Lebanon Finally Gets a Government for an Economy on the Ropes
(Bloomberg) -- Lebanon’s Prime Minister Saad Hariri finally announced his new cabinet lineup after nine months of political bickering and mounting economic challenges. Now the government faces the tough task of managing faltering public finances.
The nation must urgently begin to “invest in economic and social solutions,” Hariri said at the presidential palace on Thursday after unveiling his new team. Courageous reforms and cooperation among political factions are essential, he said. Lebanon’s sovereign bonds due in 2028 climbed the most since they were issued in November 2015, adding 4 cents to 83.01 cents on the dollar at 12:20 p.m. in New York.
Finance Minister Ali Hasan Khalil and Foreign Minister Gebran Bassil retained their posts. And Hariri named Nada Boustani as energy minister and Rayya Hasan as interior minister, meaning that for the first time in Lebanon’s history, two top ministerial portfolios will be held by women.
Political disputes between Hariri, President Michel Aoun and Hezbollah have prevented the formation of a government since an election in May, undermining plans for needed fiscal and structural reforms that would unlock $11 billion in grants and loans. The new government is expected to introduce reforms that Lebanon committed itself to including reducing the deficit by a percentage point annually for the next five years, addressing rampant corruption and fixing its ailing electricity sector.
A breakthrough emerged this week after Aoun agreed to allocate a seat from his cabinet share to a Sunni representative allied with the Iran-backed Hezbollah. Hariri is the head of the largest Sunni bloc in parliament and one of Saudi Arabia’s main allies in the region.
Talk of a possible debt restructuring earlier this month shook investor confidence in the country’s ability to pay its obligations and prompted Moody’s Investors Service to lower Lebanon’s credit rating one level to Caa1. While quickly disavowed by the government, the remarks show “a growing urgency” that coping with one of the world’s biggest debt burdens might prompt measures resulting “in a default event under Moody’s definition,” the agency said in a statement.
Qatar this month extended a much-needed lifeline to Lebanon, offering to buy $500 million of Eurobonds. Saudi Arabia also vowed to support Lebanon “all the way,” Finance Minister Mohammed Al Jadaan said, falling short of saying exactly how.
“Forming a government is one thing and saving the economy is another,” said Sami Nader, head of the Beirut-based Levant Institute. The country needs a working government, one that is able to manage the crisis and ensure a “radical decrease in the budget deficit and cut public spending,” he said.
Spending sharply increased last year to accommodate a public-sector wage and pension hike the government approved in 2017. The budget deficit is expected to have jumped to 8.3 percent of gross domestic product in 2018, from 6.6 percent the previous year, according to the World Bank. Over half of the government’s money goes to debt servicing, public sector salaries and buying fuel for electricity, leaving little room for investment.
The crisis in neighboring Syria has drastically slowed growth in Lebanon, with the shutdown of vital trade routes and influx of 1.5 million refugees burdening an already ailing infrastructure. The crisis has also resulted in fragile security that led countries, including some in the key Gulf Corporation Council, to issue travel advisories. Saudi Arabia has said that it would lift its advisory once a government is formed.
Lebanon’s public debt, estimated at over 160 percent of gross domestic product this year, is projected to rise to near 180 percent by 2023, second only to Japan’s, the International Monetary Fund says. Its “debt affordability” is the weakest of all the sovereigns rated by Moody’s Investors Service. Despite the challenges, Lebanon has never defaulted on debt payments.
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