The Economic Research and Analysis Department of Byblos Bank Group provides a high-quality weekly analysis of what’s happening in the finance and business sectors in Lebanon. Its well-documented articles offer useful information, data, and analysis of what’s going on inside and outside of government. The charts and tables are clearly explained, as in its latest article on “Draft budget for 2020 projects deficit of 7.4% of GDP.” Unfortunately, the story the numbers tell is not a happy one, and the projections are incomplete at best.
For example, the article compares the 2019 budget and the 2020 projection using Ministry of Finance and Byblos Research sources. It lists 2020 revenues at $12.6 billion versus 2019’s $12.5 billion. This shows that all of the fuss over the 2019 budget will only increase revenues by a bit over 1%, not reassuring to reform-minded investors and analysts. The expenditures side is also weak with less than .02% decrease projected from $16,985 billion in 2019 to $16,982 billion in 2020. Compounding the challenge is that the 2019 budget was not approved until July, which means that the few revenue and expenditure changes will largely not even have an impact until 2020.
Key facts to know:
The 2020 projections say it will cost $16.1 billion to run the government or some 94.5% of all spending. Alas, capital spending, which includes infrastructure, land acquisition, and equipment only makes up the remaining 5.5%, less than a billion dollars in a country that is desperate for upgrades and improvements, and this is even less than the 5.7% called for in the 2019 budget. This is why the CEDRE funding for the national infrastructure projects is so critical; Lebanon can’t move forward without it.
Of course the biggest expenditure is salaries and compensation, some 40% ($6.8 billion) of the budget in 2020 a slight increase over 2019. Debt servicing, the bête noir of rating agencies, will represent some 36% of the 2020 budget, up from 32.5% in 2019. Transfers to EDL are supposed to decrease in 2020 to just under $1 billion, a proposed cut of 40% from 2019 but without significant improvements in generation, supply, and distribution, this remains wishful thinking.
The revenue side is neither ambitious nor practical as it is full of loopholes and depends on revenues generated as a result of the 2019 budget.
Goldman Sachs investment bank offered a measured response to news that Saudi Arabia would offer financial support to Lebanon. At this time it is not clear if this means a deposit with the Central Bank, buying foreign currency bonds scheduled to be issued in October, or subsidizing Lebanon’s purchase of petroleum products, or another option. An investment by Saudi Arabia would “improve depositor and investor sentiment towards Lebanon, which would translate into a pickup in capital inflows and an increase in rollover financing of Eurobonds,” according to the Economic Research and Analysis Department.
However, it also noted that Saudi support alone was insufficient to address Lebanon’s fiscal and monetary deficiencies without significant structural reforms. As of now, “domestic political uncertainties” continue to slow the pace of the implementation of existing reforms, let alone those proposed for 2020 such as privatization of state owned services. According to Morgan Stanley investment bank, “a financial support package of $5-6 billion over the next 18-24 months would help cover Lebanon’s external financial gap [borrowing or attracting funds from overseas] and improve market sentiment.”
Given rising tensions in the Gulf, the heightened risk of military conflict between Hezbollah and Israel and Israel and Iran in the region, and the continued drop off of capital inflows into Lebanon due to security and stability concerns, Lebanon’s financial health is a major concern in the coming year.
One sure sign of Lebanon’s tough road ahead is the continued decline in its ratings as a tourism destination. Although Beirut regularly receives great reviews as a party destination, overall, the country is growing less competitive in the region and globally according to the World Economic Forum’s Travel and Tourism Competitiveness Index (TTCI) for 2019. It is now in 100th place among 140 countries, barely ahead North Macedonia, Nepal, and Moldova; and placed 11th out of 14 Arab countries.
Another measure of economic growth worth following is the utilization of the loan guarantees by small and medium sized enterprises (SMEs) under the Kafalat Corporation program sponsored by the government. Loan guarantees were down 86% in the first two quarters of 2019 to $5 million from $35 million the same period last year. Kafalat offers financial products for SMEs in the manufacturing, agricultural, tourism, high technology, crafts, and energy sectors. Loans are tracked by region and sector, giving a useful picture of what sectors are most attractive to SMEs. So far in 2019, 38.6% of the loans went to agriculture, 31.8% to the industrial sector, tourism received 22.7%, specialized technologies got 4.6%, and the handicraft sector – 2.3%.
For a very useful breakdown of the 269 infrastructure projects in the Capital Investment Plan by type and region of Lebanon that will be targeted in part by the CEDRE funds, check this link from The Lebanese Center for Policy Studies, click here.