The Daily Star
BEIRUT: The Finance Ministry announced the completion of two LL2.035 trillion ($1.3 billion) Treasury bill issuances to partially finance the needs of the state in 2019. The first issue, valued at LL1.007 trillion, matures in 2029, while the second was valued at LL1.2 trillion and matures in 2033.
Both the Lebanese pound-denominated T-bills carried an interest rate of 10.30 percent after an agreement was reached between caretaker Finance Minister Ali Hasan Khalil and Central Bank Gov. Riad Salameh to raise the interest rates on the bonds in line with the market trend.
The ministry said in a statement that the LL1.2 trillion T-bill issue was oversubscribed by 84 percent, reflecting the confidence of investors in Lebanese bonds.
Lebanese banks were the main subscribers to these bonds.
The statement added that the interest rates on the bonds were still lower than the interest on certificates of deposit the banks have in Banque du Liban. One banker told The Daily Star that the two new issues represent a small portion of the needs of the Treasury.
The issuance of these bonds coincided with another negative outlook for Lebanon by an international rating agency.
Fitch Ratings has revised the outlooks on Lebanon’s long-term foreign- and local-currency Issuer Default Ratings to negative from stable and affirmed the IDRs at B-.
“The revision of the outlook on the long-term IDRs reflects a further deterioration in government deficits and debt dynamics and signs of rising pressures on Lebanon’s financing model, including a decline in deposit growth, and increasing reliance on unorthodox measures by the Central Bank in response to these pressures,” Fitch said.
It added that Lebanon’s public finances have worsened in 2018 and risks to the medium-term sustainability of government debt have risen.
“We forecast that the 2018 budget deficit has widened significantly to 10.6 percent of GDP, from an average of 8.2 percent of GDP in 2012-2017, because of hikes in public sector salaries, higher electricity subsidies and interest payments and a pickup in capital spending. We forecast that the budget deficit will remain above 10 percent of GDP in 2019-2020, on the back of higher interest rates, weak economic growth and a lack of material fiscal reform.
“Lower oil prices and the higher corporate tax rate introduced in 2018 will help marginally. We project that government debt/GDP will reach 158 percent in 2020 and will continue rising, to 169 percent in 2023,” Fitch said. It stressed that the salary scale adjustment in September 2017 has been the primary driver of the larger deficit.
“In the first half of 2018, personnel costs [which include wages, end of service and pension payments] were 26 percent higher than a year earlier. The cost of the adjustment has outweighed revenue-raising measures introduced in 2018 to offset the salary scale. Other spending lines have also pressured the budget in 2018, notably transfers to Electricite du Liban, the loss-making state-owned electricity company, which rose 33 percent year-on-year in the first half, in line with global oil prices,” the report said.
Fitch warned that government spending has grown dramatically this year as a result of government interest payments on bonds.
“Lebanese and international stakeholders agree that the budget deficit needs to narrow, but a credible, actionable plan for achieving this is still lacking and it remains unclear if political dynamics will allow for a concerted fiscal adjustment. At the CEDRE conference in April, Lebanon gained $11 billion in pledges for concessional financing, which is conditional on reducing the budget deficit by 5 percent of GDP over five years, by reforming subsidies to EDL and improving tax compliance,” Fitch said.