Indebted Lebanon may struggle to refinance as austerity budget stalls

Fri, 2019-05-17 15:10

LONDON: Lebanon’s impasse in agreeing 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 maneuver 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 US 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
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 pay all maturing debt and
interest payments on predetermined dates.
“Eurobond maturities this year would be met by issuing further
eurobonds,” 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, 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 stabilize 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
Still, some prospective investors remain unconvinced.
“We are underweight Lebanon,” said Sergey Dergachev, senior
portfolio manager at Germany-based Union Investment. “There’s
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 US-China trade spat.

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Source: FS – All-News-Economy
Indebted Lebanon may struggle to refinance as austerity budget stalls