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Lebanon Economic Report LEBANON ECONOMIC REPORT 2ND QUARTER 2021 TABLE OF CONTENTS STABILIZING MONETARY CONDITIONS STILL POSSIBLE, IN THE CONDITION OF RESTORED POLITICAL CONFIDENCE AND THOROUGH ECONOMIC MANAGEMENT Executive Summary 1 Economy contracting further in the first half-year Almost all sectors have witnessed a further contraction in the first half of 2021 relative to the 2020 period, Introduction 2 amid domestic political bickering, rising macroeconomic uncertainties and ascending monetary fears. The BDL average coincident indicator, a weighted average of a number of real sector indicators, reported a Economic Conditions 3 contraction of 44.1% in the first two months of 2021 relative to the same period of 2020. The Tourism and real estate sectors seem to be the only sectors regaining some strength this year amid cheap domestic prices and global travel opening up, with property sales and passengers at the airport up by double-digits this year. Real Sector 3 Net financial inflows down coupled with a rise in trade deficit External Sector 5 According to the latest figures for foreign trade, imports reported US$ 1,949 million in the first two months of 2021, contracting by 7.5% relative to same period of 2020, while exports reported US$ 384 million in the first two months of year 2021, dropping by 43.0% year-on-year. As such, Lebanon’s Public Sector 7 trade deficit recorded US$ 1,565 million, up by 9.3% relative to the same period last year. In parallel, a decline in net financial inflows by 11.9% was observed between the two periods, moving from US$ Financial Sector 8 924 million to US$ 814 million. Significant retreat in fiscal deficit in absolute and relative terms Concluding Remarks 11 While no public finance figures are yet available for the year 2021, the just released fiscal statistics for end-2020 suggest Lebanon has reported important savings in fiscal deficit in the past year amid a drastic decline in debt servicing following the State’s default on its foreign currency debt on one hand and some austerity efforts on the other hand. Public finance deficit decreased from LL 8,799 billion in 2019 to LL 4,083 billion in 2020, a contraction of 53.6%. As a percentage of expenditures, public finance deficit moved from 34.5% in 2019 to 21.0% in 2020. As a percentage of GDP, fiscal deficit contracted from 9.7% to 3.7%. CONTACTS Narrowing banking activity contraction, rising deposit dollarization and contracting loan dollarization: The first half of 2021 was marked by a continuing contraction in activity this year, though less Research significant than that of the corresponding period of last year Assets contracted by US$ 7.0 billion in the 2021 year-to-June period, against a contraction of US$ 15.7 billion over the same period of 2020. Marwan Barakat A lower deposit contraction was reported this year amid stricter restrictions on withdrawals, mark ups (961-1) 977409 and less loan redemption. In parallel, a rising deposit dollarization was registered to a 28-year high [email protected] along with contracting loan dollarization to a 34-year low. LL and US$ deposit interest rates reached new historical lows in June. Finally, shareholders equity contracted amid net banking losses tied to Salma Saad Baba significant provisioning requirements facing Lebanese banks covering both sovereign and private (961-1) 977346 sector risks at large. [email protected] Strong equity price rebounds year-to-date, bond prices at new record lows Farah N. Nahlawi Lebanon’s equity market bounced back during the first half of 2021, registering strong price gains (961-1) 959747 on hedging activity against crisis, while Lebanese Eurobonds pursued their downward trajectory [email protected] amid lingering domestic political uncertainties and prospects of long-delayed discussions with international financial institutions and bondholders. In details, Lebanon’s equity market registered Zeina M. Labban strong price rebounds during the first half of 2021, as reflected by a 29.8% surge in the BSE price index, (961-1) 952426 following an 8.9% contraction in 2020, as market players sought to add Lebanese equities to their [email protected] holdings to hedge against potential financial losses. Michele Sakha A new wave of currency volatility amid fundamental and psychological factors (961-1) 977102 The year 2021 has witnessed erratic fluctuations of the Lebanese Pound exchange rate on the black [email protected] market. The depreciation of the exchange rate of the Lebanese Pound is the result of a combination of psychological factors related to domestic political confidence and fundamental factors related to the demand and supply of Lebanese Pounds and US dollars on the market (Drop in dollar inflows, LL money creation, non-subsidized imports, etc). Subsequently, the year-on-year Consumer Price Index has surged by 143% in June 2021 compared to results of June 2020 as per the Consultation and Research Institute. BDL FX reserves contracted by US$ 3.5 billion in the first half of 2021 amid FX market intervention and import financing for basic products. 3rd Quarter 2019 1 2nd Quarter 2021 1 Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: [email protected] 2NDECONOMICS QUARTER 2021 LEBANON The first half of 2021 was marked by a volatility in the Pandemic, with the first quarter reporting a rise in COVID cases in Lebanon generating consecutive lockdowns, while the second quarter reported a sharp decline in cases and deaths, leading to a number of countries removing their travel bans with Lebanon. The third quarter yet started with a resurgence again in the number of cases amid the emergence of new Corona strains worldwide, while vaccination exceeded so far 12% of Lebanon’s population. The analysis of major macroeconomic aggregates this year suggest that private consumption has been adversely impacted by overall economic concerns, in addition to the adverse impact of the Coronavirus Pandemic on the consumption behavior. Private investment got a significant hit amid lack of economic appetite and growing concerns on the politico-economic outlook of the country at large. Almost all sectors have witnessed a further contraction in the first half of 2021 relative to the 2020 period, amid domestic political bickering, rising macroeconomic uncertainties and ascending monetary fears. The tourism and real estate sectors seem to be the only sectors regaining some strength this year amid cheap domestic prices and global travel opening up, with property sales and passengers at the airport up by double-digits this year. The evolution of real sector indicators this year is actually a mirror image of a sluggish economy. The BDL average coincident indicator, a weighted average of a number of real sector indicators, reported a contraction of 44.1% in the first two months of 2021 relative to the same period of 2020. Among indicators with negative growth over the first half of this year, we mention new car sales with a decline of 49.1%, cement deliveries with a decline of 33.3% and the value of cleared checks with a drop of 22.1%. The indicators with positive growth were construction permits with a surge of 326.6%, the number of passengers at the Airport with a rise of 18.7% year-on-year, the value of property sales with an increase of 9.6% year-on-year, and the merchandise at the Port with a rise of 7.4%. At the monetary level, the year-on-year Consumer Price Index has surged by 143% in June 2021 compared to results of June 2020 as per the Consultation and Research Institute. BDL FX reserves contracted by US$ 3.5 billion in the first half of 2021 amid FX market intervention, and import financing for basic products. In parallel, Parliament approved law to distribute prepaid cards valued at a yearly total of US$ 556 million, an average of US$ 93 per household per month for 500 thousand eligible households, parallel to potential subsidy rationalization. Banking sector statistics for the first half of 2021 suggest a continuing contraction in activity this year, though much less significant than that of the corresponding period of last year. In fact, measured by the aggregated assets of operating banks in Lebanon, banking activity contracted by US$ 7.0 billion in the 2021 year-to-June period (the equivalent of -3.7%), against a contraction of US$ 15.7 billion over the same period of 2020 (the equivalent of -7.2%). Banks’ shareholder equity amounted to US$ 16.4 billion at end-June 2021, against US$ 19.9 billion at end-2020 and US$ 20.7 billion at end-2019. The contraction in shareholders’ equity is tied to the accumulation of bank losses, despite cost control efforts, amid significant provisioning requirements facing Lebanese banks covering both sovereign and private sector risks at large. At the capital markets level, equity markets did not mirror the economic sluggishness of the first half year. The BSE price index reported an expansion of 30% in the first half of the year driven mainly by the improvement in Solidere prices which rose by 35% over the period, amid the investor tendency to avoid haircuts on their financial placements. This occurred within the context of a 57.4% annual increase in trading volume year-on-year, moving from US$ 119 million in the first half of 2020 to US$ 188 million in the first half of 2021. The developments in the real sector, external sector, public sector and financial sector for the first half of the year 2021 will be analyzed thereafter while the concluding remarks are left to an assessment of the monetary conditions, the reasons for LL depreciation and the monetary challenges looking forward.
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