BLOM Lebanon PMI: Macro highlights – October 2020

In its October World Economic Outlook, the IMF revised the Global growth in 2020 at -4.4% (the worst annual plunge since the Great Depression of the 1930s), reflecting better-than-anticipated second quarter GDP outturns in advanced economies where economic activities started to uplift. In this context, PMI index of the USA, Eurozone, UK, Russia and China among others, increased to stand approximately at 54.3 points, 50.4, 56.5, 53.7, and 54.5 respectively in September 2020. Meanwhile, the IMF projected the Lebanese economy to see one of the region’s sharpest economic contractions this year at 25%. In fact, Lebanon has been struggling with issues ranging from economic and financial crisis to corruption and high unemployment well before the coronavirus swept across the globe. It is worth mentioning that the WorldBank updates on Lebanon were a bit different.  In details, the World Bank sights an expected fall of 19.2%. Moreover, IMF’s projection for Lebanon’s fiscal Balance marked -16.5% of GDP and Consumer Price Index estimated at 144.5%; however, World Bank denotes a fiscal deficit of 14.5% and indicates a Consumer price index (inflation) of 70%. Moreover, IMF puts the Current Account Balance at -16.5% whereas World Bank at -4.4% of GDP.

Lebanon October’s PMI reading of 43.3 signaled another marked deterioration in business conditions faced by Lebanese private sector firms. In details, the further downturn in operating conditions was partially driven by another contraction in output and new orders. However, it’s worth mentioning that the latest decline in the PMI and sub categories was the softest for three months.

It is known that when an economy enters a recession, government revenues will fall while its spending will rise leading to a wider fiscal deficit. However, this appears to be not the case of Lebanon. According to Ministry of Finance (MoF) latest figures, Lebanon’s fiscal deficit (cash basis) stood at $2B by July 2020, down from last year’s $2.41B. In detail, the substantial deficit is attributed to the annual 21.22% drop in government revenues (including treasuries) which fell to $5.49B by July 2020.  Fiscal revenues recorded a yearly downtick of 28.59% to stand at $4.76B. Worth mentioning that the primary balance which excludes debt service posted a deficit of $706.84M, compared to a surplus of $577.22M during the same period last year.

Tax revenues (constituting 84.51% of total revenues) retreated by an annual 27.43% to $4B by July 2020. Revenues from VAT (16.47% of total tax receipts) dropped by 55.21% y-o-y to $663.89M. The drop in “VAT revenues” is attributed to the low growth environment and reduction in spending, thus limiting income for the government of Lebanon. On the counterpart, total expenditures (including treasuries) retreated yearly by 19% to $7.59B by July 2020. The drop in expenditure is mainly related to the decrease in debt servicing. In details, total debt servicing (including the interest payments and principal repayment) reached $1.39B by July 2020, down by a yearly 53.38% such that interest payments alone retreated by 54.50% y-o-y to $1.30B. Interest payments on domestic debt slumped by 32.94% y-o-y to $1.16B. Meanwhile, interest payments on foreign debt registered a year-on-year significant drop by 87.63% to $134.74M noting that on March 7 2020, the Lebanese government announced for the first time that Lebanon will not pay a $1.2B Eurobond due on March 9 and will seek to restructure its sovereign foreign currency debt.

 In this context, the data released by the Ministry of Finance (MoF) recently indicated that Lebanon’s gross public debt hit $94.27B in August 2020, thereby recording an annual increase of 9.2%. The increase is mainly attributed to the 9.76% annual increase in local currency debt (denominated in LBP) which stood at $59.04B in August 2020. Meanwhile, total debt denominated in foreign currency (namely in USD) climbed by a yearly 8.37% totaling $35.22B over the same period. It is worth mentioning that $3.78B represents the Unpaid Eurobonds, their coupons and accrued interests.

Lebanon is a country traditionally open to trade supported by a fixed exchange rate which ensured greater stability regarding import/export. However, the ongoing economic slowdowns, the devaluation of the Lebanese currency and the recent Covid-19 outbreak have exerted pressure on trade, resulting in spending reduction and inability to import raw materials. As a result, Lebanon’s trade deficit totaled $4.66B by August 2020, narrowing from the $11.37B registered in the same period last year. In fact, total imported goods retreated by 49.97% year-on-year (YOY) to $6.92B by August 2020. Meanwhile, Lebanon’s total exports declined by 8.52% YOY to $2.26B by August 2020. Worth mentioning that the volume of imports is expected to further decline in the upcoming period, especially if the BDL stops the support of essential goods including basic food, medicines and fuel.

On the monetary front, Lebanese citizens were mainly occupied this month by the BDL circulars aiming at absorbing liquidity in local currency following the fall of the Lebanese pound on the parallel market. In details, BDL called on banks to limit their withdrawals based on the size of accounts they have at BDL and therefore Lebanese banks started lowering the limit of pound cash withdrawals by clients. In fact, Money supply M1 inclusive of currency in circulation (CC) and LBP demand deposits rose by 176%YOY to $22.26B by mid-October 2020, but most of the increase was due to higher CC.

Against this backdrop, BDL’s balance sheet indicated that total assets climbed by 9.80% since year-start, to reach $155.21B in October 2020. The increase was mainly due to the 25.76% rise in gold prices since the start of the year to $1,907.82/ounce by October 2020. As such, the Gold reserves at BDL (composing 11.14% of BDL’s total assets) increased by 24% to $17.28B in October. Meanwhile “other assets” increased by 83.35% since year-start to reach $45.76B in October 2020. The huge swell in “other asset” is explained by seigniorage profit. This unorthodox accounting has raised concerns about transparency. Meanwhile, the BDL’s foreign assets (grasping 16.39% of total assets) decreased by 31.75% years to date to stand at $25.44B in October 2020. It is worth mentioning that foreign currency reserve at BDL has dropped approximately to $11.83B since the start of the year which rings the bell to find other solution in order to finance the importation of basic commodities. In details, Central Bank Gov. Riad Salameh informed the government in his last meeting, that BDL has around $2.3 billion left to subsidize basic goods, and will rationally spend it to last longer than three months. Furthermore, BDL and the Finance ministry are working on plan to reduce the subsidies instead of lifting them in one shot. One year has passed since the national protests in October 2019 and policy makers have failed to try to contain the damage and properly manage the crisis, with no serious reforms and recovery plans put in place. Former Prime Minister Saad Hariri whose government was brought down by the Lebanese people, is currently trying to from a new government in the hope to deliver

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