Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
Social unrest and populist uprisings has become a norm in recent years with superpowers like the United Kingdom and the United States falling victim to historical events such as Donald Trump becoming President of the United States and the United Kingdom voting to leave the European Union.
This, of course, doesn’t tell the whole story. There are many examples of social unrest that have become widespread across the globe including several uprisings in the Middle East, demonstrations throughout Europe and even the protests taking place today in nations like Hong Kong, Chile and Lebanon.
Even though Hong Kong is seen as one of the most advanced economies in the world and a crucial market to the Asian region that on 15 November, its authorities confirmed protests will lead to the first recession since the global financial crisis, whereas the Chilean Peso spectacularly fell over 5% to a new record-low between 8-11 November. However, it’s neither Hong Kong nor Chile that the investors are at the moment considering as a market risk to consider.
It is Lebanon.
Once labeled as “the Paris of the Middle East” and a major tourist attraction, the pre-2010 Lebanese economy was recording GDP growth levels between 10-8%. It’s well-known that Lebanon has suffered due to its geographical location and has been impacted by regional tensions specifically in reference to the recent Syrian conflict. It is thought that up to 15% of the 6.4 million population of Lebanon are refugees from war-torn Syria. But, capital flows in Lebanon have steadily dropped lower from 2010 with a plateau seen until 2013 when an increase (still not to the levels before world financial crisis) has seen another plateau from 2016 onwards.
Lebanon Capital Flows
And why investors hold concern over Lebanon
In a snapshot, Lebanon has faced structural issues and received warnings about many of them for a long time. Yet, the country has failed to find a solution. As mentioned, regional turmoil has not done any favours although as an economy, Lebanon has long been seen as a country that imports far more than it exports. Debt to GDP is a problem that has continued to pile higher over time, and now stands at a whopping 151% of GDP.
Infrastructure in the country is also poor. This doesn’t even take into account regular power cuts that impact its citizens and its issues with rubbish that fill the streets as neither are attractive when considering whether to invest in one’s country.
The below are some other issues highlighting why investors consider Lebanon as a risk:
- The Prime Minister of Lebanon resigned early into the protests, but the unrest has since continued. It shows that the PM stepping down isn’t enough to bring normality back to the country. Lebanon’s Defence Minister has even been reported to have compared the recent street unrest to the 1975-1990 civil war.
- Reform is something that has been requested for years, but to no progress. Even if reforms are introduced to improve structural hindrances, it won’t stop current problems and will remain difficult for its people.
- As above, the Lebanese economy was once expanding by 10-8% until 2010 before plateauing 0.9- 2.8% since 2010.
- Another distressing element in Lebanon is the cost of living – partly because of the currency being pegged to the US Dollar and the strength that the US Dollar has seen (historically) in recent years.
- The World Bank, a week ago, stressed that Lebanon needed to form a new Cabinet within a week to prevent further loss of confidence in its economy.
- Protests saw the banks closed for two weeks. People are concerned over potential capital controls being imposed, to prevent money leaving Lebanon.
- GDP growth was expected to rebound to 0.3% in 2020, though this will inevitably be revised lower should the protests continue in the indefinite future.
- Public debt is thought to increase to 155% of GDP by the end of 2019.
According to the IMF’s recommendations for the country that were reported at the time as the protests broke out, a “multi-year fiscal adjustment to reduce public debt” that can include the potential “raising of VAT” as well as “broadening the tax base” is needed – with the latter two implying that everyday folk could have even less disposable income.
Can the Lebanese Pound be delinked against the US Dollar?
In short, it is possible and it can happen. However, it is not a preferred course of action to undertake at this point and it will bring many more problems of suffering in the short-run.
Egypt might be seen as one of the few economic success stories of 2019, but the county went through turmoil when it famously removed the pegged its currency three years ago. Unfortunately for Lebanon, un-pegging the currency will not turnaround the economic or political challenges that have been unresolved for years. In fact, it would continue to threaten domestic market issues for a number of years (capital flows).
Removing the currency peg would in almost all cases mean a serious devaluation for the people of Lebanon to contend with. This would push up the cost of living and inflation beyond anything that the average person has come across yet, while the essential items of groceries would risk becoming unaffordable to the mass.
Unemployment that already stands at 25% could potentially climb at levels close to half its population and the poverty line that stands at 27% would climb higher. Part of the issue that Lebanon has faced in the past is due to its geographical location and the unsolved geopolitical issues that stand in the region. A free-floating Lebanese Pound would likely see fluctuations and volatility on levels that will prevent a sense of continuity in its currency. Essentially instability in the region would subsequently mean its currency would see instability as well. It might become difficult to budget ahead for what the price of fuel, milk or even bread, vegetables will be from week-to-week.
This is without even mentioning that either devaluation to de-pegged Lebanese currency would prevent what has encouraged some aspects of its current economic distress – less investment and inflows entering Lebanon.
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