Macro-highlights: BLOM Lebanon PMI – May 2020

Lebanon officially asked the IMF for a financial lifeline on May 01st. The Lebanese government began its negotiations with the International Monetary Fund (IMF) after presenting a detailed financial rescue plan. This is one step towards stabilizing the economy as the two parties discuss in-depth the technicality of: the final figures’ calculation presented in the reform agenda, alongside needed legislations (including the Capital control law, among others) and potential prior actions that may be imposed on the country. By end-May 2020, the sovereign had held 7 remote meetings tackling the way forward on different fronts but no final decisions were taken to-date as the two parties continue their negotiations.      

Meanwhile, partial easing of coronavirus restrictions gave the private sector businesses some breathing space. The lockdown restrictions were gradually being eased starting early May. This extended the opening and working hours of some essential sectors, allowing a portion of the private sector businesses to operate with low capacity. This mostly explains the Purchasing Manager’s Index (PMI) jumping from last month’s 30.9 to 37.2 in May 2020.

However, partially lifting restrictions was not enough to support the economic losses born over the period. In fact, companies’ 1-year Business Expectations and their Purchases Index fell to the respective second all-time lows of 2.1 and 26.6 points, way below the 50-mark threshold used in the survey. Notably, the index designating Output Prices hit a historical high of 54.5. As such, demand for goods and services was constrained as lifting restrictions partially was insufficient to support economic growth estimated at -7% in Q1 2020 as per BLOMInvest Bank. In tandem, the monthly inflation rate in Lebanon surged to 11.4% in February 2020, up from 3.15% in Feb. 2019 according to the Central Administration of Statistics (CAS). Overall, the average inflation rate settled at 10.7% in the first two months of the year, as consumer prices increased lack of sufficient government control on stores’ pricings, but also as a result of the emergence of an active parallel exchange market amid ongoing capital controls.

In its turn, touristic activity in Lebanon and the region continued to be muted. Tourism is a leading growth driver of the Lebanese economy. Nonetheless, with the tourists already discouraged from visiting the country since the onset of the October 2019 protests, the outbreak of coronavirus in the region weighed down on tourism altogether. With most of the airport closures across the Gulf and Lebanon and flights being halted, the number of travelers to and from Lebanon was halved (down by an annual 53% exactly) to 1.2M travelers by April 2020. Even though some Lebanese expatriates are being flown into the country amid the pandemic, the number of arrivals remained subdued, falling by a yearly 56% to 540,380 passengers. Among the most eminent Middle East capitals, the occupancy at Beirut’s 4-and 5-star hotels suffered the most. It fell to an unprecedented low of 22% in Q12020, down by 48.1 percentage points (pp) during the same period last year. Correspondingly, the Average Room Rate and Rooms Yield declined from $189 and $132 in Q1 2019 to lows of $130 and $28, respectively, in Q1 2020.

Meanwhile, real estate (RE) purchases slowed down but remained solid overall. Real estate is Lebanon’s second eminent growth driver alongside tourism. Moreover, our study last week indicated that a number of wealthy depositors are still seeking to buy real estate (land and/or properties), knowing that no clear decision has been made yet on potential “haircuts”. Consequently, the total number of real estate transactions fell by an annual 5.6% to 14,841 transactions by April 2020 compared to the annual uptick of 17% recorded in Q1 2020. However, the value of RE these transactions stood at $2.6B, up by 26% when compared to last year’s.

The slight drop in the appetite for real estate is quite insightful. The RE activity in the month of April 2020 witnessed 773 transactions, compared to an average of 4,689 transactions in Q1 2020. It is safe to assume that most investors had already bought their need of RE since November 2019 and continued to do so to-date, only to a lesser extent. This can be explained by two main factors: a) increased demand on RE pulled prices up, which resulted in a high value of RE transactions over the period, and b) the synthetic appetite on RE may not last for much longer as wealthy depositors have used up the savings they can spare during the past period.    

On the monetary front, BDL’s foreign assets are in a downturn. BDL foreign assets (22.26% of total assets) recorded a decline of 10.08% (or the equivalent of $3.75B) since year-start, to reach $33.51B by end-May 2020. Furthermore, on a monthly basis, the central bank’s foreign assets retreated by $907M from April to May 2020 mainly as a result of the BDL covering costs of the import of essential goods. In fact, it is worthy to note that two new BDL circulars issued on May 27th may explain the expected decline in foreign assets over the coming months. In detail, BDL’s new circulars now mandate that it covers the costs of importing food, of raw materials used in the agro-industry, and raw materials for industrial exporters. In its turn, Currency in Circulation (7.86% of BDL’s total liabilities) rose by 68.93% since year-start, to hit $11.84B in May 2020. In fact, this is mainly attributed the increase in BDL’s money supply as its circulars enabled depositors with foreign currency accounts to withdraw their savings in Lebanese pound, close to the market rate.

Lebanon’s twin deficits remain substantial, jeopardizing suggested reform plans. On the fiscal front, the latest data by the Ministry of Finance indicated that Lebanon’s cash-basis fiscal deficit stood at $1.16B by Feb. 2020, up from last year’s $657.84M. The breakdown of the revenues and expenditures (excluding treasuries) reveals that the former declined by a yearly 6.56% to end the month at $1.58B. Meanwhile, the latter increased by an annual 18.18% to $2.69B over the same period. As for the trade deficit, it reached $2B in Q1 2020, down from last year’s $4.09B. While total imported goods fell by an annual 40.8% to $2.93B, total exports added a yearly 6.8% to $914M over the same period. In fact, overall imports have been on a downtrend partly as a result of the shortage in foreign currency (US dollars namely)  and partially as the country dips further into negative territory growth, reflecting the spillovers of the coronavirus impact coupled with the  onset of protests since October 2019.  

BLOMImnvest Bank

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