Osama Habib – The Daily Star
The political paralysis in Lebanon triggered some conversion to dollar deposits and a drop in the prices of sovereign Eurobonds in the month of October, a leading banker revealed Monday. “The failure to form a Cabinet has apparently caused some dissatisfaction in the local market and this was translated into the conversion of Lebanese pound deposits to dollar deposits. I estimate that close of $570 million was converted to dollar bank accounts.
“This figure does not call for panic, but nevertheless, this development should send a clear message to politicians that keeping the country without a Cabinet is detrimental for the country,” the banker told The Daily Star on condition of anonymity.
He added that despite the development, the monetary situation is still stable, noting that the Central Bank has other tools at its disposal to draw more funds.
As of September, 68 percent of bank deposits in Lebanon were in dollar accounts.
The Central Bank, sitting on $41 billion in foreign currency reserves, usually intervenes in the market to ensure that the local currency remains stable. Central Bank Gov. Riad Salameh has warned politicians that the budget deficit issue should be addressed quickly once the new Cabinet is formed.
Bankers and economists agree that the main threat to the economy is the public debt, estimated at $84 billion, or 150 percent of GDP.
Marwan Barakat, head of economic research at Bank Audi, said that “despite the adverse conversions, the foreign exchange market remains considerably buffered, with BDL FX reserves standing at $41 billion, the equivalent of 78 percent of the national currency supply.”
He added, however, that resilience is not equivalent to immunity.
“There is a drastic need to improve political governance, reduce the budget deficit, contain debt ratios and move the balance of payments from a net deficit to a net surplus,” Barakat said.
According to Bank Audi’s Lebanon Weekly Monitor, Lebanon’s capital market last week witnessed extended price falls on the Eurobond market, while the equity market registered price gains along with increased activity, and the FX market saw net conversions in favor of foreign currencies.
It attributed this fall to the heightened political tensions and a long-simmering Cabinet formation gridlock.
“Cabinet uncertainties continued to weigh on the Lebanese bond market, which pursued its downward trajectory amid price falls in MENA bond markets following an oil price collapse. The Lebanese weighted average yield increased by 38 basis points week-on-week to reach 10.73 percent. On the equity market, the BSE total turnover increased tenfold, reaching $31 million, mainly helped by large cross trades on Solidere shares,” Bank Audi said.
It added that at the level of the FX market, the commercial demand for U.S. dollars exceeded the offer for the greenback in terms of volume, while activity remained shy in the interbank market.
International investment bank Goldman Sachs, in a report released Monday, also underlined the importance of reducing the budget deficit to relieve the market and diminish the dependence of the Treasury on the support of the Central Bank.
It implied that Lebanon could face a potential default in the next two to three years if the status quo did not improve.
“In the medium term, we think the pressure is on the external side, and estimate that the external funding gap can be financed from existing FX liquidity in the banking system [via BDL financial engineering operations] for the coming 2-3 years. Beyond this time horizon, the risk of a forced external adjustment and potential default rises sharply in the absence of alternative financing sources,” Goldman Sachs Economic Research said.
It reiterated that the government formation would be an important first step toward easing financing pressures if it leads to progress on the reform agenda and the release of funds committed in the CEDRE process beyond what investors and depositors currently expect.
“Other positive external shocks that could improve the financing outlook include a commitment of financial support from a regional power or a reduction in regional geopolitical risks, particularly the conflict in Syria,” it added.
The report expressed concern that Lebanon’s debt-to-GDP could reach 170 percent in 2022.
“In the long run, even if the financing outlook improves, we believe Lebanon’s current trajectory will be unsustainable due to the current imbalances on the fiscal side. This is because Lebanon’s external financing is non-debt-creating [in the form of remittances and deposit inflows], while financing the government deficit clearly implies a rapid build-up in public debt.
“Our forecasts imply that debt/GDP will rise to over 170 percent of GDP by 2022, the main driver of this being an ever-increasing debt servicing burden,” it added. Goldman Sachs noted that commercial banks’ liquid assets, estimated at $10.3 billion, can only finance the external funding gap for less than two years.
“The extent to which this liquidity can cover the external funding gap is a subjective assessment: In principle, one could take a restrictive view and assume that only highly liquid assets should be considered. In this case, the $10.3 billion in liquid assets would cover less than two years of our projected net external funding gap. In reality, however, banks have been accessing FX liquidity from a variety of sources.
“We calculate that in the first nine months of this year, for example, banks have liquidated around $500 million of Lebanese Eurobonds, reduced FX lending by $1.2 billion, and drawn down overseas deposits by $1 billion, to raise a grand total of $2.7 billion,” the report said. It added that if deposit growth and remittances do not rise significantly in the next three years, the Central Bank can finance the external funding gap until 2021.
“In our opinion this is a realistic estimate of how long the BDL can continue to finance the external funding gap via its operations assuming no pickup in deposit inflows,” Goldman Sachs said.
