Lebanese Forces Economic Brief
Issue N.1 / August 18 – September 02, 2018
CONTENT General Overview ......................................................................................................................................... 2 Housing and real estate need quick policy solutions .............................................................................. 2 Higher interest rates crowds out private investment ............................................................................... 3 Banks stable but challenges growing ........................................................................................................ 4 McKinsey & Co delivers findings ................................................................................................................ 4 IMF Article IV says momentum ahead ....................................................................................................... 4 1
Lebanese Forces Economic Brief
Issue N.1 / August 18 – September 02, 2018
General Overview Economic prospects in Lebanon remain uncertain even after the holding of the Cedar conference, the conclusion of the parliamentary elections and the nomination of Prime Minister Saad Hariri for a new term. Consumer and business confidence are at low levels, with many Lebanese growing fearful of an imminent economic crisis despite recent reassurance from the President of the Republic and the Central Bank Governor that stability is maintained. Blaming in large part deteriorating economic conditions, the signs of a housing crisis, higher interest rates, and a lack of political will to go after corruption, reign in waste and improve the quality of public services, Lebanon’s economic stability and growth prospects are once again put into question. Politically, conditions are not much better; deadlock over the formation of a unity government after nearly 4 month since the nomination of Prime Minister Hariri for a new term, may have added to general negative sentiments by consumers and businesses alike. Negotiations seem to be stalled at present time. But forming a government won’t be sufficient by itself. Restoring confidence and bringing in much-needed investments will remain conditioned on the forthcoming cabinet wisely addressing a range of pressing economic and policy challenges, including reforms mandated by CEDRE conference, in addition to adopting an adequate policy response with regard to the Syrian refugees. The forthcoming cabinet is thus called to put policy back on track, prioritizing agreed-upon reforms to tap into the soft loans promised by friendly countries during CEDRE conference –Loans which are expected to be used to
overhaul the country’s infrastructure and boost investments and growth. Said reforms consist of a range of debated measures that key political parties have expressed their willingness to implement. They include reigning in deficit to reduce the debt to GDP ratio by %5 over the next five years; eliminating costly electricity subsidies and expanding production capacity; restraining public wages; and reducing corruption. By so doing, the forthcoming government could gradually unlock 11$bn in international grants and soft loans into the country’s infrastructure, as already planned in Phase 1 of CEDRE conference. These challenges are nonetheless tied to abiding by a “policy of dissociation” (Na’y bil nafes) when it comes to regional conflicts; unless political leaders work together to make sure Lebanon is dissociated from regional conflicts at every juncture, they will fall back into disagreement and deadlock, and once again undermine reform and Lebanon’s growth prospects.
Housing and real estate need quick policy solutions The news that a number of real estate companies are in trouble with some at risk of collapse and other suffering from a liquidity crisis is now well known in Lebanon. This was originally reported by the media, when at least two major developers, Sayfco and Badawi Group, have revealed to be suffering from a crisis, with the latter 2
Lebanese Forces Economic Brief
Issue N.1 / August 18 – September 02, 2018
Higher interest rates crowds out private investment
announcing that it arrived at an arrangement with its banks to satisfy its clients and creditors. For starters, it all came to light when demand sharply declined after the Central Bank suspended its interest-rate subsidy on housing loans, citing depletion of cash that was allocated for this purpose.
Generous interest rates are currently being offered by local banks to attract local currency deposits. This is mostly due to local banks competing with each other to attract deposits, while at the same time private and public sectors equally competing to attract funds. The result has pushed interest rates to high levels, with at least one bank offering as much as %15 return on Lira denominated deposits for amounts exceeding 30 million. But other contributing factors are equally important. In fact, deposit dollarization increase and deposit outflows that occurred after the resignation of Prime Minister Hariri in late 2017, have raised concerns about political chocks that could substantially damage trust and put pressure on the local currency. The recent Lebanese Banking System Outlook by Moody’s has revealed that Central Bank’s intervention came after deposit dollarization rate reached %68,7 in December 2017, as conversion from the Lira to US dollars amounted to USD 2.9 billion, with around 2.6 billion withdrawn (%2 of total deposits) from the banking sector, before inflows resumed after Prime Minister Hariri retracted its resignation. Higher rates mean higher borrowing and business costs, lower investment levels, and “subdued growth” for Lebanon. Banks, however, will continue to attract inflows, but at higher rates. They will therefore be able to finance the twin deficit (Fiscal and Current Account) and maintain financial stability for the near term.
The subsidies that have been in effect since 2009 have served their social goal by reducing the cost of borrowing and allowing thousands of home seeker to buy houses and start families. However, other causes are also in play; sales have already been stagnating during the past couple of years and developers continue to face uncertainty in the midst of adverse economic conditions. Knowing that annual subsidy plans date back to 2009 and were originally designed to be a temporary means until policymakers can develop an adequate housing policy, the crisis seems to be growing with no serious alternative solutions in sight. A few proposals have recently been advanced in hopes of finding suitable solutions, but social implications have already started to emerge. Plus Properties CEO said in a recent Daily Star interview: “There is a crisis, it’s not about a few companies, but about an entire sector which is in danger, not just developers – contractors and subcontractors too will be impacted…If this situation continues, developers may come to a point where we hand over our properties portfolios to the banks and let them handle it!”
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Lebanese Forces Economic Brief
Issue N.1 / August 18 – September 02, 2018
Banks stable but challenges growing
IMF Article IV says momentum ahead
Growing at slower rates than in past years, banks in Lebanon are nonetheless stable and solid. To weather adverse economic conditions, most banks have adopted prudent strategies, prioritizing cautious lending, lower risk appetite, high liquidity levels and enough provisioning. But bank’s high exposure to the sovereign risk, their holding of substantial mortgage debt, and the fact that deposit are growing at a slower pace than in past years, are factors that add to their challenges. Recently, increased taxes have also played to their disadvantage, further shrinking their profitability margins.
While the economic and business communities in Lebanon still wait for the full release of Art IV report, IMF recently added on its website that “The authorities need more time to consider the publication of the staff report”. However the case, Art IV’s press release says growth is estimated at around 1 to %1.5 percent in 2017 and 2018, with real estate and construction, known as the drivers of growth, remaining weak and unlikely to change during year 2018. It also says opportunities for Lebanon to benefit from potential improved conditions, such as the likely near resolution of the Syrian conflict, the outcome of CEDRE conference, offer a momentum for policymakers to enact agreed-upon reforms. Yet sustained political commitment is needed for substantial fiscal adjustment, coupled with a well-defined fiscal strategy that include a combination of revenue and spending measures amounting to about %5 of GDP to stabilize public debt and place it on a declining path.
McKinsey & Co delivers findings Global consulting firm McKinsey & Co. presented the President of the Republic its recommendations on how to build and develop the Lebanese economy, in an abridged -1,000page report titled “Lebanon’s Economic Identity and the Procedures to Achieve It”. The report consists of a number of recommendations, including: • • •
•
Building a wealth-management and investmentbanking hub Setting up a construction zone for prefabricated housing that can be used in the rebuilding of wartorn Syria and Iraq Boosting tourism and opening new markets for a couple of Lebanese crops: avocados and cannabis which can be legalized and exported for medical treatments The construction of a building technology zone near the Syrian border
Rather than presenting a short-term quick fix, these recommendations provide a path for Lebanon in that they are long-term policy subscriptions that can be implemented after the Capital Investment Plan presented at CEDRE conference. The full version of the report must be ratified by the new cabinet and is expected to be made public. Most importantly, for policy recommendations to be implemented over a decade, they must first be interpreted and packaged into deliverable steps, as declared by economic advisor Nadim Munla in a recent Daily Star interview. LF Economic Policy & Research – Email LFEB@lebenese-forces.com - Prepared by RS Disclaimer: The content of this publication provides a general overview and should not serve as an advice for investment or a recommendation to buy or sell assets or securities. Owned and published by the Lebanese Forces and intended for internal circulation, this report, including its intellectual property and design, are the exclusive property of the Lebanese Forces. As such, no material may be copied, republished, or circulated without prior authorization. 4