Last Updated: Sat Aug 06, 2011 19:25 pm (KSA) 16:25 pm (GMT)

Nadine Hani: Lebanon’s sovereign debt... why are we different?

Nadine Hani

It is time to rethink how to manage Lebanon’s public debt. The world has changed, global rating agencies do not work in the same way that they used to before, and Lebanon’s financial situation is no longer as robust as it used to be. Following critiques global rating agencies faced in the wake of the global economic crisis, these agencies have become more proactive as apparent by their latest downgrade of the US credit rating. Rating agencies have become much more stringent in the evaluation of risks, and therefore will become stricter in their evaluation of Lebanon. A few days ago, Moody’s has changed the outlook of four Lebanese banks to negative from stable (Bank Audi, Blom Bank, Bank of Beirut, Byblos Bank).

The stability of Lebanon’s financial situation has always been based on trust which has been evident in the global demand for Lebanese bonds. But this has changed recently. Last week, JP Morgan changed the recommendation on Lebanese bonds to “underweight,” and advised its clients to buy the CDS on the 5-year Lebanese sovereign bonds.

The spread of contagion of the European debt crisis has lowered investors’ appetite for risk-taking. The crisis has hit even powerful economies like Italy, although 50 percent of its public debt is held by its well-capitalized banks and the average maturity of its bonds is seven years, which is a comfortable period for debt redemption. Besides, Italy’s budget records a primary surplus excluding interest payment on its outstanding debt. However, its debt to GDP ratio stands at 120 percent, and it is suffering from weak economic growth despite its robust export sectors.

The spark that ignited the fears from Italy’s public debt was the spread of contagion from Greece, Portugal and Irland after a conflict erupted between its Prime Minister Berlusconi and his finance minister over the budget. In addition to the fact that 175 billion euros of its public debt (11 percent of its total debt) matures in the second half of this year.
The comparison with Lebanon is worrisome, despite that it has a completely different economy. Those who consider Lebanon’s public debt acceptable cite the fact that most of its debt is held by well-capitalized Lebanese banks, although they saw decreasing incoming transfers this year.

Besides, Lebanon has recorded a primary budget deficit in the first half of this year. Its budget deficit in 2011 is expected to grow to its highest level in 10 year. And the debt to GDP ratio which has decreased over the last few years due to strong economic growth, is expected to remain this year at 134 percent because the economy is only expected to grow by 1.8 to 2.5 percent along with a growing budget deficit. The economic condition appears to be even more worrying with the current political situation and the repercussions of the Hariri tribunal.

Countries that were hit by the economic crisis have adopted policies of austerity. Lebanon is no exception and it has to start effectively addressing its debt either by reforming the electricity sector, which is costing the treasury $1.5 billion annually, or by selling small parts of publically-owned companies, such as Middle East Airlines, and listing other parts of them on the Beirut bourse. Lebanon can also review its tax system.

The International Finance Corporation has advised raising VAT to 12 percent because Lebanon has the lowest VAT among similar countries and because it would increase treasury incomes by $400 million annually. But it would be more reasonable to implement a gradual tax increase that does not affect the poor. Whatever the course of action, it is time Lebanon takes steps to resolve its sovereign debt problem.

This article appeared originally in Arabic in An Nahar newspaper on Thursday, Aug. 4. Nadine Hani, Senior Business News Presenter at Al Arabiya, can be reached at Feedback@nadinehani.com, and Twitter at: @Nadine_bn. The translator was Mustapha Ajbaili, of Al Arabiya, who can be reached at: Mustapha.ajbaili@mbc.net

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