BEIRUT (Reuters) – Financial strains in Lebanon have been brought into focus by turbulence on markets where its dollar-denominated sovereign bonds suffered a heavy sell-off last week following comments by the finance minister about the public debt.
But the episode has added to debate about Lebanon’s debt sustainability after warnings from politicians, the IMF and World Bank over economic and financial conditions in a country that has suffered years of low economic growth.
Lebanon has one of the world’s biggest public debts compared to the size of its economy, largely generated through servicing existing debt and high state spending.
The World Bank has estimated that financial transfers to the state-owned power producer alone averaged 3.8 percent of GDP from 2008 to 2017.
“At the heart of concerns is the recent slowdown in remittance/deposit inflows, which have traditionally funded a large part (if not all) of Lebanon’s financing requirement,” Goldman Sachs said in a Dec. 3 analysis.
Central bank governor Riad Salameh said last month the banking sector was capable of financing the state’s foreign and domestic debt in 2019.
Often in the absence of effective government, the central bank has maintained stability using stimulus packages and unorthodox financial operations, made possible by large diaspora deposits into the banks.
But since 2016, the slowdown in non-resident inflows prompted the central bank to embark on “financial engineering” to draw more dollars to its reserves.
But the World Bank’s October report noted some central bank tools were becoming less effective and that Lebanon’s risk profile was rising sharply.
The power wielded by the Iran-backed Lebanese Shi’ite group Hezbollah is at the heart of tension between Lebanon and Gulf states such as Saudi Arabia that once supported Beirut but have turned their attention elsewhere in recent years.
Goldman Sachs noted that one cause of the slowdown in remittance and deposit growth was “the perceived reduced likelihood of external support in light of heightened tensions between Lebanon and the oil-rich Gulf countries”.
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