Lebanon’s private sector continues to struggle as economic conditions deteriorate

Investor confidence in the country remains low

Lebanon's economy has slowed and its finances deteriorated prompting rating agencies to rank the country below investment grade. Barcroft Media

Lebanon’s private sector continued to struggle in August, changing little from the previous month as political instability in the country continues to weigh on economic demand.

The Blom Lebanon Purchasing Managers' index recorded a headline rate of 47.8 in August, relatively unchanged from 47.7 in July, but the highest since January 2016. A reading above 50 indicates an increase in economic activity, whereas a rate below 50 indicates contraction. Lebanon’s economy has been shrinking since mid-2013.

Output at private sector firms in Lebanon continued to fall in the middle of the third quarter, but the rate of contraction eased for the third month in a row with new orders placed with Lebanese private sector businesses contracting at a softer rate in August. The decline was the slowest for just over two-and-a-half-years, according to the survey.

“Investors’ confidence remains very low,” said Marwan Mikhael, head of research at Blominvest Bank.

With its financial condition deteriorating, Lebanon plunged deeper into crisis when Fitch cut its credit rating last month into junk territory. The downgrade will raise the country’s risk profile, which had already pushed the country’s credit default swaps, a barometer of a country’s default risk, to 1200 basis points before Fitch’s decision. S&P Global Ratings ranks Lebanon six notches below investment grade.

Lebanon's economy is set to shrink for the second year as it struggles with higher interest rates, political infighting, arrears in expenditure and disagreements over the fiscal and structural reforms needed to fix the country's deficit, the Institute of International Finance’s Mena chief economist Gardis Iradian said in a report this week. He estimates a contraction of 2.2 per cent in real GDP in the first half of the year and said an expected pick-up in economic activity in the second half is unlikely to offset the retrenchment.

“The only way out of this vicious cycle of stagnation, high public debt and low confidence is for the government to accelerate the pace of structural reforms and finish the 2020 budget on time, including all the necessary tough measures in it in order to reduce the deficit and unlock CEDRE funds,” said Mr Mikhael, referring to a 2018 Paris conference where international donors pledged $11bn of assistance contingent on the country undertaking various reforms.

Lebanon is one of the most indebted countries globally with a debt-to-GDP ratio of about 150 per cent. The country’s public debt increased 3.35 per cent from the end of last year to reach $85.73bn at the end of June.

Lebanon has always banked on the economy expanding at a faster pace than its public debt and high interest rates on Lebanese pound deposits that attracted inflows from Lebanese citizens abroad, which have slowed in the wake of deteriorating economic conditions. The start of a war in neighbouring Syria in 2011 had direct reverberations on Lebanon's economy, cutting off a major land channel for its exports and saddling it with the burden of hosting more than 1 million refugees.

On Monday, Lebanon's prime minister Saad Hariri said the country will declare a state of "economic emergency" to accelerate public finance reforms with a view to ensuring the stability of the Lebanese pound, which is pegged to the US dollar.

"This difficult economic situation requires us taking speedy measures such as finishing the budget on time and reducing the deficit," Mr Hariri said, according to Reuters.