Lebanon’s Purchasing Managers’ Index hit an all-time low, as did the USA’s and most global markets’ PMI. Lebanon’s BLOM PMI expectedly slumped to lows of 30.9 in April 2020 as a result of business closures due to the prolonged national lock-down against coronavirus threat. In fact, the USA’s IHS Markit Manufacturing PMI hit a low of 36.1 in April 2020, the lowest such reading since 2009 and fell below the market estimate of 36.9 and March’s 48.5. By the same token, Turkey’s and Brazil’s manufacturing PMIs stood at a record-low of 33.4 and 36.0, respectively. As for Egypt’s PMI, it stood at 29.7 in April while the Eurozone’s manufacturing PMI slumped to 33.4 over the same period.
The low-record of PMI results is mainly due to measures implemented across the world, to contain the COVID-19 outbreak.
In Lebanon, the Lebanese pound (LBP) was on a downward spiral vis-a-vis the US dollar (USD) during April, thus nurturing hyperinflation. By the 23rd of the month, the LBP depreciated sharply against the dollar as it traded at highs of LBP 3,800 in the parallel market. Meanwhile, citizens’ demand on scarce US bank notes spiked while off-the-market currency exchange operations nurtured an intense parallel market. It followed that Lebanon’s inflation rate mounted to 10.04% in January 2020 while the more recent data on consumer prices remains unavailable despite its importance during this critical phase.
On the monetary front, BDL issued a series of Circulars during the month, namely No.148 favouring small depositors and No.151 regarding foreign currency accounts. In a nutshell, both circulars intended to ease the pressures especially on small depositors squeezed by the capital controls imposed since October 2019. Circular No.148 tackles the exceptional measures taken regarding cash withdrawals from small accounts, while Circular No.151 is linked to the special measures for cash withdrawals from foreign currency bank accounts. In detail, the former authorized bank account-holders not exceeding LBP5M to collect their money as per the following steps:
- The bank converts the desired amount to be withdrawn into US dollars “at the interbank rate”;
- The resulting amount is then converted to LBP at the “current market rate” which the client collects.
- Similarly, Circular No. 148 adds that holders of bank accounts smaller than USD 3,000 or its equivalent in foreign currency can also withdraw the LBP-equivalent at the “current market rate”.
As for Circular No.151, it enables the holders of foreign currency bank accounts (USD or other) – to which Circular No.148 does not apply – to withdraw their savings in LBP at the “current market rate”.
It is worthy to note that the lira’s depreciation translated into weaker purchasing power for citizens and higher cost burdens for businesses, which albeit fueled street protests again despite the threat of coronavirus.
In fact, with the central bank’s recent actions and continued to support essential imports, BDL’s foreign assets and currency in circulation are key indications. Expectedly, BDL’s foreign assets have further gone down by 7.6% since year-start to $34.4B by April 2020. Meanwhile, total assets nudged up by 5.3% largely due to gold appreciating over the same period. On the counterpart, BDL’s financial sector deposits (76% of total liabilities) remained almost stable, recording a 0.8% uptick year-to-date, to $112.9B by April 2020. Notably, Currency in Circulation jumped from $7B by December 2019 to $10.4B by April 2020. This is explained by the new issued circulars during April, coupled with the general preference of customers shifting more towards cash since October’s uprising.
In parallel, the lack of market confidence was reflected in commercial banks’ financial statements. In fact, the dollarization rate for private sector deposits increased from 76.02% in December 2019 to 77.94% in March 2020. In detail, Total deposits at commercial banks fell by 5.9% since year-start to $152.8B by March 2020. Moreover, it is worthy to note that some of the banks’ debtor clients closed their loans over the period, namely real estate developers who paid back loans as they sold their realties to wealthy investors seeking to diversify. Therefore, Total loans to the private sector declined by 9.6%YTD to $44.7B.
By end-April, the government approved a reform plan and announced Lebanon will officially seek the IMF’s financial assistance immediately. The government extended the national lockdown further to May 10th in its fight against coronavirus, but it also announced that measures will gradually be eased to support the re-opening of private businesses which have been struggling to grapple with the multifaceted crisis.
More importantly, by April 30th, the Cabinet approved and finalized a comprehensive economic plan outlining key measures to cut the budget deficit and stimulate the economy which has recorded a Balance of Payments (BOP) deficit of $1B by March 2020 compared to last year’s $2B, noting that the former nonetheless remains substantial.
Lebanon is struggling to deal with dwindling foreign-currency reserves and double-digit inflation. The country had announced its default on all future foreign currency payments while the gross debt climbed an annual 8.2% to $92.24B by Feb. 2020. This implies the country is largely crippled in terms of servicing its debt to foreign and/or local creditors. Though the economic plan triggered a series of reactions, its final format remains crucial to support Lebanon’s negotiations with bondholders and to back its official request from the IMF for needed financial assistance to prop up confidence.
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