Lebanon Plans $2 Billion Eurobonds as Election Holds Risks

(Bloomberg) -- Lebanon plans to sell up to $2 billion in Eurobonds over the next year, Central Bank Governor Riad Salameh said, part of a debt-swap aimed at reducing servicing costs in the world’s third most indebted country.

The country held its first parliamentary election in nine years on Sunday, and Salameh said it was important that the next government take action to revive the economy, which has been battered by sectarian conflict and the war next door in Syria.

The “government will be judged by the markets depending on its commitments economically as Lebanon is at a stage where positive economic and financial news are needed,” Salameh, a former Merill Lynch banker, said Friday in an interview with Bloomberg TV.

Early results showed an alliance led by the Iran-backed militant Hezbollah group emerging again as heavyweights in the next legislature, while the party of Saudi-backed Prime Minister Saad Hariri faltered.

Hobbled by political turmoil and an influx of refugees from the war in neighboring Syria, Lebanon has struggled for years to revive its economic fortunes. To turn the economy around, factions who win at the ballot box will need to set aside feuds that have often paralyzed decision-making. In the meantime, parliament has approved a new round of financial engineering to ease the burden on government finances.

Salameh, who has steered the financial sector through repeated upheavals since taking the helm at the Banque Du Liban in 1993, said the central bank would give the finance ministry local-currency Treasury bills at low interest rates in return for dollar-denominated Eurobonds by the end of this month, in a transaction worth $5.5 billion to $6 billion. It would sell on $2 billion worth.

“We might not do the $2 billion in one operation. We will cap it at numbers between $500 million and $1 billion,” Salameh said, adding that the rest would stay on central bank books for future years.

Lebanon carried out a similar swap in 2016, offering Lebanese banks incentives to buy up some of that debt in an unconventional move criticized as risky by some economists. Salameh said incentives were not needed this time and the central bank hopes to scale back such programs as the government’s position improves and the pressures of the war in Syria ease.

Election Fever

The economy has been a central focus for candidates across the political spectrum amid high unemployment, slow growth and the cost of hosting the Syrian refugees. Making the challenges more daunting is a growing confrontation between Israel and Iran, one that could degenerate into a war involving Hezbollah.

Monday’s unofficial results, released by local media, show the Shiite Hezbollah, which operates as political group and an armed movement, and allied factions winning in at least 10 districts. Hezbollah had been expected to benefit from the collapse of the main Saudi Arabia-backed, Sunni-led caretaker coalition led by Hariri, as well as new electoral laws.

Hariri’s predominantly Sunni party received the biggest blow, winning a preliminary 18 seats, down from 33 in the previous elections. Voter turnout was estimated at 49.2%, according to Interior Minister Nuhad Machnouk.

The U.S. Treasury, which sanctions Hezbollah as a designated terrorist organization, has targeted the group and its financial backers for years in a bid to crack down on cash inflows. The U.S. has urged Lebanese authorities to block the group from the financial and banking sector, and the central bank has ordered the country’s lenders to comply.

“The banks are seriously implementing the U.S. laws in their daily operations and correspondent banks are comfortable with the way the Lebanese banks are working,” Salameh said. “This is the best proof that things are being done seriously in Lebanon.”

Salameh said he was “happy” that foreigners hold about 30 percent of Lebanese Eurobonds, despite the risks increased exposure to global markets can bring, “because it has turned these bonds into international assets.”

“We know that that creates more volatility,” he said. “But these are the realities.”

The governor also said:

• He doesn’t agree with the International Monetary Fund’s forecast of 1.5 percent growth for 2018. “We don’t have forecasts for 2018 because usually we wait till the summer to announce our forecast due to the volatility in the Lebanese political life," he said, citing estimates of 2.5 percent.
• Annualized deposit growth is running at 6 percent, “which for us is a positive element as the growth in these deposits is sufficient to fund the public and the private sector.”
• Though debt-to-GDP stands at 150 percent, the market holds only about two thirds. The rest -- $27 billion out of $80 billion -- is held by the central bank.
• Lebanon is the second-biggest holder of gold in the Middle East, said Salameh. "We will not buy more gold but of course we will not sell the stocks that we have," he added.
• On interest rates: “Interest rates in Lebanon have been matching the increases that have happened worldwide.”

--With assistance from Dana Khraiche and Hussein Slim

To contact the reporters on this story: Donna Abu-Nasr in Beirut at dabunasr@bloomberg.net, Yousef Gamal El-Din in Dubai at ygamaleldin@bloomberg.net.

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Amy Teibel, Glen Carey

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