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Lebanon's bonds market holds the key to the nation's indebtedness

By Nancy Mitri, Bonds Analyst, Zawya

Lebanon's corporate bond market is relatively minuscule with an estimated size of less than USD 1 billion, according to data compiled by Zawya's Bonds Monitor. Among the main issuers are the Lebanese American University , which raised a USD75 million 10-year bond in 2008, and Byblos Bank , whose outstanding notes total USD0.5 billion. Clearly, Lebanon's corporate bond market needs to be further developed.

Sovereign Bonds

On the other hand, the Republic of Lebanon relies heavily on the issuance of treasury bills and Eurobonds to finance its needs. It was not too long ago that the Ministry of Finance undertook a commitment to strengthen the debt management strategy and reform the capital markets. Among these initiatives was the shift from frequent short-term to longer-term instruments with a low frequency of auctions.

In this framework, the ministry of finance issued in March 2006 the first five-year treasury bills amounting to LBP400 billion (USD265.7 million), followed by the seven-year LBP1500 billion (USD996.3 million) treasury bills in December 2010. With the aim of increasing transparency, the ministry started to publish quarterly debt reports disclosing financial and statistical information about public debt in Lebanon. (Please click here to view the latest debt report.)

Public debt, which currently stands at USD53 billion, has been the main concern of the Lebanese government and financial institutions. Looking at public debt as a percentage of GDP, Lebanon records the highest figure in the region, although the Lebanese government has managed to decrease the ratio from its peak of 179% in 2006 to 137% in 2010.



Source: Zawya Bond Monitor

Public debt increased rapidly after the civil war when the government was short of funds needed for reconstruction. The government decided to raise debt through treasury bills and Eurobonds. But the problem of illiquidity remains due to the continuing budget deficit.

Several solutions have been discussed, including privatization and raising VAT on consumption. According to Transparency International, the corruption perception index of Lebanon is 2.5 on a scale that ranges from 0 (highly corrupt) to 10 (highly clean).

Debt Repayment

With 2012 just around the corner, efforts are directed towards creating a plan to pay back debt maturing next year. The Ministry of Finance hired Standard Chartered, Deutsche Bank and Fransa Invest Bank to arrange the refinancing of USD2.036 billion in bonds due 2012. Reopening and bond-swapping are the most often used financial tools of the Ministry of Finance to avoid a default, but these instruments are simply a way of postponing debt. Ultimately, the Lebanese government should consider new alternatives to raise funds.

Two courses of action are implemented in similar situations - either an increase in revenues or a cut in expenditure. Raising taxes in a country where the minimum wage is often insufficient seems unreasonable. However, stimulating economic growth by encouraging investment projects and entrepreneurial activity would generate additional revenues.

On the other flip of the coin, eliminating inefficiencies in the public sector helps to cut out useless expenses. Also, as many argue, privatization, especially at the level of EDL , would save the government around USD1.2 billion each year.

While some argue that Lebanon's public debt is increasing irrationally, others are pleased that the sovereign bond market is one of the most developed in the region, and they are reassured by the fact that the majority of the debt is internal and held by reliable Lebanese banks.

Also, credit rating agencies have been assigning a relatively positive grade to Lebanon's sovereign bonds. Moody's and S&P keep Lebanon at B1 and B, respectively. High oversubscription for treasury bills and Eurobonds shows investor confidence in Lebanon's debt capital market.

Moreover, in a country devoid of oil reserves, it is not surprising that the government taps the bond market every time it needs funding. Apart from regular issuances of treasury bills, Lebanon holds a portfolio of USD17.94 billion in international Eurobonds that are often dually listed on the Beirut and Luxembourg stock exchanges.



Source: Zawya Bonds Monitor

Nancy Mitri
Bonds Analyst
nancym@zawya.com

© Zawya 2011