The World Bank this week warned that Lebanon, once dubbed the Switzerland of the Middle East for its unique status as both a snow-capped holiday destination and discreet banking hub for Gulf Arabs, is at risk of “implosion” should it fail to reform.
A drive from Lebanon’s mountainous north to the capital Beirut will make an observer immediately feel the impact of capital controls and the economic downturn.
Ski resorts, from the Cedars to Faraya overlooking the Mediterranean, are operating at partial capacity despite generous powder on the slopes; the oil needed to power electricity generators for the chairlifts is proving far too costly to run them through the season.
The ubiquitous billboards and ads that populate every usable space the eye can see are either blank, advertising for New Year’s Eve concerts long-since passed, or screaming out jaw-dropping sales of 50% or more at sports stores and malls.
Every fourth car dealership along the north-south highway, from Porsche to standalone lots, is empty or out of business.
At rest stops, a pack of Cedars cigarettes, for years priced at 1,000 Lebanese pounds (then 70 cents), have now nearly doubled.
At night, the highway lights remain dark – though this has been the case for years, just one of the many symptoms of rampant mismanagement and corruption to which the population had been forced to acclimate, but which now may finally be hitting a breaking point.
“Economic rationing is compulsory today,” Neemat Frem, a prominent industrialist, told one of the country’s most watched talk shows Thursday night.
“We can no longer pay for our electricity debt!”
Frem, a relative newcomer to politics now heading the parliamentary commission for economy and trade, raised alarm bells on the state of the country’s electricity sector, which loses $2 billion per year despite most households relying on their own generators for half the day’s power.
While the party of Lebanese President Michel Aoun has been in charge of the energy portfolio for the better part of the last decade, entrenched corruption is blind to party affiliation. All of Lebanon’s state utilities, from telecom to waste management, have been hollowed out for decades to shore up sectarian patronage networks.
For a population that has long prided itself on resilience in the face of crumbling infrastructure and incompetent and corrupt governance, the reality that this moment is different is setting in.
Debt to society
In recent days, Lebanon’s sovereign bond yields have skyrocketed to nearly 2,000% as anxiety grows over the indebted nation defaulting on its March 9 Eurobond payment.
Umesh Desai, finance editor of the Asia Times, notes that “when a bond trades at distress levels, you don’t look at the yield, it is the price that matters.”
That price dropped to 55.5/56.6 cents on the dollar as of Friday, down from 97.7 cents in mid-October of last year, before nationwide anti-government protests kicked off.
Faced with dwindling usable foreign reserves, a rapidly depreciating currency, and a $1.2 billion Eurobond maturity due in a fortnight, Lebanon’s new government is in the midst of preliminary talks with the International Monetary Fund with an aim at restructuring its gargantuan debt – currently at 150% to GDP.
Lebanon’s traditional Gulf allies, namely Saudi Arabia, have shown no interest in bailing out the government, now entirely composed of Hezbollah and its allies. The Trump administration is equally enthused, seeing Lebanon in the context of its maximum pressure campaign on Tehran.
“If the Lebanese are not able and willing to claw back billions upon billions of dollars siphoned off through graft over decades, then there is no rationale for a goodwill gesture from the US and its partners,” Aram Nerguizian, senior associate at the DC-based Center for Strategic and International Studies, told Asia Times.
Many local economists see an IMF rescue plan as the country’s only option to ensure it can continue to secure critical imports beyond the coming year. But the ongoing “technical assistance” talks are only the first step toward requesting an IMF loan, which is far from guaranteed and will require America’s vote of confidence.
In the meantime, Lebanon’s economy is shedding jobs at a rapid pace. A reckoning over the local currency’s longstanding peg to the US dollar has only just begun.
The Lebanese pound’s peg to the dollar, long upheld as a sacrosanct marker of stability, now teeters on the verge of free-fall – with even the national airline rejecting its use.
Middle East Airlines, which is almost entirely owned by the Lebanese government, on Sunday announced it would only accept US dollars for airline tickets, and would decline payments in the national currency starting Monday.
The startling decision came despite the capital controls that have nearly cut off Lebanese from their deposits, including widespread US dollar accounts.
The MEA office at Beirut airport was quickly inundated with Lebanese desperate to buy plane tickets in the available currency, with one man telling a local TV station he was planning to leave the country and never come back.
The national carrier’s demand for dollars was widely seen as an implicit recognition that the official exchange rate of 1,507.5 Lebanese pounds to the dollar had entered into the realm of fantasy, putting the burden on customers to exchange their pounds for the black market rate of 2,300.
As outrage over the decision grew, the new government ordered the airline to reverse its move.
Despite the decree, at least one instance of continued dollar demands has since been caught on camera. On Tuesday, a Lebanese travel agency owner attempting to buy tickets in local currency videotaped an encounter with an MEA office rejecting his Lebanese pounds.
Lebanon currently has three exchange rates: the official one, the government-mandated exchange house ceiling of 2,000 LBP to the dollar, and the street rate of 2,300 as of February.
Anxiety is growing over the possibility of the pound nosediving in the weeks and months to come.
The central bank, meanwhile, is “not in a position” to repay the foreign currency liabilities it owes to commercial banks, thus making it impossible for Lebanon’s vast banking sector to produce its clients’ deposits, according to FitchRatings.
“Banks are currently in default on their own FC liabilities to depositors,” the ratings agency said, estimating Banque du Liban’s total liabilities to commercial banks at $70 billion as of the end of 2019. “BdL does not publish data on this, making the figure uncertain.”
Fitch further warns that Lebanon’s liabilities are large, and not transparent: “BdL’s balance sheet has grown by 55% since January 2016. “Other assets” now account for 18% of total assets. In the absence of further transparency on this , we have tended to view this line as an accounting balancing item that at least partly reflects BdL losses.”
“A simple subtraction therefore gives a negative net FC position for BdL close to $40 billion, excluding gold. On this basis, the overall finances of the sovereign financial-sector complex are fundamentally unsustainable.”
A restructuring of Lebanon’s debts appears inevitable, even as complications loom over how that would take shape – and who would pay the price.
“One question is whether the sovereign aims to make a distinction between resident and non-resident bondholders. Another question centers on whether there is a significant litigation from bondholders,” Fitch said, in reference to the significant power that could be wielded by foreign funds.
Lebanon this week requested bids from various international firms to provide financial advisory services on whether to pay out its 2020 debt obligations. The political implications of an independent decision carry high-risk for the new cabinet, which took office in January after months of anti-government protests forced entrenched sectarian elites to allow the entry of fresh faces.
“The new government is clearly in a quandary as to whether to pay the upcoming bonds or not. The government is caught between bondholder interests, popular pressures and being in the great unknown when it comes to the costs of paying versus trying to restructure,” said Toby Iles, director of Sovereign Ratings at Fitch.
“There is the money to pay, there are enough reserves at the central bank for now, but in a longer perspective those reserves will continue to erode. The IMF will want to hear what the government can commit to doing by way of a meaningful reform plan,” he told Asia Times.
But that, he says, is a tall order in today’s Lebanon.
– With reporting by AT Finance Editor Umesh Desai