High indebtedness has been plaguing the Lebanese economy over the past two decades or so, as the government has been caught in a vicious cycle of a hefty public debt burden and recurrent budget deficits. This has thwarted the economic growth, escalated the debt crisis, and positioned Lebanon among nations with the highest debt-to-GDP ratios in the world. More specifically, the Lebanese government embarked in the early 1990s on an expansionary fiscal policy and a costly reconstruction plan, aimed primarily at rehabilitating the severely destroyed infrastructure in the hope of fostering economic growth and doubling the GDP per capita. In this context, the Credit Libanais Economic Research Unit has analyzed the Lebanese public debt dynamics particularly in the post war era and recommended potential reform measures to trim the budget deficit and curb debt growth.
Our publication highlights that total capital expenditures stood at $12.49 billion between end of 1992 and 2014 out of which circa $5.02 billion were externally funded and $7.47 billion were financed by the government. The sizeable borrowings to restore the damaged public infrastructure, the high interest payments on said debt, along with the resulting budget deficits from debt servicing and transfers to EDL were the main culprits behind the ballooning public debt. More particularly, said debt grew at its fastest pace during the early post-civil war period, with growth decelerating at later stages. Delving further into details, our analysis uncovers that Lebanon’s debt grew at a CAGR of around 40% during the 1993-1998 era, increasing from $3.39 billion to $18.56 billion as the capital expenditures to GDP ratio hovered between 8% and 9% during the 1994-1998 period before slowing markedly to around 1% to 2% of GDP in the early 2000s. Similarly, government borrowings fell sharply between the years 1998 and 2015 due to the government’s efforts to refinance its existing debt by rolling it over on several occasions and at a cheaper cost, aided by the Paris conventions and other donors’ agreements. Transfers to EDL have been a major drain on public finances, aggregating to $16.85 billion over the 1992-2015 period, accounting for 23.96% of gross public debt at end of year 2015.
At present, the Lebanese banking sector still holds the lion’s share (53.8%) of total debt, despite managing to reduce its exposure from 59.3% in the year 2013. This is in fact mirrored by the smaller proportion of claims on the public sector which fell from 26.96% of local banking sector balance sheet in 2008 to 20.32% in 2015 and subsequently to 20.35% as of April 2016. Historically, Lebanon’s debt has been almost evenly split between the domestic currency and foreign currencies, with the share of local currency debt increasing significantly over the last couple of years. This new trend can be attributed to the fact that the issuance of foreign currency denominated debt in the form of Eurobonds requires the ratification of the parliament; the thing which was hard to secure in recent years on the back of the intense political bickering, which has derailed the regular convention of legislative parliamentary sessions.
At present, gross public debt stands at $71.65 billion (April 2016) with Lebanon’s debt to GDP ratio reaching an alarming 139% level, positioning it as the 4th highly indebted country in the world according to the CIA World Factbook. This debt figure excludes some sizeable amounts owed by the government to the National Social Security Fund, hospitals, and private sector contractors, among others which, if embedded in the calculation, would undoubtedly raise gross public debt to just above $74 billion. This trend is unsustainable and calls for immediate action from the government in the form of reform measures which can take several forms such as privatization, Public-Private Partnerships, expenditure rationalization, fiscal reforms, and many rounds of debt softening and financial engineering schemes.
Despite its strength as a reform measure, privatization seems to be the least applicable tool at present amid the prevailing local and regional turmoil which would widen the sovereign risk premium and accordingly depress the fair market values of public sector enterprises. Public-Private Partnership schemes, on the other hand, would be a viable solution to trim the budget deficit, especially if implemented in the exploration and extraction of the newly discovered offshore oil and gas reserves in Lebanon’s Exclusive Economic Zone, which are believed to be able to generate circa $1.85 billion in revenues for the government during the first year, a figure that can reach $3.66 billion over twenty years according to a research previously published by the Credit Libanais Economic Research Unit. The implementation of PPPs, however, is delayed by the inability of the parliament so far to pass the required laws due to the continuous political bickering.
Expenditure rationalization is essential to contain the structural deficit in public finances, yet would be almost impossible to implement without the passing of a budget law, noting that the government failed to pass a budget law proposal note since 2006. Fiscal reforms such as combating tax evasion and improving tax collections is another alternative to consider, with some progress being already accomplished including the introduction of e-payments both by the Ministry of Energy and Water for the settlement of the water bill and the Ministry of Finance for the payment of the built-up property tax among others. However, it is imperative to put an end to the prevailing paralysis on the executive and legislative fronts in order for the transition to the e-government to take full swing.Finally, many rounds of debt servicing alleviation through swap mechanisms similar to the recently engineered $2 billion tripartite exchange between the Ministry of Finance, the Central Bank, and commercial banks can be considered to reduce the budget deficit and curb the growing public debt.
In the midst of the raging waters clawing the Arab world and the murky horizons smudging Lebanon’s future political and economic picture, a new gem has shined within the Middle Eastern seas, opening the page for a new era of economic prosperity. Discoveries of black gold have, in fact, enkindled the flame of hope to a country that has been suffering of ailing public finances for quite some time, fetching promises of healing Lebanon’s economic woes, from current account deficit to budget deficit, while paving the way towards a blossoming economic journey.
The concerned research report strives to quantify the potential repercussions of the exploitation of Lebanon’s oil & gas reserves on major macroeconomic indicators under the umbrella of the scenario and set of hypothesis adopted. Oil reserves under the tailored scenario (557.5 million barrels) were based on the mid value of the estimated interval of 440 million barrels to 675 million barrels of oil reserves conveyed by Beicip Franlab, the French company that conducted the seismic surveys, while gas reserves figures centered upon the interval of 12 trillion to 25 trillion cubic feet in Lebanon’s southern waters, as unveiled by Spectrum, the British company which surveyed the Lebanese coast. It is worth noting that a production horizon of 20 years was adopted in the tailored model, mimicking the estimates relayed to the press by the secretary-general of the World Energy Council. In parallel, oil & gas price forecasts used in the paper are based on the most recent Energy Information Administration’s (the statistical and analytical agency within the US department of Energy) published projections for the 2020-2039 period, which correspond to the assumed extraction phase. These prices range between $4.96 billion per TCF in the year 2020 and $12.04 billion per TCF in the year 2039 for gas, and $109.37 per barrel in the year 2020 and $224.62 per barrel in 2039 for oil. It is worth noting that the sharp drop in oil prices in the last quarter of 2014 was not accounted for in our model given that hydrocarbon production is not likely to kick-in before the year 2020, and that this downturn in prices may not be sustainable. In this context, the Credit Libanais Economic Research Unit projects the value of oil production to stand at $3.05 billion in the first year of extraction (2020), with gas production value estimated at $4.96 billion.
The total oil & gas output value is thus estimated at $8.01 billion in the first year of production, lifting as such the extrapolated nominal GDP figure to $77.60 billion in the year 2020, from an estimated $69.59 billion in the absence of oil & gas discoveries. In parallel, the Credit Libanais research publication projects Lebanon’s current account balance to turn into a surplus during the hydrocarbon production period, appreciating from $0.42 billion in the year 2020 to $2.87 billion in the year 2039. These figures compare to estimated current account deficits of $4.39 billion by end of year 2020 and $8.12 billion in the year 2039, based on an extrapolation of IMF estimates when excluding hydrocarbon production.
On the public finance front, the Credit Libanais research report expects the budget deficit to shed 5.64 percentage points in the first year of hydrocarbon extraction and settle at 4.36% of nominal GDP under the scenario adopted. The budget deficit has a tendency to increase gradually afterwards and reach 5.65% of GDP in the last year of production (2039), owing to the faster pace of growth in non-oil deficit when compared to the growth in oil & gas receipts.
On a cumulative basis, the model developed projects total government revenues to aggregate to $113.18 billion from oil & gas extraction over the twenty-year production period, representing around 45% of the country’s offshore hydrocarbon reserves.
The aforementioned simulation results center upon a scenario that channels all hydrocarbon proceeds towards taming the budget deficit. Nevertheless, and given both the government take in total oil and gas production and the projected budget deficit, said proceeds will most probably fail to reduce Lebanon’s debt stock, but instead will slow the accumulation of public debt and possibly reduce the debt-to-GDP ratio.
The Beirut Stock Exchange has been travelling through a wobbly path, clawed by the family nature of Lebanese companies, which continues to thwart the listing of new companies on the official market. In parallel, the ever-changing economic and political conditions reigning on the local scene have played a major role in setting the track to the Lebanese Stock Exchange’s trading activity, which has been oscillating between different periods of booms and busts since its re-opening in the year 1996.
Based on the empirical model developed in this research report, a positive and significant correlation is witnessed between net financial inflows to Lebanon and the performance of listed banking stocks represented by the Credit Libanais Financial Sector Stock Index (“CLFI”). The performance of the listed construction stocks, on the other hand, measured by the Credit Libanais Construction Sector Stock Index (“CLCI”) turns out to be significantly negatively correlated to political shocks. Accordingly, our econometric model leads us to conclude that the impact of a positive political shock, such as the election of a new president on the performance of listed construction stocks (Solidere “A”, Solidere “B”, Holcim Liban, and Ciments Blancs) is a 3.21% increase in their market capitalization to around $2,583.59 million as at end of June 2014.
The historical analysis of the BSE’s market capitalization, on the other hand, shows a 33.11% rally in the value of traded stocks during the eight-year period extending between the year 2006 and April 2014. This increase can be explained by the listings of additional securities by already listed companies on the official market amid various phases of capital increases over the past decade to address Basel solvency requirements on the one hand, and finance domestic and regional expansion on the other. In fact, and when factoring out the impact of new listings on the evolution of market capitalization, the latter would have suffered a sizeable 46.26% slump over the aforementioned period. Said drop mirrors the contraction in the prices of listed securities on the back of the recurrent sequences of political and economic shocks, of which we name the Israeli aggression on Lebanon in summer 2006, the long sit-in in the Beirut Central District since late 2006, the outbreak of the global financial crisis since early 2008, and the spillover of the Arab Spring since late 2010, only to name a few.
In this context, the turnover ratio of the Beirut Stock Exchange, which measures the aggregate traded volume as a percentage of the number of outstanding listed stocks, peaked at 15.44% in the year 2010, before plummeting to 4.07% in the year 2011, 3.27% in the year 2012, and an even lower 3.05% reading in the year 2013, hence mimicking the many stages of political bickering. From a different angle, the weighted average price to earnings (P/E) multiple of the Beirut bourse surpassed the 36x mark in the year 2007, mainly lifted by the rallying prices of heavy market-cap weighted Solidere shares and various other banking stocks. This owes to the fact that many Lebanese expatriates and regional investment funds channeled back their investment portfolios to the country as Lebanon was spared from the global financial crisis that struck major stock markets across the world. The BSE’s weighted average P/E subsequently spiraled through a downward twirl starting the year 2008 amid the wider spread of the global financial crisis, plunging to 19.67x in 2008, 13.81x in 2009, and a much lower 8.56x as at end of April 2014.Finally, a number of factors have constrained the listing of new companies on the Beirut bourse including, among others, the small capitalization of Lebanese companies, the reluctance of family-owned firms to go public, the requirement to abide by international accounting standards, the limited exit potential for investors, and the depressed valuation multiples in recent years which discouraged candidate companies from floating their shares on the stock market. This research report highlights these issues and suggests corrective measures.
The Lebanese economy continues to prosper in 2009, notwithstanding the rippling effects of the global financial crisis and propagating World economic recession. Main indicators remain solid, thanks to a regained level of confidence in the economy, a strong banking sector, a prudent Central Bank and an unprecedented rebound in tourism activity.
Private sector participation in public sector enterprises, which is said to enhance efficiency, improve the quality of services rendered and limit corruption, has always constituted a debatable issue in the Lebanese political arena. In fact, private sector involvement was first proposed in the form of privatization, an idea which received backing from international donors, with the Paris II and Paris III conferences even tying the disbursement of some pledged financial aids to the implementation of some reform measures including, among other, the privatization of the telecommunications and energy sectors.
The Arab Spring has been touted by many as one of the landmarks of the twenty first century. For decades, many Arab countries have been governed by oppressive leaders, restricting civil liberties and harnessing the resources of the economy to their own benefits, building up as such the momentum for a sentiment of resent and dissatisfaction among citizens. The first spark of the Arab Spring started in Tunisia, and then spread rapidly to other Arab economies, toppling age-long regimes via a domino effect whilst stirring civil wars in other neighboring countries. The Arab Spring, however, and which is still raging nowadays, has come at a catastrophic cost, whether on the human front, claiming tens of thousands of lives, or on the economic front, sending economies into shambles. More specifically, and according to our (Credit Libanais Economic Research Unit) estimates, real GDP losses have amounted to $9.23 billion in Tunisia, $1.15 billion in Yemen, $62.26 billion in Libya and $19.3 billion in Syria. In the case of Egypt, however, it could not be determined whether the losses, and which were not significant relative to GDP in the first place, were a result of the Arab Spring or a simple shift in the economic cycle.
On the local front, Lebanon was to a certain extent spared from the Arab Spring phenomenon, yet its geographical proximity to ailing Syria and the various inter-connections with neighboring Arab countries meant that the political and economic spillovers were inevitable. The tourism sector was one of the first sectors to feel the pinch of the Arab turmoil, as the resulting political instability and deteriorating domestic security conditions prompted some GCC countries to issue travel warnings to Lebanon. The real estate sector followed suit, with prices stagnating and the number of transactions dropping markedly, ending as such a four-year rapid acceleration spree. Accordingly, and due to its high reliance on the tertiary sector, the Lebanese economy suffered major setbacks, prompting international agencies to downwardly revise their growth estimates for Lebanon for the years 2011, 2012 and 2013.
In this context, we have quantified the economic losses stemming from the Arab Spring on Gross Domestic Product. Accordingly, we have developed an empirical regression model that aims at evaluating the Arab Spring’s economic cost on GDP growth. According to our economic model, we have concluded that the Arab Spring has slashed some 3.3% of Lebanon’s real GDP growth per annum over the 2011-2013 period.
Finally, our economic model also led us to quantify the economic cost of the Arab Spring on Lebanon at $6.03 billion in real terms over the 2011-2013 period, representing 20.21% of the country’s year 2013 real GDP.