Lebanon may tap Debt Markets Again to Finance Fiscal Deficit

Lebanon, the country with the highest debt-to-GDP ratio in the Middle East, may tap the Eurobond market again this year for long-maturity debt, depending on market conditions and the prospect of US interest rate increases, a senior official at the country’s ministry of finance said. 

The country, which is seeking to plug a fiscal deficit forecasted at $5.2 billion for 2017, issued U$3bn in Eurobonds in March, with an order book that exceeded $17bn. That issue, which was inititally set at $1.5bn, had three tranches with 10, 15 and 20 year tenures.

“We will see very soon if we will tap the market once more this year or whether we can rely on our internal means,” said Alain Bifani, the director-general of the ministry of finance.

“If we are able to squeeze rates and still achieve long maturity, of course that’s an option. We were able [in March] to extend the maturity which allows us to lock in a significant amount of money at very low rates. And it is of course one way of protecting Lebanon from any significant hikes in [US interest rates].”

The US Federal Reserve has hiked rates twice so far this year and is expected to raise rates again once more before the end of the year. Any hike may be tempered by several factors including US inflation, which is still below the Fed’s 2 per cent target.

Lebanon’s debt-to-GDP ratio reached 148 per cent last year, one of the highest in the world. The country is forecasting a fiscal deficit for this year of $5.2bn, or 8.7 per cent of GDP, down from a deficit of 9.5 per cent of GDP last year.

Mr Bifani said he does not expect the country’s budget shortfall to improve next year.

The Lebanese parliament is expected to approve in the coming weeks the country’s budget for the first time since 2005, a move that is likely to help improve investor sentiment towards the indebted state. The vote to approve the budget has been labelled as credit positive by credit rating agency Moody’s Investors Service.

Lebanon’s government debt is rated B2 by Moody’s, which maintains a negative outlook on the country.

The state often taps the debt markets to plug its deficit shortfall, which in recent years has been exacerbated by sluggish economic growth and the hosting of over 1 million Syrian refugees – the world’s highest per capita – which has put a strain on the country’s finances.

To address the budget shortfall, the Lebanese parliament approved 20 tax measures that it hopes will create an additional annual revenue of $1.2bn. The new taxes are expected to help finance a bill of public sector salary increases estimated at around $800 million, but have proved controversial among the Lebanese population and banking community.

The new measures include increasing the value-added tax rate to 11 per cent from 10 per cent, raising corporate profits tax to 17 percent from 15 per cent and hiking the tax on the interest of deposits and treasury bill to 7 per cent from 5 per cent.

Mr Bifani dismissed criticism of the measures, saying interest rates on deposits remain attractive to investors and that reforms are needed to instill confidence in investors to keep funneling money into Lebanon.

“Usually, one very important factor to keep the flow going is to show the world that the system is able to keep its deficit under control and to raise enough revenue for this deficit to remain under control,” said Mr Bifani. “There is no doubt that the money will keep flowing in a much better way if we go on with reforms instead of refraining from doing that.”