In three days, Lebanon’s central bank governor, Riad Salameh, is set to step down from his position, concluding a 30-year tenure. There are speculations that a dubious political agreement might prolong his mandate until a replacement is found. Mr. Salameh has faced corruption accusations in several European countries, leading France and Germany to issue Interpol “red notices” for his arrest.

Nevertheless, the governor’s departure signifies a more profound message. It marks the symbolic end of an era, which was the financial and economic strategy to revitalize Lebanon after its civil war in 1990. These designed policies helped to achieve the reconstruction of Beirut’s historic downtown area and they played a vital role in the Lebanese revival until the country’s financial collapse in 2019.

The foundation of this policy was to maintain a stable exchange rate between the Lebanese pound and the US dollar, attracting capital to Lebanon through relatively high interest rates on treasury bills and bank accounts. This approach allowed the state to continually refinance its debt, relying on incoming funds to offset the country’s ongoing trade deficit and maintain a relatively positive balance of payments. However, when these inflows dwindled at the beginning of the last decade, Lebanon’s financial situation became increasingly precarious, eroding confidence in the stability of the system, along with Central Bank policies and the entire fiscal framework of the government.

Consequently, the Lebanese Eurobonds market is still recording an all-time worst performance below the 7 cents during the course of the week. The BLOM Bond Index (BBI) which is BLOMInvest Bank’s market value-weighted index tracking the performance of the Lebanese government Eurobonds’ market (excluding coupon payments), increased remarkably this week by 4.95% to stand at 6.84 points by the week ending July 27, 2023. As for the JP Morgan EMBI, it rose by 0.14% to stand at 806.99 by the week of July 27, 2023 compared to 805.86 by July 20, 2023.

Furthermore, the yield on the five years (5Y) and ten years (10Y) Lebanese Eurobonds dropped respectively by 390 and 420 bps to stand at 134.9% and 98.9% by the week ending July 27, 2023 compared to the previous week.

US yield curve shifted higher on July 27, 2023; moreover six months treasury yield reached the highest figure of 5.56%, thus still indicating an inverted yield curve. The US Treasury yield curve is raising alarms among investors and economists again since it has been flipped upside down in an inversion for more than a year. However, Economists at Goldman Sachs Group Inc. reported in July that investors shouldn’t worry about the inverted yield curve because it’s not foreshadowing a recession this time around. This is largely due to the fact that with the cooling of US inflation, there is a plausible scenario where the Fed can reduce interest rates without triggering a recession.

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday, July 26^th to stand at 5.5%, the highest level in 22 years. Moreover, the FOMC left the door open to further rate hikes this year. The committee said it remained highly attentive to inflation risks and would continue to assess additional information and its implication for monetary policy. Indeed, consumer prices rose by 3% in June from a year earlier down from last summer’s 9.1% peak but above the Fed’s 2% inflation target.

Moreover, in the second quarter of 2023, US Gross domestic product (GDP) grew at an adjusted 2.4% annual rate, above the 2% growth in the first three months of the year, with consumer spending providing the most support. The report showed the economy remained resilient even in the face of aggressive rate hikes from the Federal Reserve. Indeed, The Federal Reserve’s economists are rethinking their calls for a recession this year and are becoming more confident the US will skirt a downturn altogether.

The American labor market has demonstrated remarkable resilience recently, with a decline in the number of jobless claims, even amid higher interest rates aimed at controlling hiring. The Labor Department reported that U.S. applications for jobless benefits dropped by 7,000 to 221,000 for the week ending July 22, 2023.  Moreover, Continuing jobless claims, which reflect the number of people seeking an additional week of unemployment benefits, fell to a seasonally adjusted 1.69 million in the week ending July 15. Despite the overall healthy labor market, the technology sector has experienced several high-profile layoffs, with many companies citing overhiring during the pandemic. While these layoffs have garnered attention, they appear to be more of an isolated occurrence rather than indicative of broader labor market trends.

In turn, the 5Y and 10Y spread between the yield on Lebanese Eurobonds and their US comparable recorded respectively a drop from 13,472 and 9,925 bps to 13,066 and 9,489 bps  by the week ending July 27, 2023.

Weekly Change of Lebanese Eurobonds Prices 

Source: BLOMInvest Bank