The latestCrédit Agricole Private Banking research report, ‘Macro Comment – Lebanon Update’, remarked that employment level rises in Lebanon despite subdued economic activity.
“There was a gain in Lebanon employment numbers in spite of lower PMI data resulting from declining new business and output levels. Such PMI levels also led to lower input prices and labour costs which finally resulted in declining prices charged by firms”, saidDr. Paul Wetterwald, Chief Economist, Crédit Agricole Private Banking.
The February PMI index in Lebanon displayed one more below-50 mark, extending its contracting streak to twentieth months. Most of the series figures lay below the contraction/expansion frontier line. At 48.7, the pace of contraction deteriorated further from the January level (49.5).
Dr. Paul Wetterwald continued, “Furthermore, it can be noted that Lebanon is escaping the recession and capitalizing on its currency’s peg to the US dollar. We can recall that the Banque du Liban (BDL) de jure exchange rate regime is free floating. De facto, the Lebanese pound rate of conversion to the US dollar remains within a very narrow band. In this context, we can name it an exchange rate stabilized arrangement, anchoring the pound to the dollar. It is generally known that despite daily interventions, the BDL does not publish intervention data.
Capitalizing on the Lebanese pound’s peg to the US dollar, the energy and food price components have contributed to lower the headline inflation rate during recent months. The latter has declined to -3.8% year-on-year in January, but it remains to be seen whether this will hold true over the year-end horizon.”
Assuming the oil price (WTI) at the end of December 2015 to be the same than today, then the year-on-year variation expressed in USD will move from -50% to -4%. In other words, oil will contribute positively to inflation in Lebanon at constant exchange rate.
Taking into account the Lebanese pound exchange rate and the USD food price variation, itallowsto compute a yearly rate of change of the food price in the local currency, and then to compare it with the consumer price inflation. Assuming that the current USD food price and exchange rate remain the same until December 2015, results in a yearly food price change which will be slightly higher than the most recent change. This assumption is illustrated by the dotted line values between now and December 2015 in the graph below. The positive difference between the current rate of food price change and the December one means that there will be some contribution to inflation stemming from the food prices.
Dr. Paul Wetterwald added, “Given the advantage stemming from the peg’s existence, namely adding a pinch of stability against a very uncertain outlook, one can’t help wonder whether that mechanism is at risk. First of all we have to note that Lebanon did not ask for assistance from the IMF to provide foreign currency during the recent crisis. Besides, it is true that the public debt outlook worsened significantly. However, the amount of public debt denominated in foreign currencies has stabilized since May 2013. Comparing the amount of currency reserves held by the central bank to “traditional” metrics to gauge the robustness of the Lebanese position does not look worrying.”
According to the Banque du Liban (BDL), “the public debt is expected to rise again in 2015 by about USD 4bn. The debt-to-GDP ratio has risen from 130% to about 143%”.
As shown in the graph below, the reserves level stand well above the various variables taken into consideration, i.e. the value of three months of imports, twenty percent of the M2 monetary aggregate, and one hundred percent of the foreign currency public debt.
Dr. Paul Wetterwald concluded, “The Lebanese economy displayed some encouraging figures with gains in employment numbers, lower headline inflation and stable currency reserves. This is the positive side of the story but there are many challenges which are still confronting Lebanon. Whilst there is a ray of positivity, economic indicators like PMI data is still low.”