Lebanon Blast Seen Adding Urgency to Talks With IMF, Lenders

(Bloomberg) --

As emergency services assess the toll from Tuesday’s deadly explosion in Beirut, one immediate consequence is becoming clear to analysts: it will ratchet up pressure on Prime Minister Hassan Diab to make meaningful progress in talks with international lenders and investors.

For some observers, that means quickly addressing the internal divisions and foot-dragging that have stalled negotiations with the International Monetary Fund about a $10 billion loan program following the country’s March Eurobond default. But that assumes the government can even hold together, which is far from assured, some analysts say.

As far as Lebanon’s immediate needs are concerned, Beirut’s governor estimates the cost of the damage to be between $3 billion to $5 billion.

Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based EFG-Hermes, says in an email message:

• “The hope is that this tragedy would urge the political factions to reach an agreement on the way forward for an economic reform program. The IMF has been eager to help, but they were faced with probably the most difficult potential program since a very long time.
• “We’ve seen the government coming up with a credible plan, which the IMF seem to have initially approved, but difference of opinions among the political factions and interest groups has made a consensus nearly impossible, hence stalling the talks with the IMF.
• “A lot of countries would like to help, in addition to the IMF, so all what we need to is to see Lebanon (represented in its political elite) wanting to help Lebanon and the Lebanese people who are definitely suffering amid very hard economic hardship.”

Nafez Zouk, emerging-markets macro strategist at Oxford Economics, says in a message:

• “The immediate economic damage is going to require that the country uses dollars it barely has to import what is needed in terms of fuel, grain, materials for reconstruction and for medical supply. Lebanon’s gross mismanagement and corruption means those buffers are nonexistent. Hence the need for immediate financial and humanitarian assistance is pressing.”
• “I think the ramifications are going to be more political than economic, though. This may prove to be the spark that re-ignites the October revolution, which had died down recently,” due to the coronavirus and the formation of the new government. “But popular discontent has been building up again, and this may prove to be the straw that breaks the camel’s back.”
• “I suspect the demand for FX is going to rise materially.” Also, the “supply side pressures on inflation will push prices up.”

Richard Segal, a senior analyst at Manulife Investment Management in London, says in an email message:

• “Yesterday’s events could motivate the political parties to set aside their differences and make efforts to break the deadlock and begin to fix the economy, negotiate with the IMF, bondholders, regional governments and the like. The direct economic impact should not be that significant, though.
• “Regarding the negotiations, the IMF is always closely attuned to humanitarian developments in its member countries.”

Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital in Abu Dhabi, says in an email message:

• “Countries that really wanted to help Lebanon but were not comfortable with doing it under the current political regime may find that this explosion will force them to overcome that, to really go ahead and give support.
• “The issue with that is ensuring the money gets directly to the people who need it, to the organizations that are in need of it, and not to the hands of corrupt politicians. That is the challenge.
• “Once the sadness is overcome, hopefully the results of the inquiry will come up. Political parties have to really pay the price. Honestly, I believe Lebanon can be a center for the region and prosper again if you remove all of these political alliances, and bring Beirut back to what it was.
• “The IMF bailout is a “bailout to help mostly the depositors in the banks. Those are not the prime target right now. The target is to rebuild healthcare, infrastructure, and trying to get even the most basic things to people now. Storage places have been hit, so getting food could become an issue.”

Ayham Kamel, Henry Rome and Sofia Meranto, analysts at Eurasia Group, write in a note:

• “The incident will worsen already troubling political and economic conditions in Lebanon and increase the likelihood of a government collapse.
• “Prime Minister Hassan Diab is opening an investigation into the incident and is likely attempting to evade responsibility for the incident. The investigation is likely to prove extremely controversial and divisive. The premier is known to be quite intransigent and will neither resign nor admit responsibility for the catastrophe.
• “The government’s credibility is declining, and large elements of the public no longer believe the government is able to manage. In our view, this accelerates movement towards collapse of the current government. The economic crisis will also deepen as the port is the main trade valve and base for many stored goods awaiting clearance.”

Khatija Haque, head of Middle East, North Africa research at Emirates NBD in Dubai, speaking in an interview with Bloomberg Television:

• “The currency is one of the first places you can see any consequences of increased risk aversion or overall uncertainty.
• “If the port is effectively being taken out of commission, it’s going to add to the already existing disruptions to the supply chain. Given that so much of Lebanon’s needs are imported, it potentially could put further upward pressure on prices. It also disrupts whatever little Lebanon was exporting as well.
• “It does potentially mean higher prices over the next several months and further erosion to the pound, but also the outlook for the talks with international lenders because it puts that much more pressure on the government to agree on what needs to be done before they can try and secure them financing.”

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