Headline PMI Rises Slightly in October

The private sector in Lebanon revealed signs of improvement during the month of October but remained facing major key challenges due to the ongoing socio-economic crisis. Private sector performance enhanced gradually following a most positive scenario resulting from the historic agreement demarcating the dispute maritime border between Lebanon and Israel. In parallel, Lebanon is being hit by a confluence of shocks as the situation remains mired in high and volatile food and consumer prices, and weaker domestic exchange rate. Nonetheless, economic activity in Lebanon probably has showed resilience thus far, with multiple failed attempts to elect a new head of state specially as Lebanon’s president Michel Aoun has vacated the presidential palace with no elected successor leaving the divided country struggles to recover from years-long financial crisis, in addition to his signing of a decree accepting the resignation of the Government. All this has left Lebanon amidst a legal vacuum without a functioning Cabinet.

Meanwhile, the Central Bank of Lebanon claimed stopping purchasing dollars from the market pushing the Lebanese exchange rate to strengthen by the end of October but remained most likely above its “equilibrium rate”. In fact, it will take more than an exchange rate change to get Lebanon on the recovery path. The exchange rate is one step among set of conditions the IMF requires so that Lebanon would be qualified for financial assistance. Not to mention, finding gas on our shores is no panacea, as excavation and proper governance remain a big question. The country has no time left and it must go fast on implementing the preconditions of the IMF, break out of state dysfunction to avoid an uncertain outlook in the next period.

The tourism sector shows strong signs of recovery two years after being severely affected by Covid-19 pandemic and social unrest. However, despite the strong recovery, number of arrivals and departures at Rafic Hariri International Airport remain lower than pre-pandemic levels in 2019. Hence, the activity at Rafic Hariri International Airport in the first nine month of 2022, as the number of Beirut’s International airport passengers added 55.56% and recorded 4,834,029 passengers by September 2022 compared to 3,107,408 passengers during the same period last year.  Total arrivals jumped by 59.83% year-on-year (YOY) to stand at 2,362,230 by September 2022, while number of departing passengers climbed by a yearly 55.67% to reach 2,445,501 over the same period. Nevertheless, transit passengers decreased from 58,581 by September 2021 to 26,298 transit passengers by September 2022. Furthermore, the data from the Ministry of Tourism showed that the number of incoming visitors witnessed an annual increase of 95.75% reaching 570,738 visitors by June 2022, compared to only 291,570 by June 2021, and 199,722 in the first half of 2020. Nevertheless, we expect them to be higher for September 2022 as they won’t cover the summer season.

Lebanon is still facing historical high inflation rates driven by high volatility in prices due to worldwide elevated energy prices as well as the devaluation of the national currency. As such, Lebanon’s monthly inflation rate jumped from 144.12% in September 2021 to register higher levels of 162.47% in September 2022. In details, the cost of “Housing and utilities”, inclusive of water, electricity, gas and other fuels (grasping 28.4% of the CPI) added a yearly 90.72% by September 2022. Also, “Owner-occupied” rental costs increased by 6.04% year-on-year (YOY) and the prices of “water, electricity, gas, and other fuels” followed a significant increase by 341.71% YOY as subsidies were removed by the Central Bank and prices went up sharply on the global market due to the war in Ukraine.

Real Estate transactions witnessed an annual decrease of 21.04% to reach 56,500 transactions by September 2022 compared to 71,580 transactions same period last year. In the same token, the value of total RE transactions stood at $9.17B by September 2022, which is 13.02% lower than $10.54B in the same period last year. The Real Estate market has been broadly perceived as the safest investment for the Lebanese since the eruption of the economic and financial crisis. The demand for owning a real estate in Lebanon remained high compared to years before the crisis but with a slower pace of expansion compared to last year. This could be attributed to the fact that Real Estate owners are requesting full payments to be in fresh while buyers are cautious towards their investments due to the uncertainty in the coming period.

In terms of the balance sheet of Banque du Liban (BDL), the central bank’s total assets added 16.40% compared to last year, to reach $188.29B by the end of October 2022. The increase was mainly due to the 55.44% year-on-year (YOY) rise in other assets, grasping 49.09% of BDL’s total assets and reaching $92.43B by end of October 2022. Nevertheless, the gold account, representing 8.04% of BDL’s total assets, recorded a drop of 8.42% YOY to reach $15.14B by the end of October 2022. Meanwhile, BDL’s foreign assets, representing 8.11% of total assets, recorded a decrease of 18.17% YOY and 14.30% YTD to stand at $15.27B by the end of October, including $5B in Lebanese Eurobonds. On a different note, total volume of dollars injected into the market through Sayrafa for the month of October reached $1.04B whereas the foreign assets of BDL increased by $378.49M for the same period. Accordingly, this indicates that BDL was able to amass close to $1.41B through purchases from the FX market (Sayrafa dollars and remittances) and through its acquisition of international aid money. This shows how subsidies were costly for Lebanon as BDL is today amassing dollars from the market despite the decreased inflows, which in turn is marginally increasing the foreign assets of the Central Bank. Noting also, during the month of October 2022, the Central Bank declared ceasing the purchase of dollars from the market mainly from the exchangers, thus leading to improvement in the Lebanese dollar exchange rate.

The data published by the association of Lebanese Banks’ (ABL) showed that the total number of cleared checks in the Lebanese financial system slumped from 2,555,352 checks from September 2021 to 1,306,237 checks by September 2022. Consequently, the value of total cleared checks decreased yearly by 12.56% to reach $25.04B by September 2022. In more details, the value of checks in LBP increased remarkably from $13.78B in September 2021 to reach $17.04B by September 2022, while value of checks in foreign currencies decreased significantly by 46.14% year on year (YOY) to reach $8B by September 2022. Accordingly, the dollarization rate of cleared checks in terms of value declined from 51.89% in September 2021 to 31.96% by September 2022. In the same token, the dollarization rate of checks in terms of volume fell by September 2022 to reach 46.56% instead of 52.71% by September 2021.  In September, banks went on a strike since depositors were holding them hostages in order to retrieve money from their bank accounts; as a result, customers without ATM cards were unable to deposit checks in their account. Also, checks are less accepted as a mode of payment since the economy is heading towards full cash-dollarization.

Moreover, data released by the Ministry of Finance (MoF) recently indicated that Lebanon’s gross public debt hit $101.72B in June 2022, thereby recording an annual increase of 4.1%. The rise is mainly attributed to the annual increase in both local and foreign currency debt by 2.09% and 7.27%, respectively. In fact, domestic debt constituted 60.69% of the total public debt and reached $61.74B calculated on the official rate of 1507.5, while foreign debt, representing 39.31% of the total public debt, amounted to $39.98B. In addition, according to Lebanon’s Ministry of Finance, personnel costs slightly increased annually by 0.1% to reach $6.56B at the official rate of 1507.5 LBP per USD, by December 2021, compared to $6.55B by the end of 2020. The increase in personnel cost was mainly driven by a remarkable annual increase in the payments related to retirement compensations by 9.6% or $182.42M to stand at $2.07B. Meanwhile, salaries, wages and social benefits dropped by 2.6% or $104.14M to reach $396.68M while end of service indemnities decreased by 18.6% or $52.40M to $230.84M and transfers to public institutions to cover salaries declined by 6.4% to reach $289.88M by end of December 2021.

It is worth noting that BOP recorded a deficit of $3.05B by September 2022, compared to a deficit of $1.96B over the same period last year. Accordingly, Net foreign Assets (NFAs) of BDL fell by $3.32B, as BDL has continued to make some intervention on Fx market through the “Sayrafa” rate while the NFAs of commercial banks increased by $269.4M by September 2022.

As for Lebanon’s consolidated commercial banks’ balance sheet, total assets decreased by 11.18% YTD and 7.05% YOY to stand at $167.01B by September 2022. In more details, deposits in foreign currencies (74.95% of resident customers’ deposits) decreased by 8.42% YOY to reach $96.27B by September 2022, while deposits in LBP (25.05% of resident customers’ deposits) increased by 5.06% YOY to stand at $27.03B by September 2022.

Amid these disruptions, BLOM Lebanon PMI registered signs of contraction but at a slower pace with the headline PMI index rising from 48.8 in September 2022 to 49.1 in October 2022 but still below the 50.0 threshold. The rise in the month of October indicated a slight improvement in private sector across Lebanon. However, new export orders dropped despite lower Lebanese exchange rate while output and new orders increased yet remained below the 50 points thresholds. Hence, the cautious positivity was most likely a result of the historic agreement demarcating the dispute maritime border between Lebanon and Israel. Crucially, however, future business activity is still subject to the risks of presidential vacuum and lack of political will as well as the continuous delays to the reforms that would likely determine the Lebanon’s recovery path.

For the full report, please click on the below links:

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