GROUP RESEARCH - September 16, 2019

THE LEBANESE ECONOMY: A READING INTO RECENT FACTS AND FIGURES

A number of positive signals that emanated over the past few weeks could have a material impact on Lebanon’s risk profile,
notably at the level of tourism, foreign trade, monetary, banking and fiscal conditions, thus helping somehow to offset Lebanon’s
persistent imbalances:

Tourism: 12% increase in touristic spending this year

The first positive development this year is at the level of the flourishing touristic
performance, with a 12% rise in touristic spending over the first half of this year,
raising hotel occupancy by 9.2% on the back of a 70% growth in GCC tourists
(following removal of the Saudi ban) from a low 2018 base and a 10% rise in
European tourists. So this year started with higher quality tourism with a positive
impact on inflow and spending. And this before the summer season, which looks
increasingly promising in terms of hotel and plane reservations.

Exports: 12% growth in exports driven by land exports

In parallel, exports, the other source of foreign currency receipts, rose by 12.1%
over the first 6 months of this year, driven by the opening of land routes in Syria
within the context of improving security conditions there. While the Syrian war
had led to a 30% contraction in Lebanese exports since 2011 because of a quasi-
absence of land exports (through Syria), exports are on the rise again this year
and are likely to continue their rise looking forward. It is worth mentioning that
land exports through Syria doubled over the first half period moving from US$ 82
million last year to US$ 160 million this year.

Monetary: BDL FX reserves back on the rise in July to restore the US$ 39
billion threshold
At the monetary level, BDL is seeing its FX reserves rising again. They rose by US$
700 million in July and by US$ 1.6 billion in August to reverse the contractionary
trend that was prevailing at the beginning of the year. They are back to US$ 38.7
billion end-August, covering 23 months of imports and 79% of the Lebanese
Pound Money Supply, against 41% for similarly rated countries, suggesting a
noticeable support to the currency peg.

Banking: Deposits renew with positive growth in June and July

Deposits renewed with positive growth in June and July. They grew by US$ 1.5
billion, almost equally broken down between residents and non-residents. In
parallel, Lebanese banks maintain good financial standing at the level of liquidity,
capital adequacy, asset quality and profitability.

Fiscal: Deficit down by 20% over the first 6 months despite economic
growth sluggishness
The year 2019 seems to have started with a noticeable improvement in Lebanon’s
public finance conditions as per the figures released by the Ministry of Finance for
the first six months of the year. The just released figures showed a net decline in
public finance deficit by 20.3% compared to the first six months of 2018 to reach
circa US$ 2.4 billion (against US$ 3.0 billion during the same period of 2018), due to
a tangible contraction in public expenditures by 9% coupled with a lower decline
in revenues by 3%. The contraction in spending is tied to the strict austerity
measures efforts on behalf of policy makers ahead of the Budget ratification.
The drop in revenues is tied to the slowdown of the domestic economy amid a
sluggish economic growth.

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For enquiries, contact Dr. Marwan Barakat, Group Chief Economist & Head of Research. Phone +961 1 977409 - Email marwan.barakat@bankaudi.com.lb
 GROUP RESEARCH
APRIL- September
18 - APRIL 24,
16,2016
2019

Budget 2019: Parliament ratifies an austere budget with a 7.6% deficit to GDP ratio
The Parliament has ratified a budget for the year 2019 with a 7.6% deficit to GDP ratio, down from an 11% ratio actually registered
in 2018. The savings between actual figures of 2018 and budgeted figures of 2019 revolve around a cut of US$ 1.7 billion in
deficit, moving from US$ 6.2 billion to US$ 4.5 billion. Of these, US$ 600 million would come from the cut in spending and US$
1.1 billion would come from the rise in revenues, driven by new taxes along with a relative improvement in collection. In parallel,
the significant deficit reduction actually realised over the first six months of 2019 increases the ability of the Government abiding
by its austere budget target for the year.

Budget 2020: A reforming budget in the pipeline

The Ministry of Finance has started the 2020 budget process, with an aim for it to be a reforming budget and to be ratified before
year-end. Our standpoint is that despite the persisting imbalances that are quite significant in Lebanon, mainly at the level of
the external and fiscal sectors, we believe that exits still exist and softlanding is still plausible if tough choices and measures are
implemented, the preliminary signs of which appeared in the 2019 budget and the electricity sector reform plan. Once reforms
are adequately implemented, Lebanon can subsequently move into an era of gradual containment of risks and threats as a
prerequisite for economic recovery in the medium to long term.
Energy sector: Ambitious reforming and upgrading plan
approved by Cabinet and Parliament
The State has approved a reforming plan for EDL, with the aim
for the company to have a balanced position by 2023 from a US$
1.8 billion deficit this year. The plan targets a gradual reduction
in technical and non-technical losses that are estimated at 17%
and 21% today respectively, an increase in power generation
by 1.3 GW and a corollary increase in electricity tariffs from 9.5
cents/KWH to 14.4 cents per KWH. Subsequently, the net impact
of the plan on the government budget deficit over the next 4
years would be a reduction in deficit to GDP by 3% over the
period. In parallel, the first results of the oil/gas exploration by
the consortium Total/Eni/Novatek should materialize by the first
quarter of 2020 a couple of months after the start of the drilling
expected this December.
IMF and World Bank: 2019 budget and electricity sector plan are very welcome first steps for sustainability and growth
In a recent Article IV concluding statement, the IMF said that the authorities have already passed a crucial plan to reform the
electricity sector and worked on a budget that will reduce the fiscal deficit. IMF states that these are very welcome first steps on a
long road towards sustainability and growth that will have to involve further substantial fiscal adjustment and structural reforms
to improve Lebanon’s business environment and governance. The World Bank said that Lebanon’s reforms are on a sound path,
especially when it comes to the budget or to the electricity reform plan, but they said reforms are continuous, so the World Bank
hopes reforms would continue at the same pace looking forward.
Governance framework: Improved governance factor, despite persistent domestic political bickering
Finally, what makes us believe that the likelihood of reforms is now higher than in the recent past is that, despite challenges
related to persistent domestic political bickering, the governance factor has noticeably improved lately as all State institutions
are functional. Indeed, there is no more vacancy at the level of the Presidency, there is a Cabinet of national unity in place, there
is a newly elected Parliament that is effectively legislating, there is a Budget Law regularizing the State’s accounts after 12 years
of no budget, and the term of the Central Bank Governor has been renewed. Such a governance framework augurs well for the
enactment of long awaited reforms, especially that there is increased awareness on behalf of all clusters of policy makers on the
imminent need to move into that direction for Lebanon to avoid the bitter cup at the horizon.
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guarantee as to its accuracy or completeness.
Week 17 April 18 - April 24, 2016 2
For enquiries, contact Dr. Marwan Barakat, Group Chief Economist & Head of Research. Phone +961 1 977409 - Email marwan.barakat@bankaudi.com.lb