The CEDRE conference, which helped raise more than $11 billion (Dh40.4bn) for Lebanon form international donors, confirms the debt-laden country still garners support from the international community, a new report said.
A large investment program is in the works in Lebanon, whose economy is severely burdened by the influx of about a million Syrian refuges. However, there is little visibility on the needed fiscal reforms, which is not encouraging in the short term for the country with a debt-to-GDP ratio of around 150 per cent, Bank of America Merrill Lynch said in a report released on Thursday.
The CEDRE’s aim is to “effectively tackle Lebanon's low growth-high debt macro challenge through a combination of fiscal reforms and investments financed by concessional loans and the private sector”, the report said. “Fiscal consolidation is necessary to minimise the impact of additional borrowing on debt dynamics while structural reforms are needed to ensure timely project implementation and raise capacity absorption.”
Lebanon called for the donor conference to help finance infrastructure projects as the government cannot finance such schemes.
The country's economy is hurting from the ongoing seven-year war in Syria, which has curtailed an important trade and business route, and led to the influx of refugees. Lebanon's heavy debt burden, the highest in the Middle East, is also a concern for investors, who are not as eager as before to invest in a country struggling to control its finances.
Lebanese authorities have presented an ambitious capital investment programme that includes 275 projects to develop and rehabilitate the country’s dilapidated infrastructure. The total cost of the CIP is $22.9bn, more than 41 per cent of GDP, across three cycles spanning the period 2018-2030.
About 33 per cent is projected to come from private investment as concessional loans are likely planned to finance projects with low economic returns. The cost of the first CIP phase over the next six years is $10.8bn, according to authorities' estimates. The CEDRE pledges more than fully cover the cost of the first cycle of the CIP, the report noted.
The re-pledging of a $1bn credit line from Saudi Arabia and $670 million from France helped the conference exceed the Lebanese estimates. Other pledges included $1.35bn in loans from the European Bank for Reconstruction and Development and $500m from The Kuwait Fund for Development.
CEDRE follows from the Rome II conference on 15 March which served to support the five-year strategic plans of the Lebanese Armed Forces and Internal Security Forces. A further conference, Brussels II, is planned in the last week of this month in response to the Syrian crisis and to support the resilience of refugee-hosting countries.
The pledges earmarked for investment over the next five years to overhaul the country’s ailing infrastructure and to lift its $53bn economy’s faltering growth, is credit positive, Moody's Investors Service said on Thursday.
"It [pledges] supports the resumption of public investment, while incentivising fiscal reform implementation as a condition for disbursements," Moody's said.
The rating agency forecasts growth at an average of 3 per cent in 2018-21, compared with an average of 1.6 per cent for 2013-16, and factors in an uptick in investment activity.
Despite the CEDRE pledges, Lebanese authorities and the government led by Prime Minister Saad Hariri have work cut out for them and will have to work closely with the international donors, which will be key to the disbursement of loans, Bank of America noted.
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Meanwhile Mr Hariri on Wednesday said that there is a mechanism to follow-up on the implementation of the reforms to unlock the pledges.
“CEDRE is the beginning of a process to modernise our economy, to rehabilitate our infrastructure, to boost the potential of the private sector and to achieve economic sustainability,” he said at a press conference in Beirut.
Structural reforms within the administration, fighting corruption, modernising legislations for the private sector and sectoral reforms for optimising investment in infrastructure, are part of the implementation process.
“Most of these loans are very soft loans with interest of 1.5 per cent maximum with a grace period of seven-to-ten years and a maturity period that exceeds 25 years," he said. "These loans will only be used for infrastructure projects that Lebanon is in dire need of and without these soft loans Lebanon would be forced to take loans with 7 per cent interest."
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Ziina users can donate to relief efforts in Beirut
Ziina users will be able to use the app to help relief efforts in Beirut, which has been left reeling after an August blast caused an estimated $15 billion in damage and left thousands homeless. Ziina has partnered with the United Nations High Commissioner for Refugees to raise money for the Lebanese capital, co-founder Faisal Toukan says. “As of October 1, the UNHCR has the first certified badge on Ziina and is automatically part of user's top friends' list during this campaign. Users can now donate any amount to the Beirut relief with two clicks. The money raised will go towards rebuilding houses for the families that were impacted by the explosion.”
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