LebanonAEs sovereign credit outlook hinges on credible policy actions.
Summary: BEIRUT: Global investment bank Barclays Capital indicated that Lebanon's macroeconomic and financial sector performance exceeded market expectations in 2009 despite spillovers from the global financial crisis and heightened political tensions surrounding the June parliamentary polls and the ensuing process of Cabinet formation.
BEIRUT: Global investment bank Barclays Capital indicated that Lebanon's macroeconomic and financial sector performance exceeded market expectations in 2009 despite spillovers from the global financial crisis and heightened political tensions surrounding the June parliamentary polls and the ensuing process of Cabinet formation.
It maintained a positive outlook for Lebanon in 2010 but considered that growth rates are likely to slow down in 2010 from their 7-8 percent level and settle somewhere around 5-6 percent, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.
It expected that private consumption, while holding up, would witness slower growth as base effects subside, as 2009 was exceptional due to the election-related boom. But this would be compensated by a pick-up in private and public investment, and continued strength in services exports on the back of a gradual recovery in the GCC.
It said inflation was likely to increase to 4 percent on the back of higher oil prices and an expected increase in VAT rates.
It expected remittances to increase slightly in 2010 in line with the recovery in the global economy, which will be offset by a widening trade deficit due to sustained growth in domestic demand, higher oil prices and a leveling-off of tourism following an exceptionally high record in 2009, leaving the current account deficit at around 9 percent of GDP for this year.
It noted that an expansionary 2010 budget would bring the fiscal deficit again to 11 percent of GDP, reducing the primary balance to no more than 0.5 percent of GDP. Accordingly, the debt level is likely to remain at 152 percent of GDP.
Barclays Capital said the formation of the national-unity government reduced short-term domestic political risks, but added that a consensual form of government is bound to render decision-making more complex.
It said that the postponement of privatization in the telecom and energy sectors should not cause further deterioration in public finances, as sectoral reform implementation advances in tandem. But the growing need for higher capital spending on infrastructure highlights the imperative to implement revenue reforms and expenditure rationalization.
It warned that failure to do so would limit room for further reductions in interest rates and maintain the need for costly sterilization of large capital inflows.
It considered that political risks remain a constant, with the biggest risk stemming from a sudden war with Israel similar to what happened in July 2006. It noted, however, that the status quo is the most probable scenario in 2010, but it saw a potential downside as negative surprises cannot be overruled.
Barclays Capital said that political risk regressed significantly, foreign reserves are at a record high and deposit growth was still running at 20 percent, adding that its fundamental credit view primarily depends on credible policy actions from the new Cabinet aimed at furthering fiscal consolidation and sustaining higher growth rates as a means of putting the debt on a sustainable path. It considered the upcoming 2010 budget to be a first key milestone and litmus test for the Cabinet's ambitions.
It said that on the expenditure side, the return to a normalized budgetary cycle implies higher budgetary and nonbudgetary expenditures, which are likely to be augmented by additional spending to meet the Cabinet's ambitious agenda in the social and infrastructure fields.
It noted that the government is proceeding with filling all vacancies in higher ranking civil-servant positions, but considered this move as a missed opportunity that would exacerbate the budget rigidity at a time when a functional review of the public administration and an assessment of options for public sector downsizing could have helped reduce the wage bill.
Moreover, higher oil prices and lack of visibility on the nature and timing of measures to reduce losses at ElectricitE[umlaut] du Liban (EdL), including the much-needed electricity tariff reforms, will keep EdL losses weighing on public finances for a while.
Finally, while interest rates on Lebanese debt have declined, the size of the domestic stock is keeping debt service cost from falling rapidly. In parallel, it said that on the revenue side, the Finance Ministry would try to forge ahead with the reform measures agreed under Paris III, most important of which is raising the VAT rate from 10 to 12 percent, and gradually to 15 percent. But popular opposition to further indirect taxation is proving fierce, rendering unlikely the proposed increase to exceed 2 percentage points this year.
According to Barclays Capital, the Finance Ministry is focused on keeping the debt-to-GDP ratio at its current levels and at preventing a reversal in solvency indicators in the absence of privatization proceeds this year and given the proposed rise in spending. It considered that the ministry can afford to run down its primary surplus to zero to keep debt dynamics in check, and based on growth estimates of between 4 and 5 percent in 2010, provided it manages to reduce its borrowing costs further. -- The Daily Star
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