28 June 2010
BEIRUT: Barclays Capital revised upward its real GDP growth forecast for Lebanon to 7 percent in 2010 from 6 percent earlier, with potential upside for further revisions to 8 percent by year-end, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group. It attributed the growth revision to favorable first quarter indicators that point towards robust growth.
It said the growth momentum is also benefiting from the sustained recovery in regional and global economies, and remains almost unaffected by the current problems of the euro area. In parallel, it noted that the government approved the 2010 budget targeting a deficit of about 11 percent of GDP despite market concerns about sovereign risks.
It indicated that the proposed expansionary fiscal budget and delays in structural reforms put Lebanon at odds with the rest of the world, and further exacerbates its fiscal vulnerabilities. It said that the government just approved the draft budget six months into the fiscal year, with discussions in Parliament delaying its ratification by at least another month, which significantly limits the government’s ability to deploy resources into capital investment projects that are the budget’s main focus.
It added that several contentious points, either policy-related or politically-motivated, have delayed and could further delay budget discussions among political factions. It noted that this reflects the fact that moving forward with fiscal and economic reforms under the current national unity government will be difficult, slow and sub-optimal at best, given the urgent nature of reforms to address Lebanon’s debt problems.
Barclays Capital indicated that the 2010 budget earmarks almost 4 percent of GDP, or 10 percent of total planned expenditures, for capital investment projects, representing a 148 percent annual increase.
It noted that the absorptive capacity limitations will result in only a small fraction spent this year after the budget’s ratification. As such, it expected the overall deficit to be limited to 8.5 percent of GDP in 2010, leading to a primary surplus of about 2 percent of GDP and a reduction of the debt-to-GDP ratio to 147 percent by year-end.
It considered that the overall fiscal financing requirements of about $13 billion will be secured through the market, and notably through the liquidity-abundant banking sector. It added that the solvency risks in Lebanon are minimal due to robust economic growth, a decline in average interest rates on the public debt, the capacity to generate primary surpluses, continuing capital inflows, the strengthening of the external balance, and the fact that most of the public debt is held locally.
But it expressed concerns about political risks given the increasing geopolitical tensions in the region. It considered that the Lebanese economy would come under extreme strains in the case of a war that is similar to the 2006 conflict. But it noted that the system would be able to avoid any major refinancing problems despite severe weakening of growth drivers, given the robust and liquid financial sector, and the expected support of Arab governments and the international donor community.
In parallel, HSBC Bank Middle East indicated that the Cabinet’s approval of the 2010 budget, the first budget to be ratified since 2005, reflects the slow normalization of policy-making after years of discord. It expressed disappointment about the content of the budget, adding that it is light on reforms and projects the largest fiscal deficit on record. It said the fact that the budget is still being debated half-way through the fiscal year points to the difficulties that continue to constrain effective policy-making. It noted that the lack of consensus within the Cabinet prevented the adoption of measures in the budget to capitalize on surging economic growth and strengthen public finances, despite an average fiscal deficit equivalent to 12 percent of GDP over the past decade. It added that the budget did not refer to privatization, long considered as the way to reduce the public debt stock, or to credible steps to overhaul the inefficient and unprofitable state-owned Electricité du Liban.
HSBC expected cyclical gains to mask these policy shortcomings over the shot-term and forecast the 2010 budget deficit to be at least 1 percent of GDP below the target 10.7 percent of GDP. It said this would reflect in part continued low global interest rates and improved confidence in Lebanon’s near-term prospects, which should contain debt servicing costs and offset increases in non-debt expenditures. Also, it expected revenues to increase by at least $1 billion this year on strong economic growth, as supply-side indicators suggest the economic recovery that began in 2006 continues to carry momentum. But it warned that, while strong growth would allow public finances to strengthen in the near term, the improvements would be temporary and vulnerable to a reversal.
It noted that Lebanon’s public debt, at 150 percent of GDP, continues to be among the largest in the world and leaves the state subject to refinancing risks. It added that debt servicing accounts for about 40 percent of total expenditures and 47 percent of revenues, keeping the structural deficit firmly entrenched, with the debt likely to increase by $3.5 billion in 2010. HSBC considered that without reforms, the slowdown of Lebanon’s economic growth will result in a deceleration of revenue growth, while an eventual increase in global interest rates may undo the drop in average interest rates on the debt. In turn, these developments would open the way for the renewed deterioration of public finances. – The Daily Star
Copyright The Daily Star 2010.
