Abu Dhabi, UAEMonday 21 September 2020

Lebanon’s private sector economy continued to contract in July as output falls

The lira’s depreciation against dollar, surge in inflation and lack of reforms creating an uncertain environment

A banner with representations of the Lebanese flag hangs on a damaged building in a neighbourhood near the scene of last week's explosion that hit the seaport of Beirut, Lebanon, Wednesday, August 12, 2020. AP Photo
A banner with representations of the Lebanese flag hangs on a damaged building in a neighbourhood near the scene of last week's explosion that hit the seaport of Beirut, Lebanon, Wednesday, August 12, 2020. AP Photo

Lebanon’s private sector economy continued to contract in July, but at a softer pace, as weak demand and a sharp fall in output worsened business conditions, putting more pressure on an economy that has faced months of turmoil.

The BLOM Lebanon PMI index, that measures the strength of the private sector economy, rose to 44.9 in July, from 43.2 in June, pointing to another “marked deterioration in business conditions.” A reading above the neutral 50 mark indicates economic expansion while one below points to a contraction.

“During July, Lebanon continued to ease lockdowns and businesses reopened leading to a higher PMI compared to last month. However, the overall Lebanese business environment remained negative,” Sarah Hadchiti, research analyst at Blominvest Bank, said. “The Lebanese lira’s depreciation against the dollar, surge in inflation and lack of reforms are creating an uncertain environment for consumers and liquidity issues for producers.”

Lebanon is facing its worst economic crisis since its independence in 1943. It defaulted on $31 billion (Dh113.8bn) in eurobonds in March, which led its currency, pegged to the US dollar since 1997, to lose more than 80 per cent of its value against the greenback in the black market.

The recent explosion in Beirut, which killed at least 177 people and wounded more than 6,000 is expected to add further pressure on the economy. The Institute of International Finance said estimates Lebanon’s economy will contract shrink 24 per cent this year, compared with an earlier 15 per cent forecast, as a result of the blast.

“The decline in the health of the private sector was partially driven by a further drop in output," according to the report. "Despite the rate of contraction easing to the softest since before the escalation of the coronavirus pandemic in March, it remained faster than the historical average. Anecdotal evidence suggested that firms continued to face liquidity issues.”

New orders as well as sales also fell in July contributing to the latest deterioration in business. On the cost front, overall input prices rose sharply, with firms opting “to pass on some of the higher costs to their clients during July, with average charges rising for the sixth month in a row.” Private sector firms continued reducing staff numbers due to less work.

“Looking forward, Lebanese businesses were still severely pessimistic towards the 12-month business outlook," according to the report. "Negativity was driven by fears that the current liquidity crisis in the domestic economy would persist.”

The survey, which is based on the responses of purchasing managers in a panel of around 400 private sector companies, also pointed to another marked reduction in backlogs of work at Lebanese businesses. Purchasing activity by businesses also dropped during the month due to weak economy.

“Investing in real estate remains perhaps the safest haven to depositors of the Lebanese banking system given the current unofficial capital control,” according to the report.

The total number of real estate transactions climbed 24 per cent year-on-year to 27,216 in the first half of 2020, according to the survey. The value of the performed transactions rose to reach a 3-year high of $5.4bn, up from $2.7bn during the same period last year.

Lebanon's fiscal deficit narrowed, yet gross public debt continued growing on an "unsustainable trajectory," according to the survey. Government revenues including treasuries dropped 15.35 per cent to $3.77bn by May 2020 and total expenditure retreated yearly by 15.66 per cent to $5.77bn during the same period. Lebanon’s gross public debt, on the other hand, increased annually by 9.10 per cent to reach $93.14bn by May 2020.

On the monetary front, BDL (Banque Du Liban)’s foreign assets recorded a decline of 17.68 per cent since year-start, to reach $30.68bn by end-July 2020.

“Till now the Lebanese government didn’t make any important progress especially with the implementation of fiscal and economic policy reforms, which further delay the unlocking of any external support package. A deal with the IMF and proper government debt restructuring plan has become essential for international investors,” the report said.

Losses from the Beirut port explosion will add to the challenges facing the country, and "make the formulation of a new reforming and active government an urgent and supreme necessity,” according to the survey.

Updated: August 16, 2020 11:57 AM

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