During the month of August, international countries continued to move beyond Coronavirus crisis and ease lockdowns which was translated in higher PMI index readings compared to the month of July. In details, PMI index of the USA, Eurozone, UK, Russia and Australia among others rose to stand approximately at 50 points, 55, 57, 57, and 58 respectively, in the month of August. Meanwhile, the situation in Lebanon deteriorated further leading to an August’s PMI reading of 40.1, the lowest level since May 2020 driven by a sharp and accelerated contraction in output and new orders at private sector firms. In fact, the catastrophic blast in the port of Beirut has come to add severely to the country’s woes. On august 4th 2020, a massive explosion at Beirut’s port took place killing more than 170 people, with dozens still missing and 6,000 wounded. The damage to the Beirut port will further disrupt trade and food supplies, while reconstruction is likely to cost the country billions of dollars. According to the RDNA’s[1] preliminary estimates, the explosion caused between US$3.8B and US$4.6B in damage to physical stock, while losses including changes in economic flows as a result of the decline in the output of the economic sectors are estimated to be in the range of US$2.9B and US$3.5B. As such, the degree of negativity amongst private sector firms was the worst since data collection began in 2013.
Even before the recent event, Lebanon has been in severe economic, financial and social crisis mode intensified by COVID-19 pandemic. The IMF has been working with the government to try to reach an agreement on a new aid program that could secure a debt restructuring and unlock billions more in aid. However, the key Lebanese political institutions and players are unable to implement structural economic, fiscal, and monetary reforms. In the meantime, macroeconomic conditions have worsened, with multiple exchange rates, capital controls and sharply rising unemployment and poverty levels. According to the latest ESCWA report, the headcount poverty rate is expected to jump from 28% in 2019 to 55% in May 2020. The corresponding increase in extreme poverty is from 8% to 23%. This brings the total number of the extremely poor and poor among the Lebanese population to 1.1 million and 2.7 million. The latter is an increase of 1.3 million among the poor, whereas the equivalent rise in the number of extremely poor is 750,000.
Amid the depreciation of the Lebanese Pound’s value on the parallel market, Lebanon’s inflation rate in July 2020 stood at 112.4%, the highest monthly rate since the Central Administration of Statistics (CAS) began releasing this series in December 2008. Looking at inflation in the 7 months of 2020, the average yearly rate stood at 49.22% compared to 3% by July 2019. In details, the average Consumer Price Index (CPI) surged from 108.74 points during the first 7 months of 2019 to an average of 162.32 points in the same period of 2020.
Lebanon’s gross public debt increased annually by 8.9% to $93.40B in H1 2020. In details, debt in local currency (denominated in LBP) stood at $58.60B by June 2020, registering a 9.62% year-on-year growth. As for debt denominated in foreign currency (namely in USD), it expanded by a yearly 7.82% to $34.80B over the same period. Worth mentioning, $3.52B of the total debt represents the Unpaid Eurobonds, their coupons and accrued interests. In this context, on August 21, 2020, S&P Global Ratings maintained the “selective default” (SD) rating for Lebanon’s long- and short-term foreign debt, after the country first defaulted in March 2020. However, three more bonds were downgraded to “D” from “CC”. In addition, the rating agency affirmed Lebanon’s long- and short-term local currency ratings at ‘CC/C. Moreover, Lebanon’s local currency sovereign ratings could be lowered to ‘SD’ if the government signals that it will restructure local currency debt in addition to the Eurobonds.
On the monetary front BDL’s foreign assets are still witnessing a significant downturn. BDL’s foreign assets (grasping 18.43% of total assets) decreased by 23.64% ($8.81B) year to date (YTD) to stand at $28.5B in August 2020. In details, this account includes mainly Eurobonds held by BDL ($5B), loans to commercial banks estimated at $6B and mostly banks’ required reserves. Worth mentioning that during the month of August alone, the foreign assets dropped by $2.22B. Starting May 27th, BDL began extending to commercial banks foreign currency to support imports of raw materials for industrial exporters including the agro-food industry and of basic food imports comprising a basket of 300 essential food items, in addition to support to basic commodities such as fuel, wheat and medicine. As a result, Governor Riad Salameh stated that he’s in the process of finding new ways to support trade because the central Bank cannot use the reserve requirements of banks to finance trade. In turn, BDL’s Securities portfolio (25.34%of total assets) climbed to $39.13B, up by 3% year-to-date (YTD) in August 2020.
Most importantly the Central Bank issued a series of circulars during the month of August:
In the first half of 2020, Lebanon’s trade deficit totaled $3.59B, narrowing from the $8.41B registered in the same period last year. In fact, total imported goods retreated by 48.7% year-on-years (YOY) to $5.20B by June 2020. Meanwhile, Lebanon’s total exports declined 6.8% YOY to $1.61B by June 2020. In fact, trade activity was affected this year by the coronavirus outbreak as businesses in the transportation, production and storage industries were shut down. In addition the Lebanese import activity has further deteriorated by the national foreign currency shortage and multiple exchange rates while the export activity will surely be affected by the damaged infrastructure at Beirut’s port. In details, the fall in new export orders of the PMI was the quickest for three months (33.6).
The future political decisions in the upcoming weeks will surely affect the economic situation. Following the resignation of Prime Minister Hassan Diab, diplomat Mustafa Adib was appointed as Prime Minister and started the formation of a new government. The new government’s priorities appear to be in line with a road map presented by French President Emmanuel Macron to Lebanon’s political leaders during his visit to Beirut last week to steer the country out of its economic crisis. In details, the next government will focus mainly on implementing long-overdue economic reforms, fighting endemic corruption in the public administration and reforming the electricity sector. These reforms will lead to the resumption of talks with the International Monetary Fund for a requested $10B bailout package, unlock foreign assistance to help Lebanon ride out the coronavirus crisis and rebuild the capital following the deadly Aug. 4 Beirut blast. In this respect, it is interesting to note that the optimism over the Government’s formation had positive effect on the Lebanese Eurobonds Market and Beirut Stock Exchange. In details, the Blom Bond Index (BBI) and Blom Stock Index (BSI) rose weekly by 9.87% and 1.27% to stand at 16.59 points (the highest since June 26, 2020) and 600.87 points by the week ending September 4, 2020.
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