IMF Survey: Resilient Lebanon Defies Odds In Face of Global Crisis

IMF News, August 11, 2009

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Canonical URL: IMF Survey: Resilient Lebanon Defies Odds In Face of Global Crisis

Authors: Harald Finger, Carlo Sdralevich IMF Middle East, Central Asia Department August
Published: August 11, 2009

In mid-2008 Lebanon seemed a prime candidate for a textbook emerging market financial crisis, but by 2009 the Lebanese economy could grow substantially faster than a recent conservative projection of 4 percent.
The country has repeatedly defied severe shocks in recent years, including events in 2005, 2006, 2007–08, and May 2008.

Government debt-to-GDP ratio reported at 160 percent of GDP.
Lebanese banks hold the lion’s share of the government’s debt, increasing exposure supported by:
- Remarkably stable deposit inflows, mostly from the Lebanese diaspora and foreign investors (typically from the Persian Gulf).
- High returns enabled by banks’ portfolio of high-yielding Lebanese government bonds.
- Lebanon’s excellent debt service record of no default, even during the civil war of 1975–90.
Specific indicators of resilience:
- Deposit inflows growing at nearly 20 percent annually.
- Central bank international reserves up 60 percent within a year to the equivalent of almost 70 percent of GDP.
Crisis episode detail:
- Lebanese Eurobond spreads briefly rose to above 1,200 basis points in October 2008.

Banks’ large liquidity buffers allowed them to hold government debt during episodes of deposit withdrawals, averting a full-blown debt crisis.
The structural bank–government relationship acts both as a vulnerability (high exposure) and a short-term stabilizer (financing buffer), softening confidence losses compared with typical emerging market debt crises.

Two additional favorable factors during the global crisis:
- A sustained improvement in domestic security conditions following the Doha-brokered peace agreement after May 2008 street fighting, enabling parliament to reconvene and a new government to form.
- Lebanon’s small export base at 17 percent of GDP, limiting the impact of the slump in global demand on growth.
Other relevant developments:
- Tourism industry quick recovery as Arab visitors return despite lower crude oil prices.
- Remittances affected by the global downturn, but negative effects small as relatively few expatriates were laid off and returned home from the Gulf.
- Bank deposits continued to grow due to attractive interest rates and an improved perception of Lebanese banks relative to Western competitors since the Lehman failure.

IMF engagement:
- The IMF maintained close policy dialogue, providing policy advice and technical assistance tailored to Lebanon’s needs.
- Following the 2006 war, the IMF became part of a concerted international effort to provide financial assistance.
Emergency Post-Conflict Assistance (EPCA) provided:
- About $37.6 million in EPCA to Lebanon in support of the authorities' economic program for 2008–09.
- An additional $76.7 million in EPCA provided in 2007.
Lebanon’s IMF-supported program objectives include:
- Further reduction of the government debt-to-GDP ratio.
- Building up the international reserve buffer.
- Implementing key reforms.

Top priority: decisive reduction of public debt.
- Requires many years of sustained fiscal discipline.
- Fixing the electricity sector identified as a perennial drain on the budget.
Maintaining the currency peg:
- Will be made easier over time by lower fiscal deficits and public debt.
Financial stability and banking-sector health:
- Safeguard the health of the large banking sector through particularly rigorous supervision to minimize shocks from banks’ portfolios and potential propagation to public debt.

IMF Survey: Resilient Lebanon Defies Odds In Face of Global Crisis