Lebanon should consider a voluntary debt restructuring to avert a financial crisis amid pledges of aid from the Gulf, according to Franklin Templeton Investments, which manages $650bn in assets worldwide.
A debt overhaul needs to be part of a reform programme backed by lenders such as the International Monetary Fund, said Mohieddine Kronfol, the firm’s chief investment officer for global sukuk and Middle East and North Africa fixed income, in an interview.
“My biggest worry is that the runway is getting shorter,” Kronfol said. “The medium-term challenges and the need to create fiscal space through a voluntary debt restructuring or re-profiling remain, as does a multi-lateral backstop to provide credibility for an inevitable structural reform agenda.”
Kronfol said it would be only “sensible” for authorities to consider a plan to buy short-dated debt and “re-issue discounted securities for longer tenors,” helping slash interest payments. The move should come as part of a comprehensive plan that addresses issues such as tackling the public-sector wage bill, overhauling the electricity sector and curbing corruption, he said.
“When you think about the solution for the country, clearly you’re going to need some breathing room to address structural reform,” Kronfol said. “Key among this is to reduce the interest burden. So if Lebanon were to enter into some sort of an agreement with the IMF, or some multilateral institutions or a collection of countries – that allows it to basically buy some time.”
Despite an unblemished record of bond repayment through war and political strife, Lebanon is coming to a reckoning with years of fiscal overreach. Still run by a caretaker government eight months after elections, the nation’s political discord has deepened with the crisis in neighbouring Syria.
Government debt is projected to rise to near 180% by 2023, second only to Japan’s, according to IMF estimates. Lebanon’s debt risk, measured by credit default swaps, has risen the most in the world over the past year, apart from Zambia and Argentina, according to data compiled by Bloomberg.
Lebanon’s dollar-denominated bonds due in 2028 are a case in point.
The securities rallied last week after the aid pledges. But the yield, at just above 10%, is still about 300 basis points higher than at the start of November 2017, when the surprise resignation of Prime Minister Saad al-Hariri triggered a political crisis.
Following Hariri’s brief resignation, local lenders raised interest rates to attract funds and have started to impose what Kronfol describes as “soft capital controls” to stem the outflow of deposits.
“This is not being disclosed but there are now numerous examples where people are finding it challenging to convert Lebanese pounds into dollars or to transfer dollars out of the country,” he said.
Central bank officials weren’t immediately available to comment.
In recent remarks carried by local media, governor Riad Salameh said local banks have enough liquidity to cover demands by 80% of depositors to convert their money into US dollars. The central bank is meeting lenders’ need for dollars, according to Salameh, a former Merrill Lynch banker who was appointed to the post in 1993.
The current predicament is one of the toughest tests facing the political system governing Lebanon since the end of the 1975-1990 civil war. The challenges are probably beyond what the existing political framework can address, Kronfol said. The central bank, regularly praised by investors for keeping the currency stable, is partly responsible, he said.
A money exchange vendor displays Lebanese pound banknotes at his shop in Beirut (file). Government debt is projected to rise to near 180% by 2023, second only to Japan’s, according to IMF estimates.
