BLOM Lebanon PMI: Macro highlights – June 2020

While the rest of the world moves beyond Coronavirus measures, Lebanon struggles to grapple with dual crises. Most nationsbegan to overcome the standstill generated by the notorious pandemic. This is apparent via PMI composite output index of the USA, Eurozone, UK, China, Brazil, Russia and Australia among others, which rose from all-time lows in May to stand approximately at 37 points, 32, 30, 55, 29, 35 and 28, respectively, in the month of June. In its turn, the BLOM Lebanon PMI revealed an increase from May’s PMI score of 37.2 points to 43.2 points in June 2020. The uptick is directly linked to the easing of the 3-months coronavirus lockdown and businesses going back to normal working hours. However, the underlying business components also unveil a national liquidity and Employment crunch. The financial and economic woes of the country weighed down on the private sector while the crux of the national crisis i.e. needed reforms to unlock/attract foreign funds and thus business margins, are postponed open-endedly.   

The free-fall in exchange rates had a detrimental impact on Lebanese businesses in June, while the rising of prices turns into hyperinflation. Lebanon has been in severe crisis mode since at least October 2019. The country’s ongoing lack of collaboration and unity on official figures, needed actions and their urgency accelerated the Lebanese lira’s depreciation against the dollar particularly during June. The currency pair USD/LBP surpassed the 4,000 mark beginning June 2020 and hit the 8,000 mark by June 30th in the parallel market. As a result, the CAS’s latest inflation stats revealed that the monthly inflation in May hit an all-time high of 56.5% while Lebanon’s average inflation rate climbed to 28.5% by May 2020, compared to 3.6% only by May 2019. In tandem, businesses’ “Output prices” grew substantially with the index hitting an all-time high of 61.1points against the 50.0 mark PMI threshold. All these indications combined signal that Lebanon has entered a critical phase of Hyperinflation, defined by a period where monthly inflation surpasses 50% over time. In a nutshell, today all stakeholders are not only grappling with fast-paced price increases, but they also begin to expect even higher prices in the future and as these expectations are being priced-in “today”, they place the economy in a dangerous loop.        

Notably, the cycle of hyperinflation continues to be fed by the rise in money supply (MS). Interestingly, Money supply M1 inclusive of currency in circulation and LBP demand deposits rose by 138%YOY to $17B by mid-June 2020. Worth noting that BDL has intervened in the Lebanese market since the onset of the crisis to-date for multiple goals: to maintain the official peg at 1507.5; to partially support depositors as de facto capital controls remain in place; and to collaborate with money exchangers to help stabilize the currency. With the resulting “cash-based” Lebanese economy, MS increased as:

a) BDL eased the pressure of mounting prices on citizens. It allowed withdrawals of USD savings in LBP at the rate of 3,000 that was raised to 3,850 by end-June.

b) Citizens’ deepening loss of trust in the banking system heightened the use of Bank notes while businesses in their turn began refusing payments by cards or bank checks.

c) BDL continued financing the state’s fiscal deficit which touched $1.8B by April 2020 up from last year’s $1.4B. Meanwhile, Lebanon’s gross public debt reached $92.4B by March 2020, up by a yearly 7.2%. It is also important to note that on June 19th 2020, Lebanon faced a $600M batch worth of maturing Eurobonds, knowing that the Lebanese government had announced in March that Lebanon will halt all foreign currency payments on all dollar-denominated Eurobonds and look into restructuring its debt.

Against this backdrop, BDL’s balance sheet indicated that the Securities portfolio, inclusive of T-Bills, climbed by 1.9% year-to-date (YTD) to $38.7B. Meanwhile, Foreign assets slumped by 11.6%YTD to end the month of June 2020 at $32.9B, noting that these reserves have been used to cover the needs of the agro-industry and industrial exporters starting June 2020 in addition to importing the essential goods. In turn, Currency in circulation outside of BDL (8.4% of BDL’s liabilities) climbed exponentially, going from $7B by end-Dec.2019 to $12.8B in H1 2020 as bank notes make up for the loss of confidence in the financial sector. 

In their turn, commercial banks halted new lending but also managed to reduce existing loans. Total private sector deposits in fact retreated by 7.9%YTD to $146.3B by May 2020 while their dollarization sky-rocketed to 79.6% 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 $42.6B by May 2020, mainly as citizens who are fearful of further currency depreciations sought to close their loans or large portions of them before things “get worse”. It followed that the dollarization of total loans fell from 68.75% end-December 2019 to 64.69% by May 2020.    

The severe devaluation of the Lebanese lira in June was also reflected on Lebanon’s external front. Any policy changes or reforms that are to be passed and implemented in an attempt to stabilize the deterioration of an economy are directly and primarily linked to the balance of payments (BOP). Applying this policy concept onto Lebanon, we observe that the country’s importing ability and thus the total outflows out of Lebanon, mainly on imported goods/services clearly deteriorated, thereby reducing for example the trade deficit.In fact, Lebanon’s Balance of payments (BOP) deficit stood at $2.2B by May 2020 compared to a deficit of $5.2B during the same period in 2019. In detail, the trade deficit was halved and amounted to $2.6B by April 2020, as total imported goods declined by a substantial 41.7%YOY to $3.7B largely owing it to the severe dollar shortage and lira devaluation in the country, as previously detailed. In their turn, Lebanon’s total exports also declined only by a softer 3.3%YOY to $1.08B by April 2020.

Amid no change to capital controls and no decision regarding urgent reforms or any progress on IMF talks, real estate remains the only safe haven to local depositors. The number of real estate (RE) transactions fell by an incremental 0.8%YOY to 18,877 transactions by May 2020 but the value of total RE transactions increased by 52.54% to $3.7B over the same period. Nonetheless, the more interesting indication of RE parameters is observed on a monthly basis. In fact, in May last year a total of 3,298 transactions were executed worth $376.2M, noting that “foreigners” performed 80 transactions of the total. However, May 2020 witnessed 4,036 transactions in RE, of which only 58 were executed by foreigners. In addition, the value of RE transactions stood at highs of $1.1B in May 2020.    

In conclusion, the crisis in Lebanon today has become primarily socio-economic and steeper to fix. Starting October 2019, the country has been slipping on every front: currency, financial, economic, political, security, social and political, with no brakes on the high speed bus. In tandem, most private sector businesses lost new or existing orders placed by their customers, as a result of: a) the deep devaluation of the lira against the US dollar, b) customer’s eroded purchasing power, and/or c) the weakened demand with a spiraling dollar shortage in the market. However, from May to June 2020, the incessant political bickering over the government’s reform agenda, growing strife over the financial losses presented and the urgency of an IMF package combined have clearly frustrated the head of the IMF’s delegation for Lebanon which may jeopardize any mechanisms of recovery for Lebanon.

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