Citigroup said over the weekend that the escalation of the Syrian crisis has started to take a greater toll on the Lebanese economy. It said the closure of border crossings in July cut off important overland trade routes for the export of Lebanese agricultural produce, while the volume of industrial exports declined as insurance costs and a strong U.S. dollar reduced the competitiveness of such exports.
The electricity crisis in Lebanon is also damaging the economy, it said.
Citigroup noted that while the government signed a deal with Turkey to lease electricity-generating barges to reduce the shortfall in supply, the vessels will not be operational until after the summer peak demand. It said that this is forcing Lebanese businesses to use private power generators, which is a costly and inefficient option, and which constitutes a significant burden on economic activity.
In parallel, Citigroup added that the revised 2012 draft budget is unlikely to be approved by Parliament, despite having been endorsed by the Cabinet.
It said that the revised budget excluded the proposed tax hikes in the original draft budget, which raises questions about the financial sources of the public sector’s wage and salary increases.
It added that protests within the education and electricity sectors over salaries may result in further increases in expenditures this year.
It expected Lebanon’s fiscal deficit to widen to 7.9 percent of GDP in 2012 from 5.7 percent of GDP in 2011, as public spending will continue to rise, especially due to the Treasury’s transfers to Electricité du Liban.
Citigroup said that its forecast is based on the assumption that the dispute over the spending bill will not limit the government’s expenditure plans significantly. Also, it indicated that fiscal results improved in 2011 from stronger revenues and lower expenditures. It said revenues rose by 1 percent of GDP last year due exclusively to rising receipts from the telecommunications sector.
But it added that the inclusion of these receipts in the budget figures is controversial, given that the actual cash does not reach the Finance Ministry until the end of the year, and only after certain deductions have been made.
In parallel, Citigroup said that some holders of Lebanese Eurobonds sold their holdings in the past two months.
It considered that fears of spillovers of the Syrian crisis after the recent rise in violence in parts of the country, as well as the government’s plan to issue $2 billion in Eurobonds, may have caused the sell-off.
It noted that the effect of these two factors is likely to subside in the coming weeks, which would lead to a reversal in the recent underperformance of the bonds.
It emphasized that it did not anticipate the bond issuance to be the start of a borrowing cycle by the government.