Lebanon’s private sector deteriorates in May on fiscal uncertainty

Firms reported the sharpest fall in output for five months - Blominvest Bank

EPWHN2 Beirut, Lebanon

Conditions in Lebanon’s private sector economy deteriorated in May as company output dropped amid ever-slowing national growth, according to a survey.

The Blom Lebanon Purchasing Managers' Index (PMI) from Blominvest Bank, Lebanon's largest lender, with research firm IHS Markit, dipped to 46.3 in May, down from 46.7 in April. The latest reading pointed to a continued decline in operating conditions and one that accelerated slightly from April, when it dropped from 46.3 in March, the accompanying report from the bank said.

The PMI is a composite index of five measurements: new orders, output, employment, suppliers’ delivery times and stocks of purchases. Readings above 50 signal an improvement in business conditions on the previous month, while readings below 50 show a deterioration.

The deterioration in May was partly driven by the sharpest fall in output at private sector firms for five months, Blominvest Bank said. Survey respondents continued to cite a lack of political and economic stability, while new orders received by businesses in Lebanon also continued to decline in May, extending the current sequence of contraction to six years.

Demand conditions remained weak, amid challenging macroeconomic conditions across Lebanon.

“There is no doubt that the economy kicked off the year on a downturn with economic growth remaining in the range of 1.3-1.5 per cent,” said Marwan Mikhael, head of research at Blominvest Bank.

“Most of the indicators show a steep decline when compared to last year except for tourism where hotel occupancy rates in March recorded 79 per cent, never seen before, at least since 2007.”

Another positive development is the new Lebanese government’s approval of a draft budget that outlines planned reforms and is expected to help unlock $11 billion (Dh40.4bn) in loans and grants pledged by international donors at the Cedre conference in Paris last year, Mr Mikhael added.

“Hope is that this will gradually restore investors’ confidence and boost economic growth,” he said.

Lebanon’s economy has stalled as a result of internal political squabbling and an eight-year war in neighbouring Syria. Annual GDP growth rates have fallen to between 1 and 2 per cent, compared to 8 to 10 per cent in the pre-war years.

The country’s financial crisis was compounded by political wrangling amid a nine-month leadership void, until Lebanon finally formed a new government led by prime minister Saad Hariri on January 31 this year. Mr Hariri has said his government must deliver on promises to rein in public spending and overhaul the economy.

In its draft budget for 2019, Lebanon is aiming for a deficit reduction of 7.6 per cent of GDP in 2019, from 11.5 per cent last year. The budget still requires parliament’s ratification, which has in the past failed to endorse previous financial plans. There were more than 20 consultations in May as the cabinet attempted to finalise the draft, according to the PMI survey.

Recent economic uncertainty has compounded existing weaknesses in the private sector, Blominvest Bank said. The country’s debt burden stood at $86.2 billion in the first quarter of 2019, while the trade deficit widened by over 2 per cent year-on-year to exceed $4bn.

The tourism sector is one bright spot in Lebanon’s private sector economy, the survey added. The country recorded 1.3 per cent annual growth in airport passengers to reach 1.75 million in the first quarter. Annual upticks were also registered in Beirut’s average room rate and rooms yield, which climbed to $189 and $132 in the first quarter of the year, from $173 and $100 in the first quarter of 2018.