14 October 2008

BEIRUT: In its first comment about the impact of the global financial crisis on Lebanon, Citigroup reiterated its optimism about the economic and financial outlook despite the global banking and financial turmoil, adding that the country's insulation is now perhaps its greatest asset amid the global turmoil, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

It noted that while some hedge funds sold off some Lebanese Eurobonds last month, Lebanese banks and cash-rich individual investors have stepped in. It considered that the restricted ratings of Lebanese banks, because of the low sovereign ratings, have become a blessing as Lebanese banks are far less vulnerable to capital outflows compared with their counterparts in many emerging markets.

It added that what was once considered undesirable is now beginning to look quite attractive. The bank said that Lebanese Eurobonds were considered undesirable several years ago because the country was in a serious debt trap, the politics would not allow policy-makers to implement reforms, and regional uncertainty added to the problem. But things have changed since then, particularly since political stability has been restored with the Doha Accord. It said that, while the rest of the world could be grappling with a global recession, Lebanon could eventually lighten its debt burden and look optimistically to the future.

Citigroup still warned that Lebanon has not overcome its economic challenges. It noted that what is different this time is that, while the problems remain, potential solutions look quite promising. It said strong capital inflows from the Lebanese diaspora have pushed foreign currency reserves to record highs and appreciated the currency band from 1,501-1,511 per US dollar to a narrower and stronger 1,497-1,501 since early September 2008. Also, private sector bank deposits have increased annually by 15.5 percent as of July which is the highest annual growth since 1999. It added that this pace is likely to increase further, as jittery Lebanese return to the comfort and better returns provided by Lebanese banks.

Citigroup expressed doubts that the much-needed privatization of the mobile licenses will go through during the term of the current Cabinet, and considered that a post-election Cabinet should push through the sale.

It believed that although the International Monetary Fund (IMF) is firmly on board to help Lebanon narrow its fiscal and external gaps, the sense of urgency is not there because of ample financing that is pouring into the country. But it warned that the continuing foreign interest in Lebanon is contingent on regional stability. It added that if the region remains stable and the privatization goes through in the second half of 2009, Lebanon's debt dynamics could change significantly.

Citigroup said in July that Lebanon's debt exposure is not as concerning as the headline number suggests due to a committed investor base, robust deposit growth in the banking sector and foreign interest in the real estate sector, while the IMF is monitoring Lebanon's economy and is working on a soft approach to debt sustainability.

In parallel, investors in Lebanese Eurobonds have remained remarkably loyal to Lebanese sovereign debt despite the country's inability to reduce its burden. It said the commitment to sovereign bonds can also be seen by the falling spread in US dollar lending, which suggests that even with lower yields on the bonds, interest remains strong. Further, as Lebanon's debt dynamics do not allow local interest rates to follow US rates, investors are inclined to remain in Lebanese assets to realize steady above-market returns. - Lebanon This Week