Lebanon sees $3bn in capital flight as Mena flows set to rise

Mena capital flows are expected to rise to $200bn this year, IIF says

Lebanon is facing capital outflows as economy deteriorates and popular anti-government protests continue. Getty Images

Lebanon saw an outflow of capital estimated at about $3 billion (Dh11bn) in the first nine months of the year, due to its deteriorating economic climate and heightened political tensions, according to the Institute of International Finance. It also forecasts that the Middle East and North Africa will attract 21 per cent more in capital flows this year, compared with 2018.

Capital inflows to Lebanon, largely in the form of foreign direct investment and non-resident deposits, have slowed sharply in the past 18 months, leading to a significant decline in official reserves and the emergence of a black market, Garbis Iradian, IIF’s Mena chief economist and colleagues wrote in a report released on Monday.

With protests continuing since October 17 amid the authorities’ failure to agree on durable fiscal measures and structural reforms, yields on 10-year dollar-denominated sovereign bonds of Lebanon have increased further to around 19 per cent.

“Dollarisation of deposits has increased to around 80 per cent, and capital flight in the first nine months of this year is estimated at about $3bn [equivalent to 5 per cent of GDP]”, Mr Iradian said. “Prospects for recovery of non-resident capital inflows hinge on achieving political stability (formation of a new government) and implementation of deep reforms, which would support confidence both at home and abroad”. Lebanese banks resumed operations on Friday after being closed for two weeks due to nationwide protests seeking reforms and changes in the governance of the country.

The Mena region is set to attract as much as $200bn in capital inflows by the end of this year from $165bn in 2018, mainly driven by global benchmark index upgrades in Kuwait and Saudi Arabia, which have bucked the trend in other emerging markets, where capital flow dynamics have been significantly affected by global monetary easing and trade tensions,

Capital inflows are expected to moderate to $173bn in 2020, however, with the ongoing economic reforms in the region and inclusions into global equities benchmark for regional indexes, the Mena region “is taking a more prominent place on the emerging market investment map”, Mr Iradian said.

Within the Mena region, capital inflows to Saudi Arabia, the biggest Arab economy, are expected to reach a record $57bn this year, as investors buy into the kingdom’s equities market after its inclusion in the MSCI Emerging Market Index earlier this year. Going forward, IIF expects equity inflows to dissipate somewhat but remain sizable.

“From the perspective of debt flows, declining interest rates and large fiscal financing needs in the context of lower oil prices will keep Eurobond issuance at high levels,” it said.

The total foreign portfolio inflows for the oil exporting nations in Mena are projected to rise significantly to $157bn this year from $115bn in 2018 and taper to $133bn in 2020.

In contrast to oil exporters, capital flows to Mena oil importers are projected to decline to $43bn in 2019 from $50bn last year and $40bn in 2020, IIF said. While twin deficits and challenging political environments appear as common themes, the ability of individual countries to handle these challenges and attract foreign capital differs considerably, it said.

“With the IMF programme ending in November, a narrowing fiscal deficit, and comfortable levels of official reserves, Egypt’s financing needs are diminishing, leading to lower borrowing and thus a decline in capital inflows,” IIF said.

The UAE remains the region’s largest FDI recipient with inflows of $10.4bn in 2018, which was equivalent to 2.5 per cent of GDP, according to the IIF.

FDI, particularly greenfield investment projects, in the GCC could increase significantly in the coming years. However, the rise in FDI hinges on continued reforms, improving business environment and de-escalation of geopolitical tensions, the IIF said.