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A closer look: can the newly appointed Prime Minister of Lebanon save the economy?

UNITED STATES (OBSERVATORY NEWS) — Two months after a political crisis erupted, Lebanon recently mandated a new prime minister to form a government.

Designated Lebanese Prime Minister Hassan Diab news
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Now it is the turn of the hard part: to save Lebanon from an unprecedented financial crisis.

The prime minister-designate, with the support of Hezbollah and its allies, Hassan Diab and the cabinet, whose pledge to form quickly, must win the support of international investors and donors.

What are the most prominent investor fears at a time when Lebanon is grappling with a scarcity of foreign exchange and a huge public debt and a weakening currency?

What are the chances of default or restructuring of debt?

Lebanon’s public debt burden, which is equivalent to about 150 percent of gross domestic product, and the current and current deficits and fiscal deficits it seems unsustainable even by the anti-government protests that took to the streets two months ago.

Lebanon will face a test of its ability to meet its commitments in 2020 with debts of $ 10.9 billion due throughout the year, including international bonds of $ 1.2 billion due in March, according to Refinitiv’s data.

International sovereign bonds are still traded with less than half of their face value, while credit risk swap contracts have risen sharply, indicating that Lebanon may be on its way to slipping towards default.

But that may not be inevitable.

“A combination of financial reforms and internal debt restructuring may be sufficient to put public finances on a sustainable basis without the need to head to default on repayment of external debt,” Farouk Sousse, economist at Goldman Sachs said in a note this week.

Even with a debt default, Lebanon may be able to mitigate the consequences.

Moody’s said in a note that central bank holdings of government securities indicate that Lebanon has options for debt management in the near term that could limit private sector losses in the event of default.

Is devaluation inevitable?

The deteriorating status of the peg to the US dollar, which has been in effect in Lebanon for 22 years, is close to the point of collapse due to the political and banking crisis in the country.

With the lira losing almost a third of its official value on the black market, a devaluation is increasingly on the horizon.

The Governor of the Central Bank of Lebanon, Riad Salameh, ruled out any such move, saying that the government has the means to preserve it.

But the ability of the central bank to maintain the peg will diminish without reviving the capital flows that are declining and recovering Lebanon’s external balance.

According to Goldman Sachs, foreign exchange reserves have shrunk to $ 28 billion.

Economists say that the devaluation may be harmful in the short term at least, as it will raise Lebanon’s already very high external liabilities, thereby expediting the risk of default on debt repayment. It is also likely to fuel the fire of inflation, which hit 1.3 percent year-on-year in October.

How can the banking system be revived?

For a long time, banks remained an important pillar to keep Lebanon’s economy moving.

By receiving deposits from millions of Lebanese abroad and buying into the local government’s debt, the banks helped to support the state’s finances. But that system collapsed in light of the scarcity of foreign deposits, with a collapse of confidence in the banking system.

Deposits of non-residents in the banking sector declined 5.2 percent year on year in October, while Lebanon faces a shortage of foreign exchange, causing restrictions on the access of Lebanese at home and abroad to their money in banks.

“Restoring confidence in the banking system must include restoring confidence in the political management of the system,” said Walid Alamuddin, the former head of the Banking Control Commission in Lebanon, who was one of the names nominated for prime minister.

This is the ‘financial shift’ that thousands demand on the streets of Lebanon.

Alam al-Din warned that the depreciation of the deposits would be “counter-productive”. Instead, the state must guarantee bank deposits to help restore confidence.

What about foreign financial support?

Lebanon is steeped in recession and its recovery is still largely dependent on Diab’s ability to form a new government and adopt the necessary reforms to ensure financial support from abroad.

Lebanon won pledges of more than $ 11 billion at an international conference last year conditional on reforms it has so far failed to implement.

Obtaining more support appears uncertain given Diab’s support from Iran-backed Hezbollah and its allies.

Saudi Arabia and the UAE, which had provided financial aid to Lebanon in the past, seemed more conservative during the recent crisis, and may even have less desire to provide funds in the presence of Diab in power.

On the other hand, Lebanon may shift its view towards Qatar, whose Gulf neighbors accuse it of getting closer to Iran. Qatari Finance Minister Ali Al-Emadi said this week that Qatar would stand by Lebanon during its economic crisis.

Saad Hariri, head of the caretaker government in Lebanon, was discussing ways to obtain technical assistance from the International Monetary Fund and the World Bank.

But it is unclear whether Diab will follow this path, while some observers warn that the United States, the largest financial backer of both institutions, may oppose any deal because of the role of Hezbollah and its allies in choosing Diab. Washington regards Hezbollah as a terrorist group.

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