Lebanon's private sector economy continued to struggle in September

Business conditions deteriorated last month at the fastest rate since June, according to new survey

A protester makes a victory sign. Lebanese citizens have been protesting about the country's economic crisis which has worsened over the past two weeks. AP Photo

Lebanon’s private sector economy continued to struggle in September, with the sharpest deterioration in business conditions since June, weighed down by political and economic turmoil that has affected the country credit ratings.

The Blom Purchasing Managers’ Index, a gauge designed to give an overview of the health of the country’s private sector economy, recorded a headline rate of 46.4 last month from 47.8 in August, staying well below the 50-mark that separates contraction from growth.

A key factor behind the faster decline in operating conditions was an accelerated contraction in overall output during September, with many survey participants citing political instability when explaining lower business activity.

New orders placed with private sector firms in Lebanon also continued to decrease at the start of the third quarter. The rate of deterioration quickened from August to reach the strongest since June. The decline was in part driven by another reduction in new export business, the survey noted.

International sales have now fallen in each month since August 2015. The rate of decline accelerated to the fastest in six months but it was moderate overall.

“Despite the renewed political willpower to reform and the plan to drive GCC investments into the country’s infrastructure, reports by Fitch Ratings among others this month downgraded Lebanon to “CCC” from “B-”, which also reflects the new rating of Lebanese banks,” Rouba Chbeir, a senior economist at Bliminvest Bank, said.  “As a result, economic growth faltered and is expected to have registered zero to 0.5 per cent in the first nine months of the year.”

The statements by international rating agencies weighed down on investor confidence, which is now key to drive back foreign exchange inflows into the economy, said Ms Chbeir. She added that Lebanon must implement structural reforms and reduce its fiscal deficit to unlock funds committed by friendly nations at the CEDRE international donor conference in Paris last year and restore confidence in the country’s economy.

Moody's Investors Service earlier this week put Lebanon's Caa1 rating under review for a downgrade within three months, as the public took to the streets, demanding banks remove curbs that have restricted foreign currency withdrawals.

Moody's downgraded Lebanon to junk status or non-investment grade in January. Lebanon has traditionally relied on capital flows from its citizens working abroad in the Gulf, Europe and the US. Banks have historically offered high interest rates on Lebanese bank deposits and on fixed-term dollars deposits. The capital inflows allowed the country to escape unscathed from the 2008 financial crisis as it received on average $1 billion (Dh3.67bn) a month that helped it meet financing needs, which today are estimated at over 30 per cent of gross domestic product.

However, the outbreak of war in neighbouring Syria in 2011 and the influx of a million refugees crimped growth which exacerbated existing structural imbalances in Lebanon’s economy. Starting May 2019, year-on-year deposit growth has turned negative, according to Moody’s.

The country received pledges for $11bn at the CEDRE event last year that were tied to the government implementing structural reforms and reining in spending. However, none of those funds came through due to lack of implementation of the required reforms.