Lebanon’s finances unsustainable

Lebanon’s continuing debt problem which demands 86% of the government's budget has some comparing it to Argentina

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By  Massoud Derhally Published  May 19, 2002

|~||~||~|As if the political situation doesn't already put a drain on its painstaking effort to revive the economy and the nostalgic era of being a regional banking centre, Lebanon received a blow when two ratings agencies; Standard & Poors and Fitch down graded it. The ratings on Lebanon will remain under downward pressure until there is a fiscal correction, that is substantial enough to reverse the growth in the public debt burden, warned the rating agencies.

The country's fiscal problems and growing debt burden prompted some to speculate that the Middle East may have a similar scenario to that of Argentina. Fitch Ratings, the international rating agency, said in April that Lebanon’s public finances are unsustainable but that the country is not likely facing imminent default. “The Lebanese pound has come under periodic pressure and bank deposit growth is slowing. Time is running short for the government, and it must act to avoid a financial crisis,” says James McCormack, senior director of Fitch.

At end-2001, Lebanon’s government debt reached 168-178% of GDP (depending on each rating agency figures), the highest of any rated sovereign. The Lebanese government issued a US $1 billion Eurobond in March to swap local bonds into cheaper external debt. The move issupposed to help reduce the government's debt-service costs but the difference is not great compared with the scale of its debt burden. Analysts point out that the rise in debt has also placed pressure on the country’s currency.

According to Fitch, the 2002 budget projects a deficit of 15% of GDP (about 21% of GDP using Fitch methodology, which adjusts official data for comparability with other rated sovereigns) with debt service accounting for 82% of revenues.

Fitch believes that public finances remain on an unsustainable path. The rating agency adjusted the Long-term foreign and local currency ratings to ‘B-’, the Short-term rating to ‘B’ and the Outlook is Stable. While Standard & Poors (S&P), also cut Lebanon’s long-term rating to single B-minus and dropped the short-term rating to single-C with a negative outlook, citing Lebanon’s debt burden and scepticism it can reform finances and win financial support from the international community.

The rating agency warned that unless Lebanon comes up with a “credible fiscal programme” to help slow the growth of its $27.1 billion public debt a debt restructuring will be increasingly likely.
Sources of financing for the government appear limited. According to Fitch, Privatisation is moving ahead very slowly and the willingness and ability of domestic banks to continue to purchase more government securities is not without limit. “As bank deposits shift from local to foreign currency, banks are reducing their holdings of LBP-denominated government securities. Concerns within the banks themselves regarding the exchange rate are affecting their desire to hold sovereign eurobonds as well.”

The government is relying increasingly on the Banque du Liban for financing, essentially monetising its debt. Meanwhile, foreign exchange reserves fell by 20% last year and are currently about US $4.9 billion. An increase in the current account deficit to about 34% of GDP and market intervention by the Banque du Liban to support the Lebanese pound drew reserves down. Fitch judges the current policy mix of targeting the nominal exchange rate as well as nominal interest rates in the context of falling foreign exchange reserves and rising government debt as unlikely to be sustainable.

Lebanon blames mounting regional tension for the latest in a string of downgrades to its credit ratings, but analysts say the cuts are a sign there is little faith in government plans to reform disastrous finances, reported Reuters. “The rating is an exaggeration because the fiscal situation does not justify a downgrade,” Jihad Azour, an advisor to Finance Minister Fouad Siniora, told Reuters.

Despite the shortcomings of budget planning, Lebanon seems to have benefited at least in way. Although no one actually knows how much money has been repatriated to the Gulf since the 11 September attacks, Lebanon was the recipient of US $800 million, flowing in from the Gulf, according to Reuters. Commenting on the inflow of capital, Elisabeth Jackson-Moore, managing director of Moodys I am amazed at the number of US$2mn upwards apartments in Beirut that are being sold to Gulf Arabs. There's still a huge amount of construction going on and most of these developments seem to be 70% or more sold before the foundations arecomplete accounts for a large portion of this money.”||**||

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