Lebanon Vows Recovery Plan for ‘Broken’ Economy by Year-End

(Bloomberg) --

Lebanon kicked off talks to restructure its $90 billion debt pile on Friday with a promise to present a comprehensive recovery plan for its “broken” economy before the end of this year.

In a video presentation to bondholders, Lebanon’s top finance officials said the economic overhaul would require external funding, but did not set concrete targets for cutting the deficit or restoring growth and spoke only in general terms about the steps required.

The Lebanese government did, however, confirm the worst analyst estimates about the current state of an economy facing the triple headwinds of a currency crisis and unsustainable fiscal and current-account deficits. The finance ministry told creditors that its total debt was worth about 178% of gross domestic product at the end of 2019 with the cost of servicing consuming about half the country’s revenues and leaving too little for other needs.

With a dollar crisis gripping the banks last year and weeks of anti-government protests breaking out in October, the economy was estimated to have contracted by 6.9% in 2019. With the added burden of a lockdown imposed due to the coronavirus pandemic, Lebanon’s economy could contract by about 12% this year, erasing jobs just as a currency depreciation is set to elevate inflation to some 25%, the officials said.

“The Lebanese economic model is therefore broken and necessitates an urgent complete overhaul with a recovery plan enabling Lebanon to start anew,” Finance Minister Ghazi Wazni said. “This government has a full agenda over the coming months to design and implement its comprehensive recovery plan, and conduct its public debt restructuring.”

Lebanon decided earlier this month it would not repay its $30 billion of Eurobonds to preserve what’s left of its foreign currency reserve as the country faces its worst financial crisis in decades. The government wants to use its $22 billion of reserves to support the import of medicine, fuel and wheat as inflows of hard currency from its expatriate community and elsewhere, the country’s main source of dollars, diminish.

The government hired Lazard Ltd and Cleary Gottlieb Steen & Hamilton LLP as its financial and legal advisers for what are set to be tough negotiations. Local banks, who hold most of the country’s dollar-denominated and local debt, have hired Houlihan Lokey to represent them in the talks that will most likely extend a showdown between the lenders and their government. Potentially complicating talks, London-based fund Ashmore Group Plc has recently built up a blocking stake in some Lebanese bonds.

Lebanon’s central bank holds about $5.7 billion of Eurobonds but those holdings won’t count in a stakeholder vote to change the terms.

Earlier on Friday, Lebanon said it had hired DF King Ltd. to help identify holders of its debt. It asked bondholders to come forward by April 17 so they could be part of the process.

Lebanon will look to treat all stakeholders in a fair and equitable way during the restructuring talks, finance ministry economic adviser Talal F. Salman said in the video briefing, promising to act in “good faith.”

Talks will initially be held remotely, by video or teleconferencing, due to travel and other restrictions dictated by governments around the world in an effort to contain the coronavirus. The outbreak is likely to hit Lebanon’s struggling economy hard, with restaurants and bars, shops, malls and most offices closed. Many businesses, barely surviving before the coronavirus outbreak, are unlikely to stay afloat if the closures are prolonged.

Unemployment levels are already soaring while the government lacks the resources to offer the kind of financial stimulus, extended tax and loan repayment holidays and other support rolled out around the world.

©2020 Bloomberg L.P.

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