BLOM Lebanon PMI: Macro highlights – September 2020

The huge explosion that ripped through the Port of Beirut on August 4, 2020, killing about 180 people and destroying large parts of the city, was only the most recent of several shocks to hit Lebanon in the past year. The nation is facing an economic, financial and social crisis, which the country’s very weak institutions appear unable to address. In fact, recession and surge in inflation impact all kinds of businesses, large and small leading to a slower demand, general fear and uncertainty. As a result, Lebanese private sector business conditions continued their deteriorations leading to a PMI reading of 42.1, albeit one that was softer than in the previous survey period. In details, the latest downturn was partially driven by a further decline in output and reached 35.5 at the end of the third quarter. Although the rate of contraction eased from August, it remained among the quickest since data collection began nearly seven-and-a-half years ago.

For more than 20 years, Lebanon’s fixed exchange rate ensured greater stability regarding import/export prices and protection against the possibility of currency devaluation leading to an average annual inflation at about 3%. However, the recent slump in the Lebanese Pound led to a monthly inflation rate surging from 11.4% and 17.5% in February and March 2020, respectively, to reach 112.4% in July and a record-high of 120% in August 2020.  It should be noted that the situation could further deteriorate and inflation rates shoot higher if the BDL stops subsidizing the import of essential goods at the official exchange rate.

It is known that when an economy enters a recession, government revenues will fall while its spending will raise leading to a wider fiscal deficit. However, this is not the case of Lebanon. According to Ministry of Finance (MoF) latest figures, Lebanon’s fiscal deficit (cash basis) stood at $2.2B by June 2020, down from last year’s $2.4B.In detail, the substantial deficit is attributed to the annual 19.81% drop in government revenues (including treasuries) which fell to $4.61B by June 2020.  Fiscal revenues recorded a yearly downtick of 28.20% to stand at $3.96B. Tax revenues (constituting 84.05% of total revenues) retreated by an annual 27.94% to $3.33B by June 2020. Revenues from VAT (16.93% of total tax receipts) dropped by 49.81% y-o-y to $564.43M. The drop in “VAT revenues” is most probably 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 16.34% to $6.84B in the first half of the year. 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 $1.35B by H1 2020, down by a yearly 50.61% such that interest payments alone retreated by 51.54% y-o-y to $1.27B. Interest payments on domestic debt slumped by 26.12% y-o-y to $1.14B. Meanwhile, interest payments on foreign debt registered a year-on-year significant drop by 87.60% to $134.90M 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.

Lebanon’s real estate continues its uptrend as citizens utilize higher checks value to make these payments. According to the data from the General Directorate of Land Registry and Cadastre (LRC), the number of real estate (R.E) transactions which may include one or more realties, rose by a yearly 48.16% to stand at 37,609 transactions by July 2020. In its turn, the value of total RE transactions stood at $7.18B by July 2020, compared to 3B in the same period last year. In fact, this year witnessed high real estate activity as wealthy investors seek to diversify their assets. In tandem, the total number of cleared checks in the Lebanese financial system slumped from 6.90M checks by August 2019 to 3.98M checks by August 2020. Moreover, the value of total cleared checks declined yearly by 3.5% to reach $36B by August 2020. As we can notice, the yearly decrease of 42.3% in the volume of total cleared checks is associated with a slight yearly decrease of 3.5% in the total value of cleared checks which shows that depositors are issuing fewer checks with higher value. This may partly indicate that the big depositors are using checks to settle their big investments with real estate agents or developers.

Meanwhile, the total construction permits witnessed a year-on-year (YOY) drop of 37.08% to reach 4,371 permits by July 2020. Notably, the Construction Area Authorized by Permits (CAP) also slumped by an annual 57.82% to 1.7M square meters (sqm).

Developments on the monetary front also explain the private sector’s deteriorating business environment. BDL has been covering imports of Essential goods (wheat, medicines, fuel oil) since December 2019, such that its foreign assets fell by $9.10B year-to-date (YTD), to stand at $28.17B by mid-September 2020. In fact the key economic indicator, the balance of payments (BOP), recorded a deficit of $5.53B by July 2020. Total private sector deposits at commercial banks slipped by 9.80% YTD to $143.30B while the ongoing economic crisis weighed down on total loans to the private sector which declined by 19.1% YTD to  $40B in July 2020.

Prime Minister-designate Mustapha Adib stepped down after failing to form a government, leaving the country in the unknown as it struggles to recover from a devastating explosion at its main port last month. Adib’s decision came nearly a month after the premier-designates attempts to pull together a small Cabinet of independent specialists hit a deadlock mainly over who controls the Finance Ministry and who names potential ministers. Following the resignation the Lebanese pound fell further against the dollar trading at around LL8,300 on the black market. Meanwhile, the Blom Bond Index (BBI) and Blom Stock Index (BSI) showed a negative performance and dropped weekly by 7.71% and 2.18% to reach 14.48 points and 601.17 respectively, by the week ending October 2, 2020.

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