BLOM Lebanon PMI: Macro highlights – July 2020

During July, Lebanon continued to ease lockdowns and businesses reopened leading to a PMI reading of 44.9, up from 43.2 in June. However, the overall Lebanese business environment remained negative. In fact, Lebanon has been in severe economic, financial and social crisis mode since at least October 2019, which weak institutions and governance strength appear unable to address. Moreover, the Lebanese lira’s depreciation against the dollar and surge in inflation are creating an uncertain environment and liquidity issues. According to the Central Administration of Statistics (CAS) Lebanon’s inflation rate in June 2020 stood at 89.74%, the highest monthly rate since it began releasing this series in December 2008. Looking at inflation in the first half (H1) of 2020, the rate stood at 38.79% compared to 3.26% in H1 2019. As a result, all the sub-components of Lebanon’s consumer price index (CPI) increased over the studied period.

Investing in real estate remains perhaps the safest haven to depositors of the Lebanese banking system given the current unofficial capital control. The total number of transactions climbed by an annual 24% to 27,216 in H1 2020. Notably, the value of the performed transactions increased to reach a 3-year high of $5.4B by June 2020, up from 2019’s $2.7B and very close to the value of RE transactions in 2017 which amounted to $5.38B. On a monthly basis, the number of RE transactions stood at a 6-year high of 8,339 in the month of June alone, which was almost 2 times higher than the 4,036 transactions recorded in May 2020.

Lebanon’s fiscal deficit narrowed, yet gross public debt continued growing on an unsustainable trajectory. In detail, the substantial deficit is attributed to the annual 15.35% drop in government revenues (including treasuries) which fell to $3.77B by May 2020.  On the counterpart, total expenditures (including treasuries) retreated yearly by 15.66% to $5.77B in the first five months of the year. Worth mentioning that the primary balance which excludes debt service posted a deficit of $715.75M, compared to a deficit of $37.57M during the same period last year. Meanwhile Lebanon’s gross public debt increased annually by 9.10% to $93.14B, by May 2020. In details, debt in local currency (denominated in LBP) stood at $58.54B by May 2020, registering a 9.98% year-on-year growth. As for debt denominated in foreign currency (namely in USD), it expanded by a yearly 7.64% to $34.60B over the same period. Worth mentioning that $2.75B of the total debt represents the Unpaid Eurobonds that matured in April 2020, their coupons and accrued interests.  In details, the government had announced in March that it will refrain from making payments on all dollar-denominated Eurobonds as it seeks to negotiate an arrangement with its bondholders and discuss the restructuring of its debt. To-date though, no major decisions regarding the restructuring of Lebanon’s public debt have been taken.

 On July 28, 2020, Moody’s Investors Service downgraded the Government of Lebanon’s issuer rating from Ca to C, the lowest rating in Moody’s rating scale, and has not assigned an outlook to the rating.

On the monetary front, BDL’s foreign assets are in a downturn. BDL foreign assets (19.91% of total assets) recorded a decline of 17.68% (or the equivalent of $6.59B) since year-start, to reach $30.68B by end-July 2020. In details, starting May 27th, BDL began extending to commercial banks foreign currency to support imports of raw materials for industrial exporters including the agro-food industry, and of basic food imports. Worth mentioning that during the first 2 weeks of July alone, the foreign assets dropped by $2.15B since June 2020. In turn, BDL’s Securities portfolio (25.19%of total assets) climbed to $38.82B, up by 2.21% year-to-date (YTD) in July 2020. Notably, Currency in Circulation outside of BDL (8.96% of BDL’s total liabilities) rose from $7B end-December 2019 to $13.81B in July 2020. This uptrend in circulated currency has been ongoing since the beginning of the year, as it continues to reflect clients’ strong preference for cash amid the growing uncertainty and feeble trust in the economy. In addition, BDL’s circulars No.148 and 151 further supported and facilitated cash withdrawals, as the circulars allowed depositors with foreign currency accounts to withdraw their savings in Lebanese lira at close to the market rate.

Total private sector deposits retreated by 9% ($14.36B) YTD to $144.50B by June 2020 while their dollarization sky-rocketed to 79.83% over the same period, up from December’s 76.02%. On the liabilities side, Total loans to the private sector fell by 14%YTD to $41.13B by June 2020. It followed that the dollarization of total loans fell from 68.75% end-December 2019 to 63.60% by June 2020.   

Amid the national foreign currency shortage and currency deterioration, Lebanon’s trade deficit totaled $3B by May 2020, narrowing from the $7.31B registered in the same period last year. In fact, total imported goods retreated by 50.4% year-on-year (YOY) to $4.35B by May 2020. Meanwhile, Lebanon’s total exports declined 7.6% YOY to $1.33B by May 2020. According to BDL’s latest monetary report, the BOP recorded a cumulative deficit of $2.49B by June 2020, compared to a deficit of $5.39B by June last year. Accordingly, Net foreign Assets (NFAs) of BDL fell by $4.43B but the NFAs of commercial banks added $1.94B over the same period.

Till now the Lebanese government didn’t make any important progress especially with the implementation of fiscal and economic policy reforms which further delay the unlocking of any external support package. A deal with the IMF and proper government debt restructuring plan has become essential for international investors. This is the more so given the huge losses obtained from the tragic blast that hit the Port of Beirut on August 4th 2020. Losses of this magnitude add to the challenges facing the country, and make the formulation of a new reforming and active government an urgent and supreme necessity.

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