Signs of Stabilisation as Lebanon PMI Hits 19-Month High

In the previous months, lockdown played a role in aggravating the economic and financial situation of the country; however, the easing of some measures and vaccine intake helped in reviving different sectors of the economy. Lebanon signed vaccine deals and reached almost 0.5M of the population end of May 2021. Moreover, as number of COVID-19 infections was brought down, the country’s restrictions eased, permitting restaurants with outdoor seating to operate until 12:30am and opening of theatres and movies with a 50% capacity.

On the fiscal side, the deficit retreated by 45.50% y-o-y to $2.68B by November 2020. The deficit was characterized by an annual 11.83% drop in government revenues (including treasuries) which fell to $8.96B by November 2020. We add that total expenditures retreated yearly by 22.80% to $11.64B by end of November. As such, Fiscal revenues recorded a yearly drop by 17.58% to stand at $7.98B. Tax revenues (constituting 77.82% of total revenues) retreated by an annual 19.98% to $6.21B by November 2020. Revenues from VAT (17.34% of total tax receipts) dropped by 48.18% y-o-y to $1,07B, mostly attributed to the deterioration of Lebanese purchasing power with the decrease in value of Lebanese pound, which obligated Lebanese people to rationalize their spending.

As such, a lower expenditure base was the main reason in the upsurge share of personnel cost reaching $5.45B by October 2020, noting that personnel costs represented 50.5% of total expenditures by October 2020, compared to 40.3% in October 2019, respectively. This increase was driven by rise of “Transfer to public institution”, “Retirement compensations” and “Salaries, wages and social benefits” by 9.2%, 6.8% and 2.8% respectively. Meanwhile, “end of service indemnities” was the only component to register a decrease of 38.7%, reaching a total of $256M by the end of October 2020.

Moreover, Electricity du Liban (EDL) transfers represented a share of 8.3% of the government’s primary expenditures (excluding interest payments), which reached $675.29M by September 2020, compared to a higher share of 13.7% last year. Furthermore, EDL transfers dropped by 40.4% compared to the same period last year, mainly due to lower payments to KPC and Sonatrach for fuel oil purchases, and lower debt services.

As for the BDL’s Balance sheet, foreign assets (grasping 13.73% of total assets) decreased by 37.37% YOY to stand at $21.43B by mid May 2021. In details, on the liabilities front, financial sector deposits (68.89% of BDL’s total liabilities) recorded a downtick of 4.43% YOY to settle at $107.51B by mid of May 2021, of which more than two thirds were denominated in dollars. However, Currency in Circulation outside of BDL (16.71% of BDL’s total liabilities) increased from $11.17B at mid of May 2020 to $26.08B in mid-May 2021.

It is worth noting that Banque du Liban had launched an electronic currency exchange platform “Sayrafa” in May 2021. The platform is set to organize exchange rate transactions with the help of the commercial banks and licensed exchange dealers. Moreover, the Central Bank also announced that it was looking into a system through which depositors could have access to their funds by granting depositors up to $25,000 of their money in installments. However, the mechanism would be granted for deposits in all currencies dating before October 2019 and as they stood at end of March 2021, but it is unknown yet whether it will be adopted, especially as a substitute for subsidies.

The total assets of Lebanese commercial banks decreased by 0.95%, year-to-date (y-t-d), and stood at $186.26B in March 2021, according to Lebanon’s consolidated commercial banks’ balance sheet. In details, resident customers’ deposits (which grasp 58.25% of total liabilities) decreased since December 2020 by 1.58% to $108.49B in March 2021, with deposits in LBP down ticked by 0.98% to $24.819B while the deposits in foreign currencies declined by 1.75% to stand at $84.30B. As for Non-resident customers’ deposits grasping 14.44% of total liabilities, recorded a drop of 1.69% and stood at $26.89B over the same period. More importantly, the dollarization ratio for private sector deposits increased from 77.94% in March 2020 to 80.24% in March 2021.

On a related note, Balance of Payment recorded a cumulative deficit of $847.2M by March 2021, compared to a deficit of $1,062.1M over the same period last year. Accordingly, Net foreign Assets (NFAs) of BDL fell by $1,854.5M, while the NFAs of commercial banks added $1,007.3M. For the month of March, the decline in foreign liabilities can be largely attributed to the monthly reduction in the “Non-resident customer deposits” mentioned above, and the reduction in “Non-resident financial sector Liabilities” by $504.3M to $5.95B; while foreign assets mainly decreased owing to the decline by $95.9M in the “Claims on non-resident customers” to $3.8B.

It is worth stating that the decline in BDL’s NFAs on a monthly basis is most likely attributed to the continued support of essential goods including medicine and fuel. Ministry of Finance reported that BDL has less than $1B to continue subsidizing essential goods before reaching required reserves; and BDL is urgently looking into ways to eliminate subsidies. Moreover, lately the government shows its willingness to prioritize the issuance of a financing card to replace cash contributions, aimed to cover the deterioration of the purchasing power of the Lebanese. The approval of the financial card project will be added to the ESSN project (Emergency Social Safety Net Support Project in response to the COVID-19 Pandemic) funded by the World Bank, in addition to the NPTP (The National Program for Targeting the Poorest families) funded by donor countries. Project value is said to total $1.23B, but is expected to save close to $3B in foreign reserves order to minimize the pressure on the exchange rate in the market and contribute in declining the prices of food and consumer goods.

Moving to Lebanon’s real sector, figures of Port of Beirut (PoB) revealed that total container activity including transshipment (TEU+TS) fell by a yearly 25.39% to stand at 50,210 twenty-foot equivalent unit (TEU), with Transshipment activity (TS) alone declining by 66.21% year-on-year (YOY) to 10,815 TEU by March 2021, while container activity (TEU) increasing by 11.63% YOY to 39,395 TEU over the same period.

This drop in activity is associated with a similar retraction in Airport activity by 36.93% year-on-year (YOY) in April 2021 as tourism activity almost ceased along with the deteriorating economic situation. The number of passengers was reduced drastically, falling from 1,213,911 passengers by April 2020 to 765,620 passengers by April 2021. In details, total arrivals alone dropped by an annual 36.56% reaching 342,824 arrivals.

It is worth noting that the effect on prices has resulted in surging inflation to reach a dramatic level of 157.86% in March 2021 from 17.5% in March 2020. By March 2021, cost of “Clothing and Footwear” (5.2% of CPI) surged by 546.64% and prices of “Food and non-alcoholic beverages” (20% of CPI), surged by 394.81% yearly.

The BLOM Lebanon PMI for month of May is at 47.9, highest since beginning of 2020, indicating a softer deterioration for the country and stabilization in the Lebanese private sector. Moreover, PMI shows a softer decrease in the trends in both output and new orders since October 2019, yet with a PMI still hitting lower than 50. Finally, World Bank’s latest report estimates that in 2020 real GDP contracted by 20.3 percent, on the back of a 6.7 percent contraction in 2019 thus reflecting Lebanon’s sinking to a top 3 rank of the most severe crises episodes globally since the mid-nineteenth century”. Furthermore, the sharp deteriorations in the financial sector as well as in basic services are expected to have long-term social implications and threaten human capital formation. And as if this were not enough, bickering among politicians reached a new level of discord that is making the prospects for government formation even more emote.

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