In a nutshell, Lebanon was struggling on multiple fronts during March 2020, namely financially and economically when the coronavirus pandemic emerged on its territory. As the government announced its intention to default, restructure its debt and lockdown the entire nation by mid-March to contain the pandemic and prevent further economic deterioration, the BLOM Lebanon PMI hit a record-low of 35 points. However, it is important to understand that the number of respondents to the PMI survey over the period was expectedly low, as most businesses were closed following strict government measures.
Consequently, delays occurred in updating many macro-economic parameters. During March, the private sector’s business conditions worsened as the government was preparing for creditor negotiations, tackling corona-positive patients, planning the flying-back of expats and finalizing an economic reform agenda urgently. Therefore, the private sector was operating in a battered economy.
On March 07th 2020, Lebanon announced it will default on its first batch of Eurobonds. Within a week, the country missed the servicing of its maturing Eurobonds and called for a debt restructuring plan. S&P thus lowered Lebanon’s foreign currency sovereign ratings to ‘SD/SD’ i.e. “Selective Default”, from CC/C. Shortly later, the Ministry of Finance (MoF) announced it will halt all payments on dollar Eurobonds for the foreseeable future, to defend BDL’s foreign reserves required for essential operations. By end-March, the national Investor Presentation held by the MoF revealed an expected GDP contraction of 12% in 2020 while the Lebanese lira continues to depreciate thereby magnifying inflation to an estimated high of 27%. Nonetheless, the MoF also prioritized 4 reform fronts: Structural, Fiscal, Banking sector- and debt- restructurings.
In the lines of the government’s March reform-plan, we highlight key fiscal indicators underlying the record-low PMI. Lebanon’s public debt stood at $91.9B in January 2020 up by a yearly 7.8%, noting that the country’s cash-basis fiscal deficit closed 2019 at a substantial $5.8B. In its turn, the trade deficit totaled $820.5M in January 2020, lower than last year’s $1.17B. In addition, imports in Jan. 2020 slumped by an annual 18% to $1.2B as a result of shortage in foreign currency, while total exports added a yearly 41.3% to $333M.
Moreover, developments on the monetary front also explain the private sector’s deteriorating business environment. BDL has been covering imports of Essential goods (wheat, medicines, fuel oil) since December 2019, such that its foreign assets fell by $2.0B year-to-date (YTD), to stand at $35.2B by end-March 2020. In fact the key economic indicator, the balance of payments (BOP), recorded a deficit of $159.7M in January 2020. Total private sector deposits at commercial banks slipped by 2.4% YTD to $155.1B while the ongoing economic crisis weighed down on total loans to the private sector which declined by 3.7% YTD to $47.9B in January 2020. A further sign of the deterioration in confidence in the Lebanese economy was the dollarization rate of total private sector deposits which increased to 76.7% in Jan. 2020, up from December’s 76.0%.
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