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Lebanon - Financing outlook remains favourable

Global Arab Network - - George Haddad

Tuesday, 02 November 2010 00:56

The Lebanese budget implies a substantial fiscal relaxation to accommodate higher capital expenditures. The budget, which was approved by cabinet in mid-June following extended deliberations envisages a 2.4 percent of GDP increase in capital spending, including substantial investments in electricity generation, reports Global Arab Network according to IMF study.

Revenue measures amount to 0.8 percent of GDP and include a 2 percentage point increase in the interest income tax, an asset revaluation tax, and higher registration fees for high-end properties. A much-discussed VAT hike was dropped for lack of political support. Full implementation of the budget would imply a fall in the primary surplus from 3 percent of GDP in 2009 to 0.5 percent of GDP this year, but would still allow a further moderate decline in the government debt-to-GDP ratio given strong economic growth.

The primary surplus in 2010 may be higher than budgeted. The authorities and IMF mission believe that the actual primary surplus could reach about 1.5 percent of GDP because of the delays in approving the budget, normal lags in the execution of public investment, and favorable revenue trends.

IMF mission noted that from a cyclical perspective there was little need for a fiscal impulse and encouraged the authorities to aim for a higher primary surplus. The currency peg, which limits room for countercyclical monetary policy, places the onus for short-term demand management on fiscal policy (supported by prudential measures).
Moreover, achieving a higher primary surplus would also contribute to faster debt reduction. IMF mission suggested a primary surplus target of at least 2 percent of GDP for 2010, which could be attained by cautiously executing current spending and saving any revenue overperformance. Planned investments to address pressing infrastructure bottlenecks could be accommodated within this fiscal envelope, although related structural reforms should proceed in parallel to ensure that these investments correct rather than reinforce existing deficiencies. For example, IMF mission cautioned that in the electricity sector a substantial increase in investment without a simultaneous movement toward cost recovery could lead to additional losses and subsidies from the budget.
Inflation also fell in 2009, finishing the year at 3.4%, a welcome drop from the peak of 14% seen during 2008. Though most expectations are that inflation will remain low in the coming year, there could be some upward movement if consumer demand heats up.
Another key indicator that showed a positive result was Lebanon's debt levels. According to figures released by the central bank in mid-January, the country's national debt was $51bn as of the end of 2009, equivalent to 153% of GDP. While still dramatically high by any standards, it is far better than the debt-to-GDP ratio of 186% in 2007, with the steady decline attributable to the solid economic performance of the past two years.

The financing outlook for the government remains favorable and should allow further progress toward achieving a safer debt structure. There was agreement that— barring a major shock—the government’s remaining financing needs for 2010 could be covered by the market, as banks remain very liquid despite the recent slowdown in deposit growth. Following the rollover of $1.2 billion in 10-year Eurobonds in March, the government does not face major foreign currency maturities until November–December ($1.4 billion).
IMF mission seconded the authorities’ intentions to use the opportunity to gradually lengthen the maturity profile and lower the foreign currency share of government debt. The latter could be achieved by continuing to fund in local currency some of the government’s foreign currency debt service. However, such a strategy should be closely coordinated with the BdL and implemented with a view to safeguard an adequate level of international reserves. IMF mission also highlighted the desirability of gradually increasing the share of non-bank funding, and welcomed the authorities’ intention to mobilize concessional loans pledged at past donor conferences.

Lebanon's banks also showed they could withstand the problems associated with a global financial crisis. Having adopted a policy of keeping borrowing rates fairly high, Lebanon's private banks saw their deposits increase to some $100bn, a rise of 22% for the year. By offering up to 3% on the dollar and as much as 7% on Lebanese dollar-denominated deposits, the country's banks were attracting capital inflows of up to $1.5bn a month. This helped banks keep the credit taps open throughout 2009, with the central bank governor, Riad Salameh, telling the Bloomberg news agency on January 20 that credit levels rose by 16%, adding that he expected demand to remain high in 2010.

Global Arab Network

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