Lebanon’s stalemate to agree on a credible financial reform plan amid deteriorating global market conditions means that the country might find it difficult to refinance key foreign-currency debts this year, which worries investors abroad.
Outright default is likely to be avoided by a government maneuver involving the participation of the central bank and local banks, Lebanon’s top debtors. But that would only be a temporary solution.
Many foreign funds said in response to questions that they would be reluctant to buy new Lebanese international bonds until they had finished evaluating the reforms. The Lebanese cabinet met again on Monday after about 12 sessions that failed to witness an agreement, amid protests by public sector employees and retired soldiers fearing cuts in wages and pensions.
In February, in order to control spending, the government promised reforms that it said were “difficult and painful.” Prime Minister Saad Hariri even said that it might be the most austere budget in Lebanon’s history.
Lebanon, burdened by one of the world’s highest public debt, is suffering from political paralysis and war in Syria and Iraq, which affected regional trade, investment and travel.
The country’s small and open economy has also been adversely shaken by the decline in cash flows of the Lebanese Diaspora scattered around the world, traditionally a factor in financing some of its economic requirements.
“The government is not even able to get its act together to deliver a comprehensible transparent budget. Nor did it present or formulate a credible medium-term fiscal adjustment plan that strikes the right balance between the imperative of growth and fiscal consolidation,” said Alia Moubayed, managing director at Jefferies, an international finance firm.
“Without a clear medium-term economic and fiscal policy framework that addresses large external imbalances, and given high levels of corruption and state capture, investors will not be convinced to buy Lebanon risk, as donors will look with extra scrutiny before committing further funding,” she added.
Lebanon should be able to improvise a solution to its most immediate debt burden, a $650 million Eurobond maturing on May 20.
Well-informed sources said the country could pay back investors in this bond drawing on a foreign exchange transaction with the central bank.
The government has used the same unconventional approach to financing its deficit in the past.
