Month of September held some positivity after the formation of the long awaited government, followed by the confidence votes at UNESCO palace on September 20, 2021 as well as discussions on the new cabinet’s policy program. Moreover, for the week of 30 September 2021, the new Lebanese Cabinet formed a team responsible for handling negotiations with the International Monetary Fund (IMF), including the Finance and the Economy ministers, BDL governor and 2 advisors, headed by Deputy Premier Saadeh Shami, considered to be the first remedy to the devastating economic crisis. As such, the Lebanese pound continued to witness a modest appreciation, trading at around 15,000 to the dollar and later depreciating to 17,000 by end of month.
Lebanon’s real sector, including real estate transactions and construction permits witnessed positive indications. In details, according to the data from the General Directorate of Land Registry and Cadastre (LRC), the number of Real estate (RE) transactions which may include one or more realties, went up by a yearly 26.67% to stand at 47,640 transactions by July 2021. In its turn, the value of total RE transactions stood at $7,135.5M by July 2021, compared to $7,183.4M in the same period last year, down by 0.67%. Moreover, the breakdown of RE activity regionally for July 2021 showed that Beirut is the one that grasped the lion’s share of the total value of RE transactions, equivalent of 34.89% and worth $426.69.
In spite of all the chaos in the country, the building industry has seen a return to 80% of its level in 2016 (8,705 permits by June 2016), just before the stop in housing loans and way before the beginning of the economic financial crisis. As such, data from the Orders of Engineers showed that the total construction permits witnessed a year-on-year (YOY) remarkable increase of 131.95% to reach 6,896 permits by June 2021. Notably, the Construction Area Authorized by Permits (CAP) soared by an annual 196.46% to 3,479,031 square meters (sqm), mainly reflecting the high interest of investors in investing in the real tangible assets. However, we note that Port of Beirut revenues are down by 39.65% by July 2021 as global shipping crisis worsens. Moreover, latest statistics show a fall in total container activity including transshipment (TEU+TS) by a yearly 18.60% to stand at 55,072 twenty-foot equivalent unit (TEU), with Transshipment activity (TS) alone declining by 33.93% year-on-year (YOY) to 15,142 TEU by July 2021.
In more details, the average inflation rate by June 2021 reached 131.92%, higher than the average inflation rate of 84.27% in year 2020. Accordingly, all sub-components of Lebanon’s consumer price index (CPI) increased over the studied period. In turn, the cost of “Housing and utilities”, inclusive of water, electricity, gas and other fuels added a yearly 38.02% by June 2021, and the prices of “Food and non-alcoholic beverages” surged by 221.80% yearly.
According to Ministry of Finance (MoF) latest figures, Lebanon’s fiscal deficit (cash basis) stood at $824.56M by March 2021, down from last year’s $1,655,03M. In details, the government revenues (including treasuries) added 1.82% on yearly basis to stand at $2,267.45M by March 2021. On the counterpart, total expenditures (including treasuries) retreated yearly by 20.35% to $3,092.01M by March 2021. It is worth noting that the primary balance which excludes debt service posted a deficit of $354.12M, compared to a deficit of $624.35M during the same period last year. On the expenditures’ side, transfers to Electricity du Liban (18.20% of general expenditure) slid by 27.96% to reach $217.45M. Moreover, total debt servicing reached $502.61M by March 2021, down by a yearly 41.59% such that interest payments alone retreated by 50% y-o-y to $474.25M.
Worth noting that personnel costs represented 68.1% of primary expenditures in January 2021. Additionally, personnel costs represented 46.1% of total expenditures by January 2021, compared to 34.2% in January 2020. Moreover, personnel costs decreased annually 5.3% to reach $548.59M on the official rate 1507.5 and $50.12M on the parallel rate (16,500 LBP/USD) on January 2021. This decrease was driven by the large drop of “end of service indemnities” by 95.9% reaching a total of $37M by January 2021. This decrease was slightly counterbalanced by a year-on-year increase in “Retirement compensations” and “Salaries, wages and social benefits” and “transfer to public institutions” to cover salaries.
It is worth noting that Lebanon’s gross public debt hit $98.17B in May 2021, thereby recording an annual increase of 5.4%. The rise is mainly attributed to the annual increase in both local and foreign currency debt by 4.38% and 7.15% to reach $61.10B and $37.08B in the month of May 2021.
Moving to the external sector, represented by the BDL Balance sheet and Commercial Banks’ balance sheet; the central bank’s total assets added 3.43% compared to last year, to reach $159.75B by end of August 2021. The increase was mainly due to the 35.12% year-on-year (YOY) rise in other assets, reaching $55.17B by end of July 2021. However, the gold account, composing 10.47% of BDL’s total assets decreased by 7.67% yearly to reach $16.73B by the same period. BDL’s foreign assets (grasping 12.25% of total assets) decreased by 31.24% YOY to stand at $19.57B by end of August 2021. Looking at Currency in Circulation outside of BDL (17.02% of BDL’s total liabilities) it increased by 83.31% jumping from $14.83B by end of August 2020 to $27.18B end of August 2021. Noting that, a quick action that could improve the situation in the short term is a direct injection of foreign currency into the financial system.
On a second note, the consolidated assets of commercial banks decreased by 3.93%, year-to-date (y-t-d), and stood at $180.64B in July 2021. In details, resident customers’ deposits decreased since December 2020 by 4.34% to $105.45B in July 2021, with deposits in LBP down by 4.56% to $23.31B while the deposits in foreign currencies declined by 4.28% to stand at $82.13B. More importantly, the dollarization ratio for private sector deposits increased from 80.27% in June 2021 to 80.40% in July 2021. On the assets side, Reserves, constituting 60.85% of total assets, recorded a y-t-d downtick of 1.45% to settle at $109.91B in July 2021. Deposits with the central bank (BDL), grasping 98.53% of total reserves, witnessed a slight y-t-d decrease of 1.93% to reach $108.30B. It is worth mentioning that comprehensive reforms, including bank restructuring, are critically needed in order to get international support, especially with the removal of subsidies on fuel and petroleum products and the resulting inflationary pressures.
We add that in the Lebanese financial system, total number of cleared checks over the period of eight months slumped from 3,979,043 checks by August 2020 to 2,350,757 checks by August 2021. Moreover, the value of total cleared checks declined yearly by 27.58% to reach $26.12B by August 2021. Accordingly, the dollarization of cleared checks in terms of value went down from last year’s 64.49% to 52.67% by August 2021. It is with no doubts that the market of checks is shrinking due to the fluctuation of the exchange rate in the parallel market and the uncertainty surrounding the banking system. It is worth noting that BDL will keep the rate in Circular 151 at LBP/USD 3,900 till end Jan 2022, while the Sayrafa platform will continue operating at the exchange rate of around LBP/USD 14,000. This is happening at a time when the issuance of the “ration card” is expected anytime soon.
As importantly, latest IIF report indicates that there is a 50% chance to carry out the reforms needed to achieve macroeconomic stability and arrest further deterioration, which would lead to an agreement with the IMF and unlock financial support from the international community. In this case, real GDP growth could start to recover to around 4% in 2022, expecting the average inflation rate to decline from 140% in 2021 to 114% in 2022. Moreover, a report by Goldman Sachs indicates the important steps that the new government will need to take to put Lebanon on the path of economic stability and recovery. The big challenge is the restructuring of foreign debt, depending on the haircut applied to the nominal value, the terms of new debt (coupon), and the yield applied; noting that the report foresees a haircut of 75%. As such, the main objective is to land the debt-to-GDP ratio between 70% and 80% by 2030.
The Purchasing Manager’s Index (PMI) for the month of September up ticked from the previous month to reach 46.9, yet still below 50. In details, “although private sector output decreased at its softest in three months, firms witnessed liquidity concerns as well as weak purchasing power among domestic clients. Worth noting that government formation eased inflationary rates; but that did not halt further deterioration in economic conditions, despite the slight appreciation of the Lebanese Lira in the second half of the month. As a result, private sector companies remain cynical about the political environment and its further pressure on their businesses. However, all this could be turned around – albeit slowly – if the government’s stabilization and reform plans prove fruitful”.
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