BEIRUT: Despite a widening budget deficit and sluggish growth rates, Lebanon should meet its 2014 debt obligations without much difficulty as Lebanese banks continue lending the government, economists told The Daily Star.
Lebanon faces around $13 billion in debt obligations in 2014 including principal payments of $8.87 billion in local and foreign currency debt that matures this year and needs to be rolled over.
“Lebanon’s government debt is mostly intermediated through the domestic banking system, which still remains stable, well capitalized and profitable,” said Garbis Iradian, International Institute of Finance deputy director for the Middle East and North Africa region.
Lebanon’s debt-to-GDP ratio has been steadily increasing from 133.9 percent in 2011 to an estimated 135.8 percent in 2012 and a forecast 143.9 percent in 2013, according to IIF figures.
However, despite its piling debt burden, ranked among the highest in the world relative to its GDP, Lebanon’s sovereign risks remain stable due to a steady debt-to-money supply ratio, Iradian told The Daily Star.
“While Lebanon’s government debt is very high in terms of potential costs of financing the debt, the relevant debt ratio is the debt to M3 [money supply] ratio, which was about 57 percent at end-2013 same as in 2010, rather than debt-to-GDP ratio,” Iradian said.
Lebanese banks, which held 58.6 percent of the total public debt at the end of October 2013, are still enjoying growth in deposits, albeit at slower pace, which according to Iradian is still considered adequate to finance the fiscal deficit.
The IIF estimates the fiscal deficit at 11 percent of GDP in 2013. Last year was the second consecutive year that Lebanon posted a primary deficit, estimated by the IIF at 2.5 percent of GDP, up from 0.3 percent in 2012.
So far, the government has not had difficulty borrowing in local currency at stable interest rates. The weighted yield on five-year Treasury bills issued in November 2013 stood at 6.74 percent, unchanged from November 2012. The country’s five-year CDS spreads, the cost to insure against default, were quoted as of Dec. 25 at around 390 points, down from a peak of 527 points in July.
“We have no concerns over the Lebanese sovereign debt at this stage. It has always been supported by a very strong banking system, the latter being itself backed by Lebanese nationals both inside and outside the country,” Philippe Dauba-Pantanacce, a senior economist at Standard Chartered Bank, told The Daily Star.
The banking sector’s total deposits grew around 6 percent in 2013, down from 11.5 percent in 2010, with nonresident private sector deposits growing by around 9. The ratio of claims on the public sector to total assets of banks remained broadly stable at about 23 percent as of September 2013, unchanged from December 2010.
“The ability and will to absorb government paper by the commercial bank has long been described as the main credit-rating driver of public-debt sustainability. The banks actually have a vested interest in making sure no accident happens to the sovereign ... considering their massive exposure to it,” Dauba-Pantanacce said.
The government’s refinancing strategy would entail a rollover of the debt ahead of maturity while lengthening the maturity of Lebanese currency-denominated debt, Former Finance Minister and economist Jihad Azour told The Daily Star.
In a bid to encourage commercial banks to subscribe to new bonds, the Finance Ministry introduced in 2013 12-year local currency bonds carrying a coupon rate of 8.74 percent, successfully raising $974.4 million from a November issue.
Leading Lebanese bankers, including Francois Bassil, chairman of the Association of Banks in Lebanon, have repeatedly stressed that banks will only roll over the outstanding debts each year, warning that local lenders are not willing to carry additional debts unless the Finance Ministry cut the deficit and showed more willingness to implement fiscal and administrative reforms.
The widening budget deficit since 2012 has been partially attributed to increased expenditures associated with the cost of hosting over a million Syrian refugees.
Caretaker Finance Minister Mohammed Safadi estimated that spending rose by $900 million in 2013 as a result of additional allocations to provide medical and social coverage to the Syrian refugees.
Government revenues also fell by 2.5 percent in the first 11 months of 2013 due to a drop in customs and VAT receipts.
The Syrian crisis has slashed around 3 percent in yearly GDP growth since 2012, according to the World Bank, while IIF estimates show growth has fallen from 1.1 percent in 2012 to 0.7 percent in 2013.
“Degradation in both the fiscal and debt-to-GDP metrics was inevitable amid a context of near-zero growth rates. Lebanon’s GDP drivers are highly sensitive to changes in sentiment and the current situation has essentially halted economic activity,” Dauba-Pantanacce said.
The stagnating economic activity has led to a decline in tax revenues such as income and property taxes, while expenditures have jumped by about $1 billion in the first 9 months of 2013 compared to the same period in 2012, according to Azour.
“Lebanon needs to have a well synchronized policy between the Finance Ministry and the Central Bank to rollover debt and maintain enough liquidity at the Treasury,” Azour said.
Last November, Central Bank Governor Riad Salameh pledged to maintain stable interest rates through intervention in the bond market a week after Standard & Poor’s downgraded three leading Lebanese banks to “B-” from “B” following a similar rating action on the sovereign.
In September and October 2013, the Central Bank sold the equivalent of $2.8 billion from its own portfolio of eurobonds issued by the Lebanese government.
“The main risk is further deterioration in the domestic security situation. ... Assuming a new government is formed in the near future and that the recent deterioration in security situation is contained, then sovereign risk could remain stable or the rating agencies will no longer lower their ratings,” Iradian said.
On top of a lower credit rating, Lebanon could find it more expensive to finance its deficit as yields are expected to rise in the United States and Europe once the U.S. Federal Reserve winds down its monthly $85 billion bond purchase program, analysts said.