Sunday, January 23, 2011

Lebanon's $18,000,000,000 Question

Whoever becomes Prime Minister and Finance Minister in Lebanon in the next government will face the same challenge that every previous Cabinet faced: how do you manage Lebanon's debt? The answer depends to a large extent on the degree of confidence they can instil in the markets.

The chart below shows the maturity profile of Lebanon's debt obligations. Most of Lebanon's debt is due within the next 24 months, of which $18 billion is due this year. Before anyone starts pointing fingers and blaming anyone, you should recall that this maturity profile is NOT unusual. Brazil, Turkey and other successful developing countries have similar maturity profiles. This is because countries without a long history of economic or political stability cannot issue long-term debt easily, unless they are prepared to pay very high interest rates.

Importantly, most of Lebanon's debt is not owed to any foreign government or entity. Most of this debt (85%) is owned locally.  Under the circumstances, the success or failure of Lebanon's economy and currency hinges to a large extent on the ability of the government to maintain the confidence of Lebanese citizens who have - either directly or indirectly - financed this borrowing.  Hariri and his team were able to instil this confidence. Can Hizbollah and their allies do the same?

The maturity profile of Lebanon's debt can lead to self-fullfilling virtuous or vicious cycles very quickly.  As long as there is confidence in the system, the government will be able to roll-over the debt at reasonable interest rates.  If confidence is shaken, interest rates will rise. Refinancing debt at higher interest rates will send the debt dynamics on an explosive path.

Who is in a position to help Lebanon with emergency financing if there is a shock to confidence? We have seen the international community deliver generously during previous crises. But will they deliver to an Iranian-Syrian backed government, whose raison d'être is to flaunt UN resolutions? Assistance cannot come from cash-strapped Syria or an Iran reeling under international economic sanctions.

I am not suggesting that Lebanon will necessarily have an economic crisis. This is because most of the debt is owned locally and the Central Bank has a healthy reserve cushion. But a Hizbollah-inspired government will have to try harder than a Hariri-led government to instil the confidence needed. This is in part because they have no track record in government, and in part because their past pronouncements on economic issues are reckless, especially those of the Aoun-clan.  All of this means that Aoun and his prodigies, like Gibran Bassil and the economist manqué Charbel Nahhas, need to have their mouths shut for a while. A few misplaced words of their wisdom can send the country to hell.

Now is the time for March 8 to move beyond their usual "it's a Zionist conspiracy" fetish and come up with a coherent outline of their economic plans and priorities. The country needs to see this very very very soon.

1 comment:

  1. Khay! Finally somebody raises important questions about the financial situation of the country.

    Thanks for pointing that out. Now, which politician has an actual economically based plan?