LONDON, Feb 4 (Reuters) - With fixed exchange rates and some of the world’s worst debt and balance-of-payment ratios, Lebanon’s newly-formed government knows it needs to act fast to avoid sinking into a full-blown economic crisis.
Lebanon’s ability to dodge financial disaster has for years confounded critics, whose warnings of debt defaults, balance of payments crises and a collapse of the pound currency, have all failed to materialise.
The hope is that it will stay that way, but as the charts below show the numbers are daunting.
Lebanon’s 150 percent debt-to-GDP level and its near 25 percent current account gap - a figure that effectively shows how much a country borrows from the rest of the world - are its most worrying statistics.
Moody’s estimates the interest bill from its debt alone absorbs roughly half of all government revenues and represents about one-third of total government spending.
The current account gap meanwhile is worth around $15 billion in real money terms according to Goldman Sachs, and although $500 billion of aid from Qatar and as much as $3.5 billion from Saudi Arabia might cover some of it, there is still likely to be an $11 billion black hole in the finances.
For the time being it can easily be covered by the country’s near $40 billion of central bank reserves, which are equivalent to 71 percent of GDP and enough to cover 13 months of imports. It also has gold holdings of $11.8 billion, the second highest in the MENA region after Saudi Arabia. But with a pegged currency, plundering that cash or gold could cause problems.
Authorities must hold sufficient dollar buffers to maintain faith in the exchange rate, while ensuring steady inflows to keep coffers topped up.
When relations with Saudi Arabia soured badly in late 2017, some Lebanese rushed for dollars wondering if the peg could be a risk. There were deposit outflows of around $2.6 billion which was roughly 1.5 percent of total deposits. (See chart tmsnrt.rs/2t1HKeu)
With such high debt Lebanon needs to cut spending massively or grow its way out of its problems, but it is not doing either.
Goldman estimates a fiscal adjustment of around 8 percent would be needed to put the government’s finances on a more sustainable footing. For comparison, that is roughly double the adjustment the average IMF programme tends to produce.
At the same time most economists see Lebanon’s growth averaging little more than 2 percent between now and 2021. While that would be an improvement on the 1-1.5 percent seen last year, it is far below the 8-10 percent in the four years before the civil war in neighbouring Syria began in 2011.
It also means S&P expects debt-to-GDP to keep rising in the next three years to 156 percent.
"Setting public finances on a more sustainable footing remains a key challenge," Goldman said on Friday. "To do so would require a fiscal adjustment of around 8 percent of GDP, on our estimates, which presents significant challenges." (See chart tmsnrt.rs/2t8P4Fv)
One reason Lebanon has managed to avoid a debt crunch so far is that its ‘diaspora’ - citizens who live and work abroad - have continued to park their money in banks and bonds back home.
However, according to Moody’s the strain is growing. Covering this year’s fiscal deficit and $2.6 billion of foreign currency ‘Eurobond’ maturities without drawing on foreign exchange reserves will require bank deposit inflows of $6-7 billion, compared to $4-5 billion in 2018.
The uncertainty about the sustainability of the exchange rate peg and financial stability can take its toll. Deposit inflows have slowed, the dollarised deposit rate went up to 70 percent in November and there is a declining coverage ratio of the broad monetary base by net foreign assets.
"Will the Diaspora continue to remit the money and will deposit growth pick up again. If it doesn't there is a challenge that the liquidity problem facing the sovereign will not be solved," said UBP EM strategist Koon Chow. (See chart tmsnrt.rs/2Tu45gn)
Additional reporting by Tom Perry in Beirut Editing by Frances Kerry