Bank Audi has projected 2.5 percent GDP growth for Lebanon in 2019, heartened by the country’s formation of a government and promised reforms. “Our macro forecasts for 2019 are based on a 2.5 percent real GDP growth forecast (a 6 percent nominal growth) following the recent Cabinet formation, and based on a slow progress in CEDRE reforms and implementation,” Bank Audi said in its Lebanon Economic Report, released Wednesday.
It gave several reasons for this optimism. “Nominal growth would be driven by: a 6.5 percent domestically driven growth in private consumption; while private investment is likely to stagnate at its 2018 level amid politico-economic uncertainties weighing on private investors initiatives,” the report said.
The other reasons behind the positive projection were double-digit growth in public investment from a relatively low base within the context of the state’s new Capital Investment Program, along with 14 percent growth in exports on the basis of the recent reopening of Syrian-Jordanian routes for Lebanese land exports.
Bank Audi said it expected money supply to grow by 4 percent on the back of an 8 percent growth in financial inflows that would somewhat reduce the balance of payments deficit. It acknowledged that the Central Bank’s foreign assets fell by $2.3 billion in 2018.
“Amid persistent domestic political tensions, Lebanon’s monetary conditions witnessed in 2018 net foreign currency conversions on the foreign exchange market, quasi-stability in the Central Bank’s foreign assets despite cash settlement of maturing bonds and higher interest rates on Lebanese pound-denominated securities. The Central Bank of Lebanon’s foreign assets slightly contracted by $2.3 billion in 2018 to reach $39.7 billion at end-December,” the report said.
It emphasized that Banque du Liban’s foreign assets cover nearly 77.1 percent of the Lebanese pound money supply in the local market, remaining well above the average of reserve adequacy in similarly rated countries (41.6 percent).
“The overnight rate saw strong fluctuations over the second half of 2018 amid a lack of local currency liquidity on the money market, reaching a high of 75 percent in December, before sliding to regular single-digit levels toward the end of January 2019 following Gulf support pledges and successful Cabinet formation,” Bank Audi said.
It added that the IMF had revised down its 2018 real growth for Lebanon to 1 percent from a previous forecast of 1.5 percent.
“BDL estimates Lebanon’s 2018 growth within a range of 1 percent to 1.5 percent. While 2018 has seemingly reported a further slowdown in growth, it is still non-recessionary in the technical definition of recession, i.e. negative growth or net contraction in Lebanon’s real economy,” the report said.
It attributed slow GDP growth to what it described as “the overall wait-and-see attitude characterizing private sector investors refraining from investing in Lebanon’s various economic sectors, while private consumption managed to continue growing moderately.”
In sum, Bank Audi said 2018 was a difficult year for the Lebanese economy, sectors of activity and financial markets in general, under growing political uncertainties especially during the second half of the year.
“While we do not foresee financial instability in the months ahead on the back of strong monetary and financial buffers related to large FX reserves (standing at 80 percent of domestic currency money supply) and abundant bank liquidity (standing at 50 percent of FX deposits), the most significant challenge to face the Lebanese government is to address the public finance imbalances that represent today the most significant vulnerability for the Lebanese economy,” the report said.
It said growing expenditures were among the main reasons for the rise in the budget deficit in the first nine months of last year. “Public finance statistics for the first nine months of 2018 released by the Ministry of Finance suggest a relative surge in fiscal deficit. Lebanon’s public finance deficit rose to $4.5 billion over the first nine months of 2018, within the context of a 27 percent growth in public expenditures and a 3 percent rise in public revenues,” Bank Audi said.
The report argued that the salary scale for the public sector employees caused government expenditure to rise considerably last year.
“The growth in public expenditures is tied to the public sector wage scale [whose] cost exceeded preset figures, while the insignificant rise in public revenues, despite the tax hikes of the last quarter of 2017, is tied to economic sluggishness amid weak real sector activity, in addition to the high revenue base effect of the previous year driven by the one-off tax on financial engineering operations,” it said.
According to the report, the rise in public spending comes within the context of a 56 percent rise in Treasury spending and a 24 percent rise in budget spending over the first nine months of 2018 relative to the same period in 2017. “In turn, the growth in budget spending is tied to a 34.2 percent rise in general expenditures (mainly wage increases), a 38 percent rise in [Electricite du Liban] deficit and an 8 percent rise in debt servicing. Net of debt servicing, the primary balance reported a deficit of $0.6 billion over the first nine months of the year.”
The report said Lebanon did not have the luxury to delay badly needed reforms. “Having said that, a tangible advancement at those levels, along with the thorough implementation of the CEDRE pledges to finance infrastructural spending, can create a positive catalyst that would move Lebanon from an era of widening macro uncertainties to an era of gradual containment of risks and threats as a prerequisite to the hoped-for economic recovery and the corollary realignment of growth with its long-term potential,” Bank Audi said.
The Daily Star