The PMI’s predictive power revealed that Lebanon’s GDP growth dipped into negative territory for two consecutive quarters Q1 and Q2 of 2019. That said, the Lebanese economy was already in a recession when the growth in Q4 recorded the largest slump in GDP equivalent to -5% to -6%, as per BLOMInvest Bank’s computations implied from the PMI. It followed that the average monthly inflation rate more than doubled, climbing from October’s 1.33% to 3.17% in November 2019. High inflation was largely a result of the imposition of capital controls early-on in November, which led to the emergence of a parallel market that also inflates consumer prices.
Going into 2020, national developments unveiled multiple recessionary facets. For instance, the PMI’s employment index steeply contracted from December 2019’s 49.3 points to stand at 48.4 points in January 2020. This translates into stark layoffs by private sector companies which in turn contribute to higher unemployment (UE), noting that UE is actually a direct result of an economic recession. In fact, UE slashes consumer spending which subdues growth. This further jeopardizes companies’ profitability albeit limiting economic activity and recovery.
Also amid this upheaval, the interdependence between the government and the Lebanese financial system came to the forefront. In December alone, (two months following the eruption of protests) the balance of payments (BOP) registered a deficit of $840.8M which outweighed 2018’s deficit of $747.5M. Overall, Lebanon’s BOP revealed a total deficit of $4.35B in 2019. Meanwhile, the sovereign’s twin deficits remained substantial. The fiscal deficit (on cash-basis) stood at $4B by October 2019 compared to a deficit of $4.7B over the same period last year. Nonetheless, government revenues exhibited a downtrend as they slipped from last year’s $9.2B to $8.9B by October 2019. In turn, Lebanon’s debt dynamics worsened with national public debt amounting to $89.5B by November 2019. Total debt-servicing also remained substantial at $4.24B by October 2019. In its turn, the trade deficit narrowed by an annual 7.8% to $14.48B by November 2019 as the total value of imports lost an annual 2.81% to stand at $17.89B while exports’ value rose by 26.1% to stand at $3.41B over the period.
It is worth noting that Lebanon faces $2.5B in principal for Eurobonds maturing by June 2020 and another $2.1B maturing by April 2021.
BDL has been partially supporting essential goods’ imports while also exhibiting a dovish monetary policy stance overall. BDL’s Foreign assets (composing 25.71% of its total assets) declined by 1.65% year-to-date to stand at $36.66B by January 2020. However, a portion of this decline may be linked to the central Bank supporting importers of essential goods (wheat, fuel, medicines) amid ongoing capital controls. Moreover, it is worthy to mention that the Central Bank issued Circular No.536 on December 04th 2019, which reduced interest rates rates on USD and LBP deposits to 5% and 8.5%, respectively. Meanwhile, phase 2 of interest rate reductions is expected to follow, to reduce the borrowing and deposit rates.
Amid the continuing uncertainty, the dollarization of customer deposits at commercial banks rose. Total private sector deposits at Commercial banks recorded an annual 8.8% drop to $158.86B in 2019 while their dollarization rate surged from last year’s 70.62% to 76.02% by December 2019. In turn, Total private sector loans fell by a yearly 11.5% to $49.48B over the same period, with the dollarization rate standing at 68.75% instead of last year’s 69.22%.
Overall, Lebanon’s real sector activity also witnessed a slowdown, except for real estate which currently represents a “safe” investment. For instance, tourism activity became frail with the number of airport passengers in 2019 marking its first slump in 8 years declining by an annual 1.72% to 8.69M passengers by December. In tandem, the cumulative number of tourists fell by a yearly 1.4% to 1.94M tourists over the same period. This was reflected on tourist spending which fell by a yearly 1.75%, noting that on monthly basis, tourist spending witnessed the most significant drops of 35.78%, 59.69% and 26.17% during October, November and December, respectively. Meanwhile, big depositors in Lebanese banks resorted to risk-diversification starting end-November and mainly purchased real estate to benefit from low-priced properties in the market. As such, the number of RE transactions in December alone stood at 6,189 transactions, which was almost twice that of November i.e. an additional 2,889 transactions were executed between November and December 2019.
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