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Will Lebanon face a further downgrade?

The Levant News — By Osama Habib for The Daily Star —

BEIRUT: Lack of reforms, political instability and slow economic growth is leaving the embattled government with very few options to finance its current expenditure needs, economists and bankers said Wednesday.

One of these options, if not the only one, is to keep borrowing from the Lebanese banks and the Central Bank, which are already sitting on a large chunk of Eurobonds and treasury bills.

Bankers say that as long they are able to achieve annual deposit growth between 6 to 7 percent then the lenders will keep financing the public debt that will reach $72 billion at the end of 2015.

But the bankers insist that they prefer the government to get its act together and reduce its borrowing needs from the lenders.

They stress that banks favor granting loans to the private sector and finance government infrastructure projects such as electricity and water under the public-private-partnership program.

But as long as this option is not attainable due to the current circumstances, banks are inclined to subscribe to the Eurobonds and T-bills.

However, there is a deep concern that this trend will sink Lebanon deeper into political and economic uncertainty, not to mention the chances of a further downgrade of the country by the international rating agencies.

Last week, the Finance Ministry successfully closed a $1.3 billion Eurobond deal which was mostly snapped up by Lebanese banks and financial institutions.

The Lebanese banking sector’s exposure to the Lebanese sovereign reached $60.4 billion as at the end of 2014, of which $21.3 billion are in Lebanese treasury bills, $16.9 billion in Eurobonds, $17.8 billion in BDL’s certificates of deposits in Lebanese pounds and $4.4 billion in BDL’s certificates of deposits in FX. The sector’s aggregate interest income accounted for about 64 percent of total operating income in 2014.

There are no official figures on the net income generated by banks from their loans to the state but some experts estimate it almost accounts for half of the total net profits.

Last week, Capital Intelligence, the international credit rating agency, announced that it has affirmed Lebanon’s long-term foreign and local currency sovereign rating of “B” and its short-term foreign and local currency sovereign rating of “B.” At the same time CI has revised the outlook for Lebanon’s ratings to “negative” from “stable.”

The revision of the outlook to “negative” reflects the deteriorating economic performance, weakening fiscal position, as well as the difficult domestic and external political environment, which in turn has derailed the pace of reforms.

CI notes that the conflict in Syria, which is 4 and a half years old, continues to weigh heavily on the performance and stability of the Lebanese economy.

It added that the influx of refugees, who now comprise around 25 percent of the population, is placing significant pressure on the country’s limited resources and social fabric and adding to unemployment and poverty.

“In addition, the highly polarized domestic political situation remains an obstacle to filling the two-year presidential vacuum and to the enactment of key legislation and fiscal reforms,” the agency explained.

It added that refinancing risk remains high, with the government’s gross financing requirement expected at about 35 percent of GDP in 2015.

“The government is reliant on the domestic banking system for the bulk of its financing in both local and foreign currency. The economy would therefore be vulnerable to a shock that adversely affects the risk appetite of local banks or the confidence of depositors,” CI argued.

It noted that in the absence of such a shock, gross financing needs would appear to be manageable in the short term given the overall soundness of the banking system and continued deposit growth.

“Should any funding gaps emerge in the near term, the government would probably be able to meet its needs by borrowing from the Central Bank and drawing on its deposits – although neither is considered a sustainable form of financing,” the report said.

Joe Sarrouh, the adviser to the chairman of Fransabank, told The Daily Star that the government should not bask in the sun just because it’s able to borrow from the commercial banks.

“This act of imbalance cannot continue for a long time. The concern is not to keep lending to the government, the concern is to create a proper environment and pursue reforms,” he said.

Sarrouh feared that the budget deficit next year would reach $5 billion. He added that banks have no choice but to help the government meet its financial needs. “This is joint partnership. If the government collapses then what will happen to the people?” Sarrouh asked.

Bankers and economists called on the government and Parliament to reactivate the institutions and pass important bills that would inject badly needed cash into the economy.

Parliament Speaker Nabih Berri has called for legislative sessions next week to discuss and approve a number of bills, including $600 million worth of grants and loans from the World Bank.

But there is deep concern that Berri may not secure a quorum as some Christian parliamentary blocs refuse to discuss any topic unless the lawmakers add the election law and the nationalization of Lebanese expatriates to the agenda.

“If this bickering continues and reforms are on hold, then the debt to GDP would swell further in the coming few years,” one economist warned. “This means that the country will plunged into chaos,” he added.

Source: The Daily Star

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