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Holders of Lebanon’s recent 1.5 trillion Lebanese pound ($1 billion) sale of seven-year government debt–the country’s longest maturity for domestic borrowing–at a 7.9 percent coupon rate are buying IOUs from one of the world’s most heavily indebted nations (gross public debt was $51.1bn in 2009 or 148% of GDP, compared with a peak of 180% in 2006 post Israel-war), mired in political tenions, where the “problem remains on the expenditures side, not on the revenues side,” per Nassib Ghobril, head of research at Byblos Bank SAL, and where parliament has failed to ratify a proper budget since 2005.  That said, political deadlock is actually a blessing in disguise in terms of curbing any expansionary fiscal ambitions since constitutional law precludes spending from exceeding a 12th of the previous legal budget in any given month during impasse.  A stable-to-slightly declining fiscal deficit (funded in the meantime by commercial banks, which now hold close to 60% of total debt), coupled with projected real growth rates between 6-7.5% over the next three years fuelled chiefly by GCC tourism and domestic demand (underpinned by higher remittances and subsequent deposit growth from residents and non-residents that grew 8-10% y/y over the past nine months, swelling banks’ assets to nearly 326% of GDP in December as the collective lending portfolio grew by nearly 20% y/y) should help counter the possibility of deterioration among rival political factions overly spiking spreads.  Additionally, banks’ stout liquidity will help finance the infrastrcture improvements needed to sustain real growth.  Moreover, analysts with Barclays opine that that central, Banque du Liban has become increasingly nimble and pragmatic over the course of the last decade and can now “easily accommodate further pressures [on the Lebanese pound, pegged currently to the dollar at a band of 1,501-1,514 pounds] should they recur.  Its reserves, at USD32bn amount to more than 55% of short-term debts and cover almost 72% of the country’s money supply, putting the country in a much better position than in previous instances of extreme political tension.”  Finally, Ghobril noted to Bloomberg that in addition to testing the market’s appetite for longer maturities in the local currency, the bond sale “helps the government further shift the financing of the deficit and the composition of the public debt from foreign currencies to Lebanese pounds.”  At present, roughly 40 percent of Lebanon’s debt is foreign denominated.  In sum, the story heading in 2011 remains the same: while Lebanon’s growth story looks promising, a lack of fiscal certainty makes it hard for many investors to make a clear, long-term call.

Last month Moody’s noted in regards to Lebanon that “deep structural challenges” (namely high public debt which hampers the scope for productive, public spending; see graph) continue to limit the economy’s longer term potential, though it riterated that a “robust level of external liquidity, a resilient bank deposit base, the government’s strong track record of debt servicing, and the country’s proven ability to mobilize donor support” underpinned its B1 rating for foreign and local currency government debt (raised from B2 last April).  To that first point, The Economist  recently underscored the strength of Lebanese remittances, which comprised a fifth of GDP in 2009 and remained buoyant during the global recession and after “not only because the war prompted generosity but also because of solid banks that offer 7% interest on the dollar and property prices that have doubled or tripled in four years.”  And last week the World Bank revised its estimate of remittances into Lebanon for 2009 upward, setting their value at $7.6 billion, and estimated they would reach $8.2 billion in 2010, the equivalent of 22 percent of total remittances to the Middle East and North Africa (MENA) region.  This means that while Lebanon has less than 1% of the MENA population, it receives 22% of all remittances destined for that region.  In regards to investing, banks (our favorite remains Blom Bank) remain a prudent way to capture Lebanese growth.  Historically quite liquid (due somewhat to pragmatism in the face of ever-turbulent geopolitics), Lebanese banks have been very profitable over the last two years, emerging relatively unscathed from the financial crisis due to conservative fiscal policies by the central bank, which prohibited exposure to risky instruments.

Beirut’s “luxury” chocolate chain Patchi, named by brand consultancy Wolff Olins as one of the world’s five most successful new brands from emerging markets, recently hired financial advisers for a primary listing in Dubai and a secondary listing in London that will see up to 49% of the company floated. The firm generated $165m in sales last year, and ultimately plans to expand into a line of cafés that would make it “like ­Starbucks, but at a higher level,” per its executive general manager, Mazin Obeidi. Its first cafe will likely open in Lebanon sometime next year, he added. More importantly for investors, Patchi’s IPO would be the first public offering on the Dubai Financial Market in the past 14 months, despite the emirate’s open-arms towards would-be foreign floaters.

Per hospitality research firm STR Global and Deloitte & Touche Middle East, Middle East hotels in 22 cities in the region during the first half of 2009 witnessed an average 10.9% decrease in occupancies and a 17.2% drop in revenue per available room (RevPAR), an industry benchmark.  Among the worst RevPAR performers were Dubai (down 35%) and Muscat (16.6%), while other cities outperformed tremendously, including Abu Dhabi (3.2% increase), Jeddah (11.5%) and Beirut (125.2%).

Lebanese BLOM (Banque du Liban et d’Outre-Mer) Bank’s first-quarter net profit rose 12.2% to $63.3m, assets grew by $612m in the quarter to stand at $18.5bn at end-March, and customer deposits went up $698m to $15.7bn, surpassing even the bank’s own expectations partly based on strong deposit growth, according to the bank’s chairman and general manager, Saad Azhari.  Labenon’s banking sector as a whole has been largely immune from the global financial crisis because of its tight regulation and cautious risk management.  Accordingly, the sector has realized an increase in deposits from expatriates, despite warnings from economists that deposit growth will slow along with the world economy.

How come?  The Economist explains:

The ironic truth is that the country’s double curse, of chaotic internal politics and being located in a nasty neighbourhood, are proving helpful for a change. For one thing, they have made Lebanese bankers unusually wary and resourceful. Four years ago, for instance, the Banque du Liban’s (central bank) stern and far-sighted head, Riad Salameh, banned any dealing in such tricky foreign instruments as mortgage-linked securities. And while banks, property developers and service vendors raked in business as private cash spilled out of the oil-enriched Gulf, competition between influence-seeking powers brought a windfall in aid for reconstruction following the ruinous 2006 war with Israel. Iran alone has injected perhaps $1 billion to rebuild the heavily bomb-damaged parts of Beirut run by its protégé militia, Hizbullah.

Lebanon’s economy gets as much as $6 billion in remittances a year from about 10 million Lebanese living abroad, or roughly 20% of GDP, per a March 24 report by Standard Chartered Bank.  And thus far, fears that the global crisis would force home thousands of expatriates have proved unfounded.  That said, forecasters predict that economic growth will probably slow to 4% this year.  But Lebanese banks may still be a sector to consider, despite a recent warning  by the IMF which warned that as the global financial crisis took its toll on the oil-rich economies of the Persian Gulf, capital inflows to Lebanon could weaken and the growth in commercial bank deposits slow.  Lebanese banks are required to hold a third of their foreign currency deposits in cash and to have a capital adequacy that is more than 11% on average.  Moreover, Lebanon central bank Governor Riad Salameh announced earlier this month a plan to cut the loan reserve requirement for banks to help push down borrowing costs.  The move could push lending rates to about 7.5% from 10%.  Finally, Moody’s upgraded Lebanon’s local and foreign currency government bond ratings from B3 to B2, while the currency ceiling for foreign currency bank deposits was upgraded from B3 to B2 and the country ceiling for foreign currency bonds from B2 to B1.

JGW

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