The recent protests in Lebanon show that it is “politically impossible” to push through fiscal austerity measures needed to stabilize the government’s debt, said London-based consultancy Capital Economics, adding that debt restructuring is “inevitable.”
“Lebanon’s public finances are among the worst in the world. The budget deficit has averaged 11 percent of GDP since the turn of the millennium. Government debt has climbed to more than 150 percent of GDP, the sixth highest ratio in the world,” Jason Tuvey, Senior Emerging Markets Economist at Capital Economics said in a new report.
A debt restructuring would allow Lebanon to reduce and renegotiate its delinquent debts to restore liquidity.
The country is set for an eighth day of demonstrations as President Michel Aoun is due to address the nation later Thursday. Protestors have largely ignored a string of reforms announced by Aoun’s government earlier this week to revive the country’s debt-ridden economy.
The combination of an overvalued currency and widespread holdings of government forex debt in the financial sector means that there’s the risk of a messy default accompanied by currency and banking crises, the consultancy said.
In response to the widespread protests that have brought the country to a halt, the government announced reforms, including a 50 percent cut in the salaries of govt officials, $3.3 billion in contributions from banks to achieve a “near zero deficit” and opening Lebanon’s telecommunications sector to private investment.
“The recent protests highlight that the government will find it extremely difficult to push through the 5-6 percent of GDP fiscal squeeze that we estimate is needed to stabilize the debt ratio,” Tuvey added.
Adding to this, Lebanon’s economy is expected to contract this year, which means reduction of debt through faster growth is out of the question.
While foreign governments could once again ride to Lebanon’s rescue, but financing may not be as forthcoming as it has been in the past, Capital Economics said.
Before the protests began, foreign donors and investors had pledged $11 billion to help Lebanon finance a capital investment program, conditional on the enactment of reforms.
“There appears to be growing concerns about the increasingly influential role of Iran-backed Hezbollah in the government,” said Tuvey in the report.
A restructuring supported by the International Monetary Fund (IMF) is the least “disruptive” option. The fund has opened the door for Lebanon to negotiate a bailout, but in the absence of a deal the resulting uncertainty would lead to a bout of capital flight, he added.
Lebanon’s economic growth slowed to about 0.3 percent in 2018 on the back of low confidence, high uncertainty, and a significant contraction in the real estate sector, according to the IMF, which expects Lebanon to see a continuation of weak growth in 2019.