International Investment Bank Goldman Sachs expects the Central Bank to continue to take measures to prevent Lebanon from sliding into a financial crisis.
“Lebanon has been able to avoid slipping into a financial crisis thanks to the efforts of the Banque du Liban and its self-styled ‘financial engineering’ since mid-2016. The extent, to which these operations can be sustained, however, is far from certain. Ultimately, we believe they are helping Lebanon to buy time, but cannot be seen as a long-term substitute for reform or a secular improvement in financing prospects, the need for which is becoming increasingly urgent,” Goldman Sachs said in its nine-page report on the performance of the Lebanese economy.
The investment bank was alluding to the Central Bank’s 2016 financial engineering which helped BDL draw more dollars to beef up its foreign currency reserves.
In mid-2016, the Central Bank swapped LBP bills in its portfolio for $2 billion in Eurobonds with the Finance Ministry.
“It then sold these and other U.S.$ liabilities (CDs) to the banking sector. In return, it offered to purchase at face value an equivalent amount of LBP debt held by the banks, resulting in a significant windfall for the banks. The effect was that banks redoubled efforts to attract fresh sources of US$ from overseas in order to benefit from the offer,” Goldman Sachs explained.
In June 2017, Lebanese commercial banks started placing LBP deposits with BDL at a premium rate on condition that they also placed an equivalent amount in U.S. dollars, also at a premium rate.
In September 2017, the Central Bank began lending Lebanese pound to banks at a discounted rate of 2 percent while continuing to allow them to deposit LBP with the BDL at a premium, with the requirement that banks also deposit U.S. dollars.
Goldman Sachs expressed deep concern over the failure of the political class to form a Cabinet.
“Investor confidence has been eroded, with spreads on the country’s external debt near all-time highs and inflows into the banking sector near all-time lows. Given these factors, a breakthrough on the political side could provide much needed comfort to investors,” the report said.
It emphasized that the formation of a government could bolster investor confidence by “(increasing the likelihood of (albeit limited) progress on the economic policy agenda; raising the prospects for realizing donor flows from the CEDRE process, and reducing investor perceptions of political risk.”
“From this perspective, we view PM Saad Hariri’s success (or failure) in forming a government in the coming days as likely to benefit (or mar) the country’s near-term prospects,” it added.
Goldman Sachs argued the formation of the government is not enough if it was not matched by serous measures to reduce the country’s budget deficit.
“We think any benefits will be short-lived without there being a meaningful improvement in the sustainability of the country’s sizeable twin deficits. We argue that this could come about in one of two ways. First, via comprehensive economic reforms aimed at reducing the size of the country’s financing requirements: we do not see that happening in the foreseeable future. Second, through a secular improvement in financing prospects, particularly depositor inflows, which have been waning since 2011,” the report said.
It insisted that only a quick formation of a government can encourage donor states to finance the infrastructure projects.
“We believe that the new Lebanese government will be highly motivated to unlock donor flows from the April 2018 Cedre conference, in which more than $11bn in mainly concessional financing was pledged to Lebanon to finance its Capital Investment Plan (CIP) on a conditional basis,” the report said.
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