Lebanon will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.
Anti-government protests, which began on October 17, 2019, have increased political and economic instability in Lebanon.
Currency devaluation and non-payment risks have increased as the Central Bank seeks to ease liquidity stress and maintain the peg to the US dollar.
Capital controls are likely to become more extensive if bank deposits continue to shrink and net capital outflows increase in the short term.
On October 29, 2019, Saad Hariri resigned as prime minister, following nearly two weeks of protests and strikes across Lebanon.
As many as 300,000 people protested against corruption, new taxes on WhatsApp voice calls, and poor quality public services.
Since then, tens of thousands of protesters have regularly occupied Martyr’s Square, the central public square of Beirut, and blocked major highways.
The protest movement has broadened and become more organized, increasing the risk of regular labor strike action and business disruption.
Protests are likely to continue until a new technocratic government is formed, which may take months.
In the coming weeks, protesters are likely to block entrances to public workplaces, including banks, ministries, and state-affiliated companies.
They may also obstruct major highways and intersections in the cities of Beirut, Byblos, Nabatieh, Sidon, and Tripoli.
Violent confrontations between protesters and security forces are increasingly likely in the short term.
Between October 17 and 24, four people were reportedly killed in protest-related violence and hundreds of protesters were injured.
Dollar shortages will increase the risk of violence, as citizens find it harder to access basic goods such as fuel and medicines.
Prior to the current protests the Banque du Liban promised to facilitate a fixed-rate access to dollars for importers.
However, with the resignation of the government, it has reversed the decision, stipulating that importers deposit 85% of payment in Lebanese pounds and 15% with the Banque du Liban in US dollars.
Fuel importers are increasingly unable to afford the additional costs, leading to strikes by gas stations and increasing fuel shortages, which in turn may increase the risk of looting and property damage.
In recent months, the risk of currency devaluation has significantly increased. Deposit inflows into Lebanese banks, which have until now largely funded the Banque du Liban’s foreign exchange reserves, have contracted by approximately US$2.2 billion in the first seven months of 2019.
The ongoing political turmoil has weakened investor confidence in the Lebanese pound’s peg to the US dollar.
Banking sector deposit dollarization reached 72% in July 2019, representing a 3.21% increase year over year, and the highest level since September 2008.
The higher dollarization rate indicates greater demand by depositors for the US dollar and a loss of confidence in the Lebanese pound.
The loss of investor confidence has weakened the Banque du Liban’s ability to fund Lebanon’s significant financing needs.
Lebanon has a current account deficit of 23% of GDP, a fiscal deficit of 11% of GDP, and the third-highest public debt GDP ratio in the world at 152% of GDP.
In addition, sovereign eurobonds worth US$1.5 billion are due to mature on November 28, 2019, rising to US$2.2 billion in early 2020. As a result, the Banque du Liban is likely to prioritize repayment of maturing sovereign debt and defense of the currency peg over non-essential foreign exchange conversions.
Capital controls are increasingly likely following the reopening of banks on November 1, 2019, after a 15-day closure due to the political unrest.
During the shutdown, Lebanese banks lowered withdrawals to US$1000 per day and imposed arbitrary rules, such as banning US dollar transactions after 5pm local time and on weekends.
Pressure will continue to mount on the pegged rate of 1,507.50 Lebanese pounds to the US dollar until a government can form and implement emergency economic measures.
The political crisis has created the conditions for a parallel exchange rate to emerge, having forced some businesses into a black market where a dollar is currently worth between 1600-1750 Lebanese pounds.
Anti-government protests may result in greater scrutiny of contracts awarded under the Hariri regime, and increase contract alteration risks once a new government is installed.
A new government will likely take at least six months to be formed, given the political challenges associated with maintaining Lebanon’s currency peg and refinancing maturing debt obligations.
Hezbollah, the Iranian-allied paramilitary-political group, holds a majority in parliament and could try to form a coalition government with its allies, the Free Patriotic Movement.
However, a Hezbollah-led government would increase the likelihood of sanctions by the US and complicate the ease of doing business in Lebanon.