Lebanon to maintain dollar peg as it reassures investors by securing $1.4bn in deposits

Fitch slashed the country's credit rating deeper into junk territory last week

Lebanon's Central Bank Governor Riad Salameh speaks to a reporter during an interview with AFP at his office in Beirut on December 15, 2017. (Photo by JOSEPH EID / AFP)

Lebanon looks to preserve its two-decade long peg to the dollar even after it secured $1.4 billion in five-year deposits from private, non-resident investors, according to its central bank governor.

“Contrary to what is being said, the supply of dollars is ample in the market,” said Riad Salameh in an interview with Bloomberg TV.

“Today, the central bank has closed deals of deposits with private, non-resident institutions, whereby in the second half of August our reserves went up by $1.4bn to reach $38.6bn. This is private non-resident money and not government money," he added.

Lebanon, one of the world's most indebted nations maintains its pound to a peg of around 1,507.5 to the dollar. The governor's comments will reassure investors about the country's ability to repay its debt and strengthen its currency. Last week, Lebanon's credit rating was slashed deeper into junk status by Fitch Ratings over concerns the country's inflows of cash from abroad had diminished.

The downgrade was the first in three years from Fitch for Lebanon, placing the country two notches below CCC. Ratings agency S&P also knocked Lebanon six stages below investment grade to B-, placing it just one grade above Moody's Investors Service.

“The downgrade reflects intensifying pressure on Lebanon’s financing model, increasing risks to the government’s debt-servicing capacity," Fitch said at the time.

“While recent policy steps point to nascent fiscal adjustment, a credible medium-term plan to stabilise government debt/GDP is lacking," the ratings agency added.

Lebanon leans on its diaspora to keep its bank coffers full, in what it has described as 'financial engineering', which ensures a steady flow of foreign currency.

Mr Salameh described the efforts to secure deposits as "a new approach", that is likely to assuage concerns of investors who worry about the slow pace of the country's reforms, which are critical to unlocking an $11bn pledge by donors towards reconstruction efforts in the country.

Last year, Lebanon secured commitments from international donors at a conference in Paris mainly to fund infrastructure projects. The pledges were linked to reforms, which include lowering the fiscal deficit by 1 percentage point annually over five years among other measures. Lebanon has struggled to control public finances as a result of ballooning public debt, anaemic economic growth and the strain from hosting over a million Syrian refugees. Political bickering delayed the formation of a new government, further fuelling economic uncertainty.

Mr Salameh also reassured investors in his interview with Bloomberg that the country had provisioned $1.5bn in cash ahead of the maturity of its Eurobond in November. The yield on the Eurobond maturing in 2021 had come under pressure, climbing to more than 19 per cent for the first time ahead of the review by the ratings agencies.

According to the International Monetary Fund, Lebanon's public debt burden has no sign of a let-up and is likely to rise further to near 180 per cent of gross domestic product by 2023.