Left Menu
Development News Edition

Indebted Lebanon may struggle to refinance as austerity budget stalls

Reuters | Updated: 17-05-2019 20:55 IST | Created: 17-05-2019 20:42 IST
Indebted Lebanon may struggle to refinance as austerity budget stalls
Image Credit: Pixabay

Lebanon's impasse in agreeing on a credible fiscal reform plan and deteriorating global market conditions means it may struggle to refinance key foreign currency debts coming due this year, unnerving overseas investors. Outright default can likely be averted in the short-term by a government financing manoeuvre involving the central bank and local banks, the main holders of its debt.

But this is only likely to be a stopgap and many foreign funds contacted said they would be reluctant to delve into new Lebanese Eurobonds until they assess reforms. Lebanon's cabinet talks may drag into next week after about a dozen sessions so far without a deal, against a backdrop of protests by public sector workers and retired soldiers over concerns about wage and pension cuts.

The government in February promised "difficult and painful" reforms to control spending. Prime Minister Saad al-Hariri has said this may be the most austere budget in Lebanon's history. At stake is investor support for new debt sales needed to help meet maturing Eurobonds next week and again in November. Access to international markets has been compounded by fresh turbulence on emerging markets as the trade row between the United States and China blew up again and geopolitical tensions involving Iran heightened.

Lebanon, with one of the world's highest public debt burdens, has been buffeted by political paralysis and fallout from conflict in Syria and Iraq, which has weighed on regional trade, investment and travel. A small, open economy, it has also been hit by a fall in money flowing in from its scattered diaspora, which traditionally helped fund a large chunk of its financing needs. "The government is not even able to get its act together to deliver a comprehensible transparent budget. Nor did it present or formulate a credible medium-term fiscal adjustment plan that strikes the right balance between the imperative of growth and fiscal consolidation," said Alia Moubayed, managing director at Jefferies, an international finance firm.

"Without a clear medium-term economic and fiscal policy framework that addresses large external imbalances, and given high levels of corruption and state capture, investors will not be convinced to buy Lebanon risk, as donors will look with extra scrutiny before committing further funding." The protracted budget process has pushed up the cost of insuring Lebanon's debt in recent days to its highest level since Jan. 22, when it was struggling to form a government.

Lebanon should be able to muddle through to find a solution to its most immediate debt headache, a $650 million Eurobond maturing on May 20. Lebanon can pay back investors in this bond drawing on a foreign exchange transaction with the central bank, a source familiar with the matter said.

The government has used the same unconventional approach to financing its deficit in the past. The central bank would likely discount dollar denominated certificates of deposits for the banks to subscribe to in return for them buying long-term domestic bonds, said one banker familiar with the situation. In parallel, the central bank would do a swap with the finance ministry, the issuer of the international debt.

The finance minister had previously said the government aimed to issue Eurobonds in the range of $2.5 bln to $3 bln on May 20 to cover this maturity and Lebanon's other maturing principle for 2019, a $1.5 billion issue due in November. A source familiar with the matter told Reuters on Tuesday that Lebanon might wait until emerging market investors have more appetite and the government has approved its budget. The government is targeting international investors for around 20 percent of the new issue.

The government says it is committed to paying all maturing debt and interest payments on predetermined dates. "Eurobond maturities this year would be met by issuing further euro bonds," said Garbis Iradian, chief MENA economist at Institute of International Finance (IIF).

"First they have to send a strong signal to the market by approving strong fiscal measures." Nassib Ghobrial, the chief economist at Lebanon's Byblos Bank, said there was no risk to Lebanon's foreign currency financing for this year because the central bank was committed to covering the hard currency needs.

But Lebanon's economic challenges remain hefty. Its fiscal deficit ballooned to 11.2 percent of gross domestic product (GDP) last year from 6.1 percent the year before and its international reserves fell to $39.7 billion, enough for 13 months of import coverage.

The government could adjust the deficit to 8 or 8.5 percent of GDP this year, a "significant" move that would help stabilise debt levels, said Iradian. Still, that rebalancing could be tricky to achieve with anaemic economic growth - JPMorgan forecasts recently revised its growth forecast down to 1.3 percent in 2019, warning of "significant downside risks" surrounding fiscal reforms.

"While cabinet formation has supported sentiment, delays in the execution of much-needed reforms could dent confidence against the background of large fiscal and external deficits and high debt," Giyas Gokkent of JPMorgan Securities, wrote in a note. Deep-seated fiscal reforms, including improving the business climate and fighting corruption, could help accelerate growth and unlock the $11 billion in funding pledged by the international community at a special conference in April 2018, according to the IIF. That money hinges on such reforms.

Qatar also said in January it will invest $500 million in Lebanese government dollar bonds. It is unclear whether that support has materialised. Still, some prospective investors remain unconvinced.

"We are underweight Lebanon," said Sergey Dergachev, senior portfolio manager at Germany-based Union Investment. "There are very few items that make us feel confident about increasing our position as the problems haven't been solved on the ground and the long-term plan remains quite weak," Dergachev said it would be tough for Lebanon to issue at the moment given uncertainty over the U.S.-China trade spat.



‘Discounted Deaths’ and COVID 19: Anthropology of Death and Emotions

Death is a social event rather than the mere cessation of biological functions. As seen by anthropologists, death is not just physical but intensely social, cultural, and political....

Indigenous knowledge of communities a must for maximizing impact of community work

Generally, it has been observed that the majority of the academicians in higher education institutions neglect the wisdom of community people and throw their weight around thinking that they know everything and the community knows nothing. ...

In rebuking FBR, Pakistan’s courts take a stand for public health

The system, if implemented effectively, will allow Pakistans revenue service to combat the illicit trade in tobacco products and potentially add hundreds of millions of dollars to the states budget each year. ...

Dissecting how COVID-19 is catalyzing the trajectory of New World Order

The ensuing pandemic of COVID-19 has hit the globalization in two ways firstly, shrinking the importance of globalization as an economic force by curtailing mobility through worldwide lockdowns, and secondly, rejuvenating the idea of indig...


Latest News

DST-SERB supports study to identify structure-based antivirals against SARS-CoV2

The Science and Engineering Research Board SERB under Department of Science Technology DST has recently supported a proposed study by Prof. Pravindra Kumar from IIT- Roorkee for identification of structure-based potential antivirals agains...

Spain sees 750 bln euro EU coronavirus fund plan as good basis for talks

The Spanish government said on Wednesday the European Unions proposal for a 750 billion euro 824 bln coronavirus recovery fund would serve as a good basis for further negotiations.In a statement, it welcomed the proposal as responding to ma...

'Leaks and rumours': UK regulator flags perils of bankers working from home

Bankers working from their kitchens or bedrooms may raise new risks around handling sensitive information, meaning financial firms must check if their surveillance systems can spot suspicious transactions, British regulators said on Wednesd...

FACTBOX-EU solvency support plan for virus-hit strategic companies

The European Commission unveiled on Wednesday a plan to borrow and disburse 750 billion euros 827 billion in grants and loans to help EU countries recover from their coronavirus slump. One of the elements of the proposal is a solvency suppo...

Give Feedback