Lebanon: Balancing act on debt

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By Oxford Business Group

Lebanon’s government has been urged by a multilateral lender to strengthen its public finances, upgrade infrastructure and improve the business environment to sustain recent macroeconomic progress.

However, servicing the nation’s vast public debt is a constant drain on the funds needed for many of these initiatives.

In its latest assessment of the Lebanese economy, released on October 8, the International Monetary Fund (IMF) said the government needs to balance plans to boost infrastructure investment with measures to alleviate public debt, which had climbed to $51 billion, or 148 percent of GDP, by the end of 2009.

“The need to periodically refinance this large stock of debt is a source of vulnerability, despite the country’s dedicated and resilient investor base,” said the IMF report.

Much of that investor base is represented by Lebanon’s private banking sector, which is currently one of the strongest in the region. As of the end of August, commercial banks in the Lebanese market had combined assets of $124.6 billion, up 16 percent year-on-year, and private sector deposits of $102.7 billion.

Lebanon’s debt accumulated due to fiscal disarray resulting from the 1975-1990 civil war. Reflecting political and macroeconomic uncertainties after the conflict, the country was given only limited access to international capital markets and had to resort to domestic markets to finance its budget deficit.

In an attempt to restructure this public debt, however, in the late 1990s the government borrowed some $2 billion on international capital markets. By the end of the decade one-third of public debt was denominated in foreign currency, with this reaching more than 50 percent by 2007.

However, in recent years this has markedly declined, with foreign currency-denominated debt falling to 41.8 percent of the total borrowing at the end of August, compared to 44.2 percent a year earlier, according to figures from Byblos Bank.

In early October, Moody’s Investor Services released an updated credit opinion note on Lebanon which said that, despite the potential for political instability, the state had an excellent track record of servicing its debt, and that the backing of the country’s finance sector helped to maintain fiscal stability.

“Lebanese commercial banks, the government’s primary creditors, remain willing and able to purchase and roll over government debt given continuing growth in bank deposits,” the note said.

The Moody’s assessment came soon after Barclays Capital issued its own overview of Lebanon’s economy, which said that one of the key challenges for Beirut was to roll over almost $4.8 billion of foreign currency debt in the next 16 months, $1.45 billion of which would fall due in November, the report said. Barclays said it is expected that the government would be able to utilize the “ample liquidity in Lebanese banks and interest from international investors in 2010”.

The government is also boosting its revenues by reducing tax evasion, improving tax assessments on real estate and simplifying laws and regulations to encourage more people to pay taxes owed, Finance Minister Raya Hassan told a finance conference in Beirut at the end of September.

“Lebanon is faced by a great challenge and has to preserve the growth reached over the past few years without opening the way to a further increase in the public debt while increasing the national economy’s resilience to any future difficulties or crises,” she added.


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