Syrian Crisis Heavily Impacts Lebanon's Economy.Citigroup
Citigroup indicated that the escalation of the Syrian crisis has started to take a greater toll on the Lebanese economy.It said that the closure of border crossings in July cut off important overland trade routes for the export of Lebanese agricultural produce, while the volume of industrial exports declined as insurance costs and a strong US dollar reduced the competitiveness of such exports, as reported by Lebanon This Week, Byblos Bank newsletter.
Further, it pointed out that the electricity crisis in Lebanon is also damaging the economy. It noted that the government signed a deal with Turkey to lease electricity-generating ships to reduce the shortfall in supply. But it added that the ships will not be operational until after the summer peak demand. It said that this is forcing Lebanese businesses to use private power generators, which is a costly and inefficient option, and which constitutes a significant burden on economic activity.
In parallel, Citigroup pointed out that the revised 2012 draft budget is unlikely to be approved by Parliament, despite having been endorsed by the Cabinet. It said that the revised budget excluded the proposed tax hikes in the original draft budget, which raises ques- tions about the sources of financing of the public sector's wage and salary increases. It added that ongoing protests within the educa- tion and electricity sectors over salaries may result in further increases in expenditures this year.
It expected Lebanon's fiscal deficit to widen to 7.9% of GDP in 2012 from 5.7% of GDP in 2011, as public spending will still rise, especially because of the Treasury's transfers to Electricité du Liban. It noted that its forecast is based on the assumption that the dispute over the spending bill will not limit the government's expenditures plans significantly. Also, it indicated that fiscal results improved in 2011 from stronger revenues and lower expenditures. It said revenues rose by 1% of GDP last year due exclusively to rising receipts from the telecommunications sector. But it noted that the inclusion of these receipts in the budget figures is controversial, given that the actual cash does not reach the ministry of finance until the end of the year, and only after certain deductions have been made.
In parallel, Citigroup said that some holders of Lebanese Eurobonds sold their holdings in the past two months. It considered that fears of spillovers of the Syrian crisis after the recent rise in violence in parts of the country, as well as the government's plan to issue $2bn in Eurobonds, may have caused the sell-off. It noted that the effect of these two factors is likely to subside in the coming weeks, which would lead to a reversal in the recent underperformance of the bonds.
Also, it did not anticipate the bond issuance to be the start of a borrowing cycle by the government. Further, it indicated that sovereign risks in Lebanon remain elevated, but noted that they have not deteriorated in recent weeks. It added that the risks are not fully reflected in the spreads on Lebanese sovereign bonds compared to other emerging markets with a similar credit risk profile. It attributed this trend to the strong liquidity in the domestic banking sector, which is the primary buyer of Lebanese Eurobonds.
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