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Abu Dhabi, UAEWednesday 20 June 2018

Lebanon's growth forecast lowered by IIF following PM's resignation

Tough political crisis won't dent confidence in dollar-pegged pound

Hariri’s resignation promises to undo the economic gains achieved this year. Anwar Amro /  AFP
Hariri’s resignation promises to undo the economic gains achieved this year. Anwar Amro / AFP

Lebanon’s growth 2018 forecast was lowered by the Institute of International Finance following the unexpected resignation of Prime Minister Saad Hariri and ensuing political tensions with the Iranian-backed Hizbollah group.

Growth will taper to 1.8 per cent from the previous projection of 2.9 per cent assuming Lebanese politicians fail to form a unity government, the Washington-based institute said in a report. The institute had forecast growth of 2.3 per cent for this year.

IIF’s forecast also assumes that the political crisis will not lead to violence or a war between Hizbollah and Israel.

Hariri’s resignation comes nearly a year after Michel Aoun was elected President following a two-and-a half year political vacuum that left the country without a president due to differences between the various political parties. Lebanon's power sharing system dictates a Maronite Christian for president, Sunni for prime minister and Shiite for the speaker of parliament.

The election of Aoun and formation of a unity government under Hariri promised to end a political détente crippling the country, which has a debt to GDP ratio of about 150 per cent, among the world’s highest.

Investor confidence had returned to Lebanon this year with the end of the political deadlock, which helped parliament pass the first budget since 2005.

However, Hariri’s resignation may potentially undo the economic gains achieved this year.

The IIF maintains for now confidence in Lebanon’s pound, which is pegged to the dollar, will hold and deposits will continue to grow, albeit at a slower pace.

“The confidence in the Lebanese pound will remain strong and the peg to the dollar will be maintained supported by ample international reserves, a strong banking system, and loyal depositors from Lebanese diaspora,” said IIF. “Depositors’ commitment to Lebanon will remain strong, motivated by a deep trust in the financial system and the perceived stability of the fixed exchange rate regime.”

Lebanon’s central bank governor Riad Salameh and the country's banking association were quick to issue reassuring statements about the stability of the currency and banking system.

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Read more:

Saad Hariri’s resignation was a shock, but what will happen next?

Lebanon passes first state budget in 12 years

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Deposits growth may slow down to 5.2 per cent by the end of this year and 4.7 per cent by June next year from 7.1 per cent in September, but could rise higher if a unity government is formed in the near future.

IIF’s report is more bullish than projections by other organisations.

BMI research, a unit of the Fitch group, said investor confidence in Lebanon will wane if a unity government is not formed soon. It also revised down Lebanon’s score in its short-term political risk index to 47.5 per cent from 49.6 per cent out of 100.

“In case of delayed formation of a new government, we could see the country back in the state of political crisis seen between 2014 and 2016, which would in turn weigh on investor sentiment and derail the uptick in economic activity recorded over the past year,” BMI said.

“In the absence of functioning government, we expect a deterioration of investor sentiment. This will for instance halt the development of the oil and gas sector in the country, which had been a priority of the Hariri government.”

Capital Economics had a more bearish view of Lebanon’s political crisis, warning of threats to Lebanon’s dollar peg, which is needed to help contain the cost of servicing its ballooning debt.

“A period of capital flight would quickly erode the country’s FX reserves and force the authorities to abandon the dollar peg,” Capital Economics said. “This could create problems for the government in servicing its large burden of foreign currency debt – which accounts for around a third of total government debt – and raise the prospect of an outright default.”

Moody’s warned on Tuesday the return of a political vacuum following Hariri's resignation may adversely affect the country’s credit rating. In August, the rating agency downgraded Lebanon's long-term issuer ratings to B3 from B2 and changed the outlook to stable from negative.