PMI Drops To Five-Month Low In August

For the month of August, President Michel Aoun and Prime Minister-designate Najib Mikati have met several times to agree on a new cabinet with no end result. However, as of last week, President expressed hope that a new cabinet will soon be formed with Prime Minister-designate Najib Mikati. As such, the Lebanese pound witnessed a modest appreciation, trading at 18,350 to the dollar by end of the month.

Lebanon’s financial crisis reached new depths this month as supplies of imported fuel ran out, forcing even essential services to scale back or shut down as central bank declared it could no longer finance fuel imports at subsidized exchange rates because its dollar reserves had been so badly depleted. Fitch affirmed Lebanon’s Long-Term Foreign-Currency at Restricted Default, following the sovereign’s failure to pay the principal on the Eurobond that matured on 9 March 2020. Moreover, no steps were taken towards an agreement on debt restructuring which stand in the way of any IMF and international support. In the real sector, Lebanon’s International Airport welcomed 2.05million (M) passengers in the first 7 months of 2021 compared to 1.39M passengers during the same period last year. The airport’s statistics revealed that total arrivals added 66.74% year-on-year (YOY), meanwhile number of departing passengers climbed by a yearly 31.30%, reflecting the desire to leave the country. On a second note, we observe an uptrend in real estate (RE) transactions; the number went up by a yearly 44.30% to stand at 39,274 transactions by June 2021, with the value of total RE up by 9.57%. As for the month of June 2021 alone, number of RE transactions stood at 9,260, compared to 8,339 transactions on June 2020.

The rapid deterioration in economic conditions involved Lebanon’s trade deficit and import transactions. As of March 2021, Lebanon’s trade deficit totaled $2.63B, going from the $2.02B registered in the same period last year. Total imported goods retreated by only 18.9% year-on-year (YOY) to $3.33B; while Lebanon’s total exports significantly retreated by 31.44% YOY to $698.61M in March 2021. Imported volume of “Mineral products” slumped from $999.84M by March 2020 to $853.25M by March 2021. As such, lower trade volumes picked up by the port for the month of June 2021; Port of Beirut activity showed an annual slump of 35.07% in the revenues of the Port of Beirut (PoB) to $7.22M by June 2021. In details, total container activity including transshipment (TEU+TS) fell by a yearly 13.30% to stand at 47,813 twenty-foot equivalent unit (TEU), with Transshipment activity (TS) alone declining by 47.77% year-on-year (YOY) to 9,958 TEU by June 2021. In its turn, container activity (TEU) increased by 4.91% YOY to 37,855 TEU over the same period.

Lebanese commercial banks total assets decreased by 3.70%, year-to-date (y-t-d), and stood at $181.08B in June 2021. In details, resident customers’ deposits decreased since December 2020 by 3.58% to $106.29B in June 2021, with deposits in LBP down by 2.72% to $23.77B while the deposits in foreign currencies declined by 3.83% to stand at $82.52B. As for Non-resident customers’ deposits grasping 14.59% of total liabilities, they recorded a drop of 3.44%. Moreover, Resident Securities portfolio dropped by 6.62% during June to stand at $20.98B. Specifically, the subscriptions in T-bills in LBP dropped by 4.19% to reach $10.97B in June 2021 while the Eurobond holding recorded a decline of 12.88% and totaled $8.18B for the same period, as banks are selling their Eurobonds to shore up their foreign currency liquidity. As such, circular 158 continues to be applied, as this circular may ease the situation for the small depositors; however, it may contribute to increase ‘money in circulation’ as well as it may impose more pressure on the Lebanese pound.

On the checks side, total number of cleared checks in the Lebanese financial system slumped by July 2021 with the value of total cleared checks witnessing a yearly decline of 25.84% to reach $23.90B by July 2021. The value of checks in LBP dropped by 2.69% year-on-year (YOY) to reach $11,073M, while value of checks in foreign currencies decreased by 38.48% YOY to reach $12,828M by July 2021. Accordingly, the dollarization of cleared checks in terms of value went down from last year’s 64.70% to 53.67% by July 2021. In the same token, the dollarization rate of checks in terms of volume rose from last year’s 49.60% to 53.64% by July 2021. It is worth mentioning; banker checks have been traded in the parallel market at a discounted rate for a while. By August 2021, a LBP 100,000,000 banker check is worth LBP 90,000,000 in cash. However, this discount is likely to be increased with further restriction on Lebanese pound’s withdrawals. In addition, discounts of bankers ‘checks in dollars to cash dollars are at more than 80%.

A core aspect remains the negative foreign assets position at BDL, which grasped 12.50% of total assets and decreased by 35.50% YOY to stand at $19.76B by mid of August 2021. Foreign assets mainly include Eurobonds held by BDL, and reserves that BDL possesses with foreign correspondents and other short-term instrument. Moreover, central bank’s total assets added 2.75% compared to last year, to reach $158.4B by mid-August 2021. The increase was mainly due to the 40.05% year-on-year (YOY) rise in other assets. However, the gold account, composing 10.23% of BDL’s total assets decreased by 10.22% yearly to reach $16.19B by the same period. Worth mentioning that Currency in Circulation outside of BDL increased by 24.28% jumping from $21.78B by mid of August 2020 to $27.07B mid of August 2021.

BOP recorded a cumulative deficit of $1,812.1M by June 2021, compared to a deficit of $2,486.3M over the same period last year. Accordingly, Net foreign Assets (NFAs) of BDL fell by $3,458.5M, while the NFAs of commercial banks added $1,646.4M for 2021. On a monthly basis, the BOP deficit stood at $238.3M, as NFAs of BDL fell by $544.6 and Commercial banks rose by $306.3. Foreign assets mainly decreased following the decline in “Claims on non-resident customers” to $3.64B and the decline in claims on non-resident financial sector to $4.65B. As to the decline of NFAs of BDL, it is mainly attributed to the continued subsidization of essential goods; something that BDL has indicated would stop soon as it is being funded from required reserves.

Lebanon’s fiscal deficit (cash basis) stood at $688.16M by January 2021, down from last year’s $670.40M. The deficit is attributed to the annual 50.86% drop in government revenues (including treasuries) which fell to $501.70M by January 2021, as well as total expenditures (including treasuries) which retreated yearly by 29.65% to $1,189.86M by January 2021. On the expenditures’ side, transfers to Electricity du Liban (EDL) (2.7% of general expenditure) slid by 84.90% to reach $28.68M. Moreover, total debt servicing slumped by a yearly 31.94%, reaching $260.75M by January 2021. On a second note, data show that Lebanon’s gross public debt hit $97.77B in April 2021, recording an annual increase of 5.3%. The rise is mainly attributed to the annual increase in both local and foreign currency debt by 4.19% and 7.11%, respectively. In details, debt in local currency (denominated in LBP) stood at $60.91B in April 2021. As such, domestic debt constituted 62.30% of the total public debt.

The ongoing economic burden on the country is expected to weigh down on the Purchasing Manager’s Index (PMI). According to BLOM Lebanon PMI for August 2021, the PMI reached a low of 46.6 reflecting the deterioration in business conditions and depreciation of the Lebanese Pound against the US Dollar, in addition to severe fuel shortages. Future expectations remain in negative territory concerning the PMI as it reflects the full impact of the private sector’s disrupted activities and the continued deadlock in government formation despite the seemingly “good” intentions.

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