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Lebanon’s Debt Fix Now Hinges on Central Bank After Lenders Balk

Dana Khraiche
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Lebanon’s Debt Fix Now Hinges on Central Bank After Lenders Balk

(Bloomberg) -- Lebanese lenders are turning against a government plan to coax them into buying Treasury bonds at lower interest rates, leaving the central bank to go it alone as regional turmoil and budget delays keep the market on edge.Finance Minister Ali Hassan Khalil said in May that the government wanted to issue 11 trillion pounds ($7.3 billion) of the securities at a rate of 1%, allowing it to cut 1 trillion pounds from the cost of servicing debt under this year’s draft budget. Lenders won’t agree to purchase the bonds at a 10th of the market rate, according to Makram Sader, secretary general of the Association of Banks in Lebanon.The central bank will most likely handle the program alone, with the details made clearer after parliament approves the final version of the budget, an official familiar with the matter said.Lebanon, one of the world’s most indebted nations that spends almost half its fiscal revenue just on interest payments, has relied on commercial lenders and the central bank to keep its finances afloat. With at least three times as many Lebanese living abroad than at home, the economy has been sustained by remittances, mainly from the Gulf and Africa, which banks then use to buy government debt.Banks are “not willing to buy any financial instrument issued below market rates,” Sader said by email. Their refusal isn’t just an issue of liquidity constraints but also reflects the industry’s cost-to-income ratio, a measure of profitability, he said.The central bank and the Finance Ministry didn’t respond to requests for comment. Speaking to reporters on Tuesday in Beirut, Governor Riad Salameh said the central bank will be working with the Finance Ministry on mechanisms to achieve the goal outlined in the budget, but negotiations are still ongoing.“No one will force anything on the banking sector,” Salameh said. “The way to do it has not yet been finalized.”Despite the risk of further increasing Lebanon’s cost of funding, the Finance Ministry last year issued Treasury bills at market rates for the first time in seven years to appeal to local lenders, which have instead been depositing their money at the central bank for higher rates.Lebanon’s government approved its much delayed 2019 budget last month, along with spending cuts, additional taxes and fees, and a hiring freeze in the public sector. It projected a deficit of 7.6% of gross domestic product, down from 11.4% in 2018, and assumed a lower cost of debt servicing under the minister’s plan. The budget was referred to parliament for final approval.Lebanon committed itself last year to a drop in its deficit by a percentage point annually in the next five years along with other measures to unlock $11 billion in funding pledged by international donors. In a sign that investors are losing confidence, Lebanese Eurobonds have entered distressed territory as political squabbles stall economic reforms.The government “should reduce spending instead of asking for market-distorting measures,” said Nassib Ghobril, chief economist at Beirut-based Byblos Bank.Parliament’s finance and budget committee studying the 2019 draft sought to inquire about the debt proposal from lenders themselves. A representative of the banks attended a committee meeting and informed lawmakers that lenders were unable to buy the Treasury bills, said another official who attended the meeting.Members of parliament also met with a representative of the central bank, who said they were studying the issue, according to the official, who spoke on condition of anonymity because the discussions aren’t public.Prime Minister Saad Hariri has been critical of the parliamentary committee’s work on the budget as lawmakers have been discussing and scrapping some revenue-generating measures introduced by the government. He also voiced concerns of a credit rating downgrade if parliament fails to commit to the deficit target, according to local media.Lebanon’s public debt is estimated at 160% of GDP and is projected to rise to near 180% by 2023, according to the International Monetary Fund. Debt servicing for 2019 is estimated at $6.2 billion, which the government hopes to reduce to as low as $5.5 billion with the T-bills issuance, one of the officials said.The measures in the draft 2019 budget, and the planned savings from the refinancing of costly Treasury bonds with lower-rate securities, “remain insufficient to significantly change the debt trajectory,” Moody’s Investors Service analysts said in a report.(Updates with central banker’s comments starting in sixth paragraph.)\--With assistance from Abeer Abu Omar and Paul Wallace.To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.netTo contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Abelsky, Michael GunnFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- Lebanese lenders are turning against a government plan to coax them into buying Treasury bonds at lower interest rates, leaving the central bank to go it alone as regional turmoil and budget delays keep the market on edge.

Finance Minister Ali Hassan Khalil said in May that the government wanted to issue 11 trillion pounds ($7.3 billion) of the securities at a rate of 1%, allowing it to cut 1 trillion pounds from the cost of servicing debt under this year’s draft budget. Lenders won’t agree to purchase the bonds at a 10th of the market rate, according to Makram Sader, secretary general of the Association of Banks in Lebanon.

The central bank will most likely handle the program alone, with the details made clearer after parliament approves the final version of the budget, an official familiar with the matter said.

Lebanon, one of the world’s most indebted nations that spends almost half its fiscal revenue just on interest payments, has relied on commercial lenders and the central bank to keep its finances afloat. With at least three times as many Lebanese living abroad than at home, the economy has been sustained by remittances, mainly from the Gulf and Africa, which banks then use to buy government debt.

Banks are “not willing to buy any financial instrument issued below market rates,” Sader said by email. Their refusal isn’t just an issue of liquidity constraints but also reflects the industry’s cost-to-income ratio, a measure of profitability, he said.

The central bank and the Finance Ministry didn’t respond to requests for comment. Speaking to reporters on Tuesday in Beirut, Governor Riad Salameh said the central bank will be working with the Finance Ministry on mechanisms to achieve the goal outlined in the budget, but negotiations are still ongoing.

“No one will force anything on the banking sector,” Salameh said. “The way to do it has not yet been finalized.”

Despite the risk of further increasing Lebanon’s cost of funding, the Finance Ministry last year issued Treasury bills at market rates for the first time in seven years to appeal to local lenders, which have instead been depositing their money at the central bank for higher rates.

Lebanon’s government approved its much delayed 2019 budget last month, along with spending cuts, additional taxes and fees, and a hiring freeze in the public sector. It projected a deficit of 7.6% of gross domestic product, down from 11.4% in 2018, and assumed a lower cost of debt servicing under the minister’s plan. The budget was referred to parliament for final approval.

Lebanon committed itself last year to a drop in its deficit by a percentage point annually in the next five years along with other measures to unlock $11 billion in funding pledged by international donors. In a sign that investors are losing confidence, Lebanese Eurobonds have entered distressed territory as political squabbles stall economic reforms.

The government “should reduce spending instead of asking for market-distorting measures,” said Nassib Ghobril, chief economist at Beirut-based Byblos Bank.

Parliament’s finance and budget committee studying the 2019 draft sought to inquire about the debt proposal from lenders themselves. A representative of the banks attended a committee meeting and informed lawmakers that lenders were unable to buy the Treasury bills, said another official who attended the meeting.

Members of parliament also met with a representative of the central bank, who said they were studying the issue, according to the official, who spoke on condition of anonymity because the discussions aren’t public.

Prime Minister Saad Hariri has been critical of the parliamentary committee’s work on the budget as lawmakers have been discussing and scrapping some revenue-generating measures introduced by the government. He also voiced concerns of a credit rating downgrade if parliament fails to commit to the deficit target, according to local media.

Lebanon’s public debt is estimated at 160% of GDP and is projected to rise to near 180% by 2023, according to the International Monetary Fund. Debt servicing for 2019 is estimated at $6.2 billion, which the government hopes to reduce to as low as $5.5 billion with the T-bills issuance, one of the officials said.

The measures in the draft 2019 budget, and the planned savings from the refinancing of costly Treasury bonds with lower-rate securities, “remain insufficient to significantly change the debt trajectory,” Moody’s Investors Service analysts said in a report.

(Updates with central banker’s comments starting in sixth paragraph.)

--With assistance from Abeer Abu Omar and Paul Wallace.

To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Abelsky, Michael Gunn

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.