by reuters –  HONG KONG/LONDON, June 26 (Fitch) The agreement on a new electoral law for Lebanon avoids a political crisis, but highlights the limitations of the country’s sectarian-based political system, Fitch Ratings says. Lebanon’s parliament approved the new law on 16 June 2017, following cabinet approval of a cross-party agreement to adopt proportional representation and reduce the number of electoral districts. Elections had been due by 20 June, but parliament will now be extended again while preparations are made for a vote under the new system in May 2018. Changing the electoral law to facilitate elections is another step towards improving political effectiveness, following the election of Michel Aoun as president last October after more than two years without a president, and the formation of a new government, drawn from across the political spectrum, in December. It has averted an impending political crisis, as Aoun had effectively set a 20 June deadline, and illustrates the ability of the main political factions in Lebanon to achieve compromises, albeit slowly and at the last minute. Maintaining this modest political momentum could further improve the prospects for policy making.

The current government has largely been occupied with electoral law discussions, but it has also reinvigorated the oil and gas licensing process and agreed on a 2017 Budget, although this has not yet been approved by parliament. But repeated delays in the political process – the 2018 elections will be the first since 2009 and the new budget is the first state budget approved by a cabinet for 12 years – illustrate the constraints of Lebanon’s sectarian political system, which have been made worse by the Syrian civil war. The new electoral law is unlikely to significantly change this system. Government formation after next year’s election may once again be a drawn-out process. High and persistent political and security risks are reflected in Lebanon’s low sovereign rating, affirmed at ‘B-‘/Stable in February 2017, alongside high public debt and anaemic economic growth. Political progress since November appears to have boosted the Lebanese diaspora’s confidence in the country’s economy.

Deposit growth was 8.2% yoy in April 2017, sufficient to fund government borrowing, which depends on the channelling of deposits and remittances via the financial system, and ensure moderate credit growth to the private sector. Foreign-exchange deposits were 11% higher than a year earlier, and gross foreign-exchange reserves were 7.6% higher, although they had declined from February and March levels. Deposit growth may have been boosted by Aoun’s election and the formation of a government, having dropped to less than 5% yoy for much of 1H16. However, reserves and deposits had also been boosted by a financial engineering operation by Banque du Liban (BdL), which sold eurobond holdings and foreign exchange-denominated certificates of deposit (CD), worth around USD13 billion to banks over several months last year. At the same time, BdL offered to discount at a premium equivalent amounts of Lebanese pound T-bills and CDs held by banks. The operation buoyed growth in non-resident deposits, as banks offered attractive conditions for foreign-exchange deposits to participate in BdL’s operation. The risk is that as the effect of this operation wanes, deposit growth will again come under pressure. Recent political developments can help sustain positive sentiment, but rising public debt, up 8.6% yoy in March 2017, means that Lebanon remains vulnerable to a recurrence of political paralysis that dents confidence and deposit and remittance flows. Tougher US sanctions against Hizbollah could also directly or indirectly affect foreign flows into Lebanon and its banking sector, although these have not yet been formally proposed as a bill.

 

Contact: Toby Iles Director, Sovereigns +852 2263 9832 Fitch (Hong Kong) Limited 68 Des Voeux Road Central Hong Kong Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Lebanhere ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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