Dubai: Lebanon’s public finances have benefited from lower oil prices and higher revenues but remain vulnerable to domestic and external shocks and continued low economic growth according to global rating agency Moody’s and the International Monetary Fund (IMF).
After four consecutive years of high gross domestic product (GDP) growth between 2007 and 2010, growth has slowed to just 1 to 2 per cent annually. The low growth rate has resulted in the halting of public-sector deleveraging. In 2012 the public debt burden increased for the first time since 2006. Moody’s estimate that the fiscal deficit will average 8 per cent of GDP in 2015 and 2016, reflecting lower transfers to Electricité du Liban (EdL) but high outlays on current spending, leading to higher debt levels. Political polarisation has considerably weakened policy effectiveness — the country has been without a president since May 2014 — and consensus on fiscal reforms often remains elusive. The political outlook is clouded by periodic disagreements among factions.
The rating agency notes that consensus on economic reforms often remains elusive amid a challenging political environment, hampering the country’s competitiveness. In this context, the country’s twin deficits and debt burden are likely to widen in 2015-2016.
“While Lebanon benefits from short-lived improvements stemming from the drop in oil prices, the release of telecom revenues and lower capital expenditures, policy action remains insufficient to curb the negative fiscal trend. Slower economic conditions will continue to pose fiscal challenges and increase the country’s vulnerability to political shocks,” said Mathias Angonin, an analyst at Moody’s.
Moody’s expects that Lebanon’s economic growth will remain subdued at 2.5 per cent this year, similar to its 2013 level and up from 2 per cent in 2014. Economic growth will likely be supported by low oil prices, a slight recovery in tourism numbers and continued private sector credit growth benefiting from central bank stimulus. Construction activity continues to be slower than pre-2011.
Public debt
On the fiscal side, according to the IMF exceptional factors allowed for a primary surplus in 2014, but without decisive action fiscal deterioration will continue in 2015. The 2014 primary surplus of about 2.5 per cent of GDP largely resulted from exceptional telecom transfers and, to some extent, from withheld and delayed payments. But the IMF estimates that the balance is expected to return to a deficit of almost 1.25 per cent of GDP in 2015, with public debt remaining high at 132 per cent of GDP.
According to Moody’s, Lebanon’s general government debt is likely to trend upwards in 2015 and 2016, to 126 per cent of GDP, after falling in 2014. However, the rating agency said that the country has demonstrated a strong capacity to withstand even higher debt levels and Lebanese banks continue to be willing and able to provide financing to the government, supported by strong deposit inflows.
Lebanon’s higher fiscal deficit will primarily result from spending pressures from utilities and spending on security. Despite high deficits, Moody’s expect fiscal deficit to remain below levels reached in 2012 and 2013.
Banking sector support
In addition, the central bank’s foreign exchange reserves, which more than tripled to $33.8 billion by April 2015 from their 2007 level, bolster confidence in the exchange rate peg and the financial system. Large remittance and deposit inflows support banking sector stability.
Lebanese commercial banks, the government’s primary creditors, remain willing and able to purchase and roll over government debt, given their significant deposit-funded resources primarily stemming from the Lebanese diaspora. Despite the country’s political instability and fiscal weakening, investor confidence has been strong, with deposits increasing 6.7 per cent year-on-year as of April 2015, down from 7.3 per cent on average in 2014.
Analysts view that disagreements among political factions remain a challenge, as reflected by the inability to designate a new president. Political polarisation has considerably weakened policy effectiveness. The most pressing fiscal reforms have been on the drawing board for years and are unlikely to be addressed.
The central bank’s foreign exchange reserves, which more than tripled to $33.8 billion by April 2015 from their 2007 level, support Lebanon’s sovereign rating by bolstering confidence in the exchange rate peg and the financial system despite weak public finances.
