remains the region’s largest FDI recipient with inflows of $10.4bn in 2018, which was equivalent to 2.5 per cent of GDP, according to the IIF.

FDI, particularly greenfield investment projects, in the GCC could increase significantly in the coming years.