BLOM Lebanon PMI Rises For First Time Since October 2022, Albeit Marginally

The start of year 2023 witnessed further deterioration of the economic conditions in Lebanon, but at a softer pace. Besides years of political instability in combination with the ongoing economic crisis, Lebanon is facing a continuous exchange rate depreciations and liquidity constraints in a “State of absence” that brought the country close to collapse. In fact, the unprecedented institutional vacuum has done much in delaying any agreement on crisis resolution and effective reform endorsement. Beirut has turned into a city of contrasts were expensive cars are being noticed in front of popular restaurants and bars while many people hunt for something edible.

Furthermore, the taxation system in Lebanon is highly regressive with no wealth tax code and corporate taxes are amongst the lowest in the world compared to all OECD averages. The country is also going through a de facto dollarization of the economic with no price controls or penalties against financial abuse. In the meantime, there are no signs for improvement, and the taxation system is not helping the overall situation in Lebanon.

Lastly, going forward, the latest IMF update on the world economy is based on expected positive development globally. The forecast for 2023 is higher than predicted in the October 2022 World Economic Outlook but below the historical (2000-19) average. Global inflation is expected to fall in 2023 and 2024, but still above pre-pandemic levels. However, the IMF argued “the balance of risks remains titled to the downside, but adverse risks have moderated since October WEO update. Moving back to Lebanon, the risk a presidential vacuum would place on the outlook for the country is high as a fractured political environment will maintain ongoing economic and political standoffs.

On the monetary and exchange rate front, the Lebanese currency followed a sharp free fall during January 2023, despite BDL effort to maintain the currency at stable levels. The national currency continued a steady decline against the dollar all over the month of January and reached an all-time low by the end of the month making a surreal devaluation from last month End of period 42,400 LBP/USD to 58,300 LBP/USD. The Lebanese currency crumbled below the levels of 60,000 LBP/USD during January and registered a 37% drop with a maximum of 63,500 LBP/USD and a minimum of 42,100 LBP.

Despite political deadlock, the tourism sector in Lebanon has recovered two years after being severely affected by shutdowns, travel restrictions and the social unrest erupted from the Covid-19 pandemic. In fact, according to the data from the Ministry of Tourism, its activity grew by 70% YOY reaching 1,120,927 visitors by September 2022, compared to only 659,030 by September 2021. According to the data from the Ministry of Tourism, visitors are mainly from top 3 destinations: Europe, Arab countries and Amercia. In fact, in September 2022, Europeans grasped the lion’s share or 39.47% of total tourists, followed by Arab countries (27% of total tourists) and America (21.64% of total tourists).

In the same token, the activity at Rafic Hariri International Airport improved remarkably in 2022 as the number of airport passengers added 46.97% YOY and recorded 6,352,446 passengers compared to 4.322.269 passengers during last year. In more details, total arrivals jumped by 50.68% year-on-year (YOY) to stand at 3,119,744 by end of 2022, while number of departing passengers climbed by a yearly 46.44% to reach 3,194,553 over the same period. Nevertheless, transit passengers decreased from 70,332 by year of 2021 to 38,149 transit passengers by end of 2022.

Lebanon’s inflation remains high but at a softer rate as the significant drop in national currency’s value and persistent volatility worldwide elevated prices that are still driving historical high inflation rates in Lebanon. In fact, Lebanon’s monthly inflation rate eased from a 224.39% in December 2021 to register softer levels of 121.99% in December 2022, the lowest since June 2021. 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 52.88% by December 2022. Also, “Owner-occupied” rental costs increased by 9.99% year-on-year (YOY) and the prices of “water, electricity, gas, and other fuels” followed a significant increase by 148.42% YOY as subsidies were removed by the Central Bank and prices went up sharply on the global market due to the war in Ukraine. Nevertheless, prices are expected to surge further in the coming period as customs and taxes would be collected at the official rate of 15,000 LBP/USD instead of 1507.5 LBP/USD.

Real Estate transactions witnessed an annual decrease of 27.34% to reach 79,990 transactions by December 2022 compared to 110,094 transactions same period last year. In the same token, the value of total RE transactions stood at $14.36B by December 2022, which is 7.65% lower than $15.55B in the same period last year. On a monthly basis, the number of RE transactions stood at 2,610 in the month of December 2022, compared to 9,874 transactions in the previous month of November 2022, and to 16,440 transactions in December 2021.  In details, South region holds the biggest share of real estate transactions at 926, or 35.48% of total RE transactions, in the month of December 2022, followed by the Zahle at 476 transactions or 18.24% of total RE transactions. Moreover, the breakdown of RE activity by value for December 2022 showed that Beirut grasped the lion’s share of the total value of RE transactions, equivalent of 49.45% and worth $700.84M, while the South followed, constituting 39.23% of the total and worth $556M. 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 year 2021 and 2020. The slowdown could be justified by lower demand on Real Estate especially as owners are requesting full payments in fresh while prices are gradually increasing and readjusting to prices before the crisis. The outlook for the coming year might be gloomy given that taxes will be valued at higher exchange rate.

Furthermore, according to the Customs Administration, Lebanon’s trade deficit totaled $15.56B by December 2022 up from $9.75B registered in the same period last year. Total imported goods added 39.65% annually to $19.05B while total exports decreased by 10.16% to stand at $3.49B by December 2022. In details, the “Mineral products” grasped the lion’s share of total imported goods with a stake of 29.29%. “Machinery; electrical instruments” ranked second, composing 12.87% of the total while “Vehicles, aircraft, vessels, transport equipment” and “Pearls, precious stones and metals” grasped the respective shares of 10.5% and 8.83%, respectively. Meanwhile, the value of imported “Mineral products” jumped by 43.94% YOY, from $3.88B to $5.58B, by December 2022. The increase is mainly attributed to the surge in fuel prices leading to greater costly imported fuel bills. Furthermore, the value of imported “Vehicles, aircraft, vessels, transport equipment” rose significantly by 78.13% from $1.12B to $2B by December 2022.

The latest statistics on activity at the Port of Beirut showed that container activity recorded an annual increase of 14.66% by the month of November 2022. In more details, the revenues of the Port of Beirut (PoB) to $6.40M by October 2021, compared to last year’s $7.54M. We note that no later data on revenue are available as per Port of Beirut statistics. Overall, total container activity including transshipment (TEU+TS) increased by a yearly 14.66% to stand at 654,344 twenty-foot equivalent unit (TEU); container activity (TEU) added 16.91% on a yearly basis to 519,274 TEU by November 2022, while transshipment activity (TS) added 5.74% YOY to 133,178 TEU by the same period. On a monthly basis, total container activity added 19.54% to stand at 60,510 twenty-foot equivalent units (TEU), while container activity (TEU) added 12.01% for the month of November 2022 compared to same month last year to reach 43,244 TEU; whereas, transshipment activity (TS) grew by 27.2% to 15,277 TEU for the month of November 2022, compared to 12,010 TEU in November 2021.

According to the balance sheet of Banque du Liban (BDL), the central bank’s total assets added 18.02% compared to last year, to reach $191.04B by end of January 2022. The increase was mainly due to the 55.67% year-on-year (YOY) rise in other assets, grasping 49.45% of BDL’s total assets and reaching $94.47B by end of January 2023. Furthermore, the gold account, representing 9.2% of BDL’s total assets, increased by 6.42% yearly to reach $17.57B by end of January 2023. BDL’s foreign assets, consisting of 7.84% of total assets dropped by 13.48% YOY and stood at $14.98B by end of January 2023, noting that BDL holds in its foreign assets $5B in Lebanese Eurobonds. On a different note, total volume of dollars on Sayrafa platform reached $557M in the last two weeks of January 2023. Consequently, the Central Bank absorbed dollars from the market up to $262.31M and sold up to $294.69M through Sayrafa platform. Noting that dollars on the Satrafa platform dropped remarkably compared to the first two weeks of January standing at $1.227B, as most banks stopped Sayrafa transactions for individuals on amounts up to LBP 100M by mid-January due to further tightening from the Central Bank.

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 3,137,881 checks from December 2021 to 1,557,226 checks by December 2022. However, the value of total cleared checks increased yearly by 2.79% to reach $37.43B by end of 2022. This upsurge is driven by a significant increase in value of Lebanese checks which reflects a larger percentage of discounting Lebanese checks in the market. In more details, the value of checks in LBP increased remarkably from $18.63B in 2021 to reach $27.14B by end of year 2022, while value of checks in foreign currencies decreased significantly by 42.13% year on year (YOY) to reach $10.28B by December 2022. Accordingly, the dollarization of cleared checks in terms of value declined from 48.82% in December 2021 to 27.48% by December 2022. In the same token, the dollarization rate of checks in terms of volume fell from 51.62% in December 2021 to 44.61% in December 2022. In fact, checks are less accepted as a mode of payment since the economy is heading towards full cash-dollarization.

Also this month, Byblos Bank published on 28/1/2023 its un-audited, consolidated financial results for end 2022. As expected, the results were impacted by the current but prolonged crisis affecting the Lebanese economy and financial markets. The Bank incurred losses in 2022 that amounted to $969.98 million against losses of $17.76 in 2021. As to net impairment losses on financial assets, they reached a positive $23.26 million against negative $283.77 million in 2021.

In terms of the balance sheet, total assets stood at $17.298 billion in 2022, up by 0.52% than assets at end December 2021. Likewise, loans to customers were $1.382 billion, down by 26.32%; customers’ deposits stood at $12.419 billion, lower by 5.87%; and shareholders’ equity amounted to $2.727 billion, up by an impressive 54.21%. As a result, the loans to deposits ratio fell from 14.21% to 11.13% as loans fell faster than deposits in 2022.

In line with the Central Bank policy to regulate the banking sector’s situation, BDL issued Intermediate Circular 659 on 20/1/2023 that amends basic decision number 6568 on Banks’ FX position and basic decision number 6939 on Banks’ capital requirement. In more details, the Circular’s articles stated that banks are required to settle their indebted FX positions as of 31/12/2022 over a five-year period starting in 2023 and ending in 2027, at 20% each year and no dividend distribution in 2019, 2020, 2021, and 2022. In addition, the circular’s articles mentioned that banks can add to their Tier 1 capital 50% of the revaluation in real estate assets they own, or they have shares of in real estate companies and in the long-term investment that banks made in financial institutions abroad and were approved by BDL. The revaluation has to be approved by BDL and has to be completed by 31/12/2023. Lastly, BDL also included in the circular’s articles that a revaluation has to be undertaken in fresh USD and valued in LBP at the Sayrafa exchange rate as it is set at the end of December in each year of the five-year period.

Moreover, data released by the Ministry of Finance (MoF) recently indicated that Lebanon’s gross public debt hit $102.70B in September 2022, thereby recording an annual increase of 3.5%. The rise is mainly attributed to the annual increase in both local and foreign currency debt by 1.29% and 7.13%, respectively. In details, debt in local currency (denominated in LBP) stood at $62.09B in September 2022. As such, domestic debt constituted 60.46% of the total public debt. Meanwhile, total debt denominated in foreign currency (namely in USD) reached $40.61B over the same period. In turn, total foreign debt grasped a stake of 39.54% of the total public debt by September 2022. 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 $3.968B 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.

Despite these disruptions, BLOM Lebanon PMI registered signs of contraction but at a softer pace since December with the headline PMI index posting 47.7 in January, up from 47.3 in December. Surprisingly, the output and new orders drove the index up while the overall big picture of Lebanon seems to reflect a depressed performance of the private sector. Crucially, however, we don’t believe that we would see anytime soon the PMI above the expansionary 50 marks. In fact, Lebanon has a lot to consider in the upcoming period, including development associated with the persistent political deadlock. That is in addition to the continuous delay in implementing the needed reforms and legislations as well as finalizing the agreement with the IMF. In short, major headwinds to growth persist while financial conditions, severe market volatility and rising political risks would pose further downside risks for Lebanon’s outlook.

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