Explainer: How Pressing Is Lebanon’s Financial Challenge?

www.oann.com | 9/28/2018 | Staff
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BEIRUT (Reuters) – Financial strains in Lebanon have been brought into focus by turbulence on markets where its dollar-denominated sovereign bonds suffered a heavy sell-off last week following comments by the finance minister about the public debt.

The bonds recovered this week on assurances the government is “absolutely not” planning to restructure the debt and is committed to paying its maturing debt and interest payments at predetermined dates.

Episode - Lebanon - Debt - Sustainability - Warnings

But the episode has added to debate about Lebanon’s debt sustainability after warnings from politicians, the IMF and World Bank over economic and financial conditions in a country that has suffered years of low economic growth.

Lebanon’s factional politics has led to years of policy paralysis and obstructed reforms needed to boost investor confidence. More than eight months after an election, politicians have been unable to agree a new government.

PROBLEMS

WHAT ARE THE PROBLEMS?

Lebanon has one of the world’s biggest public debts compared to the size of its economy, largely generated through servicing existing debt and high state spending. It amounts to roughly 150 percent of GDP.

World - Bank - Transfers - Power - Producer

The World Bank has estimated that financial transfers to the state-owned power producer alone averaged 3.8 percent of GDP from 2008 to 2017. A public-sector wage increase in 2017 and higher interest rates have added to pressures on the budget deficit.

Lebanon also has a current account deficit because it imports far more than it exports.

Deficits - Transfers - Diaspora

Financing these two deficits has depended on critical financial transfers from its diaspora.

But questions over this model have grown.

Heart - Concerns - Slowdown - Remittance/deposit - Inflows

“At the heart of concerns is the recent slowdown in remittance/deposit inflows, which have traditionally funded a large part (if not all) of Lebanon’s financing requirement,” Goldman Sachs said in a Dec. 3 analysis.

The World Bank, in an October report, said Lebanon was exposed to significant refinancing risks. “Attracting sufficient capital, and in particular deposits, to finance significantly...
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