New government a positive for Lebanon

Speculation around Lebanese debt restructuring, or even the demise of its long-maintained currency peg, have once again appeared to have been premature, as a couple of positive developments over the past week have seen a marked improvement in the country’s risk profile. While there remain significant challenges in the Lebanese economy, the risk of a crisis appears to have been averted for now, especially with reserves still equivalent to around 11 months of import cover. Reforms are still essential, but Lebanon has been given a stay of execution for now.

News of new government received favourably

Some nine months after elections were held in May last year, it was announced on Friday that Lebanon has formed a government, in a potential inflection point for the country after the past several months of escalating concerns over its financial stability.  This followed earlier positive developments the previous week when both Qatar and Saudi Arabia affirmed their commitment to Lebanon’s stability, with Qatar stating it would buy USD 500mn of government bonds. On the back of these developments, Lebanon’s five-year CDS has retrenched to 709 at the time of writing on February 2, levels last seen in November. Yields on its 2028 eurobond have also declined, from a recent peak of 11.5% in January to 9.4%, the lowest level since July.

Lebanon eurobond 2028, % yield

Source: Bloomberg, Emirates NBD Research

The delay in government formation, coupled with GCC states being seemingly less committed to Lebanon than they had been in the past, was among the primary concerns around the economy, but with both of these dangers seemingly passed, the outlook is brighter. The formation of a new government paves the way for the release of USD 11bn in funding pledged at the CEDRE conference in Paris last April, and for the implementation of essential reforms more generally. Prime minister Saad Hariri is expected to announce the new government’s policies on Monday, and while there is not expected to be anything contentious contained within this that might alienate one or other of the factions in the new administration, he has signaled that it will move ahead with fiscal consolidation. While easier said than done, especially in light of the disparate stakeholders represented within the government, the vocal commitment to it is encouraging, and will help stem the growth in Lebanon’s debt levels, among the highest in the world.

Depending on how quickly the CEDRE funds are allocated, the government formation provides potential upside risk to our growth forecast for Lebanon this year, currently just 0.9%. Nevertheless, it will still likely remain quite slow as the private sector comes under pressure. Investment appears to have been weak in recent months, with both cement deliveries and building permits seeing substantial falls over the year in a negative signal for the real estate sector, while the PMI remains stubbornly in sub-50 contractionary territory. Potential growth spots include the tourism sector, which saw visitor growth of 13.0% y/y over January to November last year, and improving security in neighbouring Syria. This could boost trade and transit activity, and potentially see some Syrian refugees resident in Lebanon turn home, reducing the burden on the government.

Tail risks

One risk that should not be discounted is that the US could look to impose sanctions on elements of the Lebanese economy, and pressure other countries and bilateral agencies to do the same, over the more prominent role of Hezbollah in the new government. One of the factors which held up the government formation was the party pushing for power more equivalent to its share of the vote, and the appointment of Jamil Jabak as health minister is seen as a sop to this. While not a member of Hezbollah, he has previously served as physician to Hassan Nasrallah. Several US officials have highlighted their concern over this development in the past several days.

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