14 January 2011
Report
BEIRUT: Credit Suisse indicated that while Lebanon’s political crisis is unlikely to affect the day-to-day running of the government, it could affect the sentiment of investors in Lebanese assets and prompt at least some potential visitors to Lebanon to delay their arrivals until tensions ease.
The impact on the country’s creditworthiness should be contained, said Credit Suisse, thanks to Lebanon’s substantial foreign exchange reserves – over $31 billion as of end-November 2010, above 10 months of imports of goods and services – and the long record of the country’s financial system of successfully coping with the political and security shocks.
Lebanon’s key creditworthiness indicators – the ratio of FX reserves to total imports, budget deficit level as a share of G.D.P. and the ratio of the country’s public debt to G.D.P. – are close to their most favorable levels since mid-1990’s. However, macroeconomic imbalances are still significant and foreign holders of Lebanese assets are likely to be cautious, according to Credit Suisse, until at least some clarity emerges on what’s to happen next.
Barclays Capital indicated that there is no cause for major concern in the short term, but risks could increase should the deadlock become prolonged. Barclays confirmed the Central Bank’s ability and willingness to ward off any pressure on the Lebanese pound and the fact that it has taken measures to absorb banks’ excess liquidity, including the issuance of certificates of deposit.
In addition, present levels of reserves remain comfortably high, almost covering all of market held debt.
Still, Barclays indicated a prolonged period of uncertainty and lack of reforms could put added upward pressures on the term structure of interest rates again and reverse the recent gains achieved by lowering the government’s domestic borrowing cost. Finally, Barclays Capital indicated that the Lebanese Treasury would need to roll-over around $ 3.4 billion of foreign currency denominated debt in 2011, and even a caretaker government should be able to undertake a Eurobond exchange, and local banks would likely subscribe almost fully to it.
Citi indicated that political crises are commonplace in Lebanon, noting the resilience the Lebanese economy has demonstrated in the face of political challenges. Domestic deposit growth continued at a considerable clip throughout the decade, despite the Hariri assassination, the war with Israel, and the domestic political turmoil of 2006-08. G.D.P. growth recovered during the 2006-08 crisis to register in excess of 7 percent in 2007 (mid-crisis), climbing to around 9 percent in 2008 and 2009. But Citi noted that to a certain extent this resilience is a measure of the confidence of the Lebanese people, diaspora and regional investors, as well as being a reflection of the economic potential of the country.
JP Morgan indicated the impact on the real economy would likely be less severe. For instance, the interest rate differential remains attractive to maintain a sustained inflow of deposits while the credibility of the peg would stay unshaken, as per JP Morgan. The investment bank noted that a new national coalition government could prove difficult to form should tensions over the Special Tribunal for Lebanon persist. Therefore, it recommended buying Lebanese credit default swaps protection.
Merrill Lynch indicated that while the risk-reward of holding Lebanese assets has deteriorated, downside risks are mitigated by a comfortable FX reserve position, large banking sector liquidity, substantial domestic investor base, likely light international investor positioning and possible G.C.C. financial support, if needed. Merrill Lynch indicated that the moderate economic slowdown that was evident in Q410 would continue and further take hold, after the stellar economic performance of the past two years. Structural reforms are likely to be delayed further and while the expenditure side of the fiscal balance may do well given the fact that last year’s appropriations would largely carry forward, tax revenue growth is likely to decrease going forward.
Financial support from the G.C.C. should be forthcoming, if needed, as per Merrill Lynch, especially to guarantee the credibility of the U.S. dollar peg, while ensuring that debt default remains a low risk. – These reports were provided by Bank Audi’s Lebanon Weekly Monitor
Copyright The Daily Star 2011.
