Time to talk about Lebanese debt overhaul

Financial support: A man heads to the Lebanese central bank in Beirut. Lebanon needed Qatar’s commitment to invest US500mil in its debt and a Saudi pledge to support the economy “all the way” to help its Eurobonds recover. — AP

DUBAI: Lebanon should consider a voluntary debt restructuring to avert a financial crisis despite pledges of aid from Gulf benefactors, according to Franklin Templeton Investments, which manages US$650bil in assets worldwide.

A debt overhaul needed to be part of a reform programme backed by lenders such as the International Monetary Fund (IMF), said Mohieddine Kronfol, the firm’s chief investment officer for global sukuk and Middle East and North Africa fixed income.

Even better if that’s accompanied by a change in leadership at the Finance Ministry and the central bank, he said in an interview in Dubai.

“My biggest worry is that the runway is getting shorter,” Kronfol said. “The medium-term challenges and the need to create fiscal space through a voluntary debt restructuring or re-profiling remain, as does a multi-lateral backstop to provide credibility for an inevitable structural reform agenda.”

Lebanon needed Qatar’s commitment to invest US$500mil in its debt and a Saudi pledge to support the economy “all the way” to help its Eurobonds recover after the caretaker finance minister said he was mulling a plan to restructure debt.

Top officials, including the minister himself, later denied that such a move was on the cards.

But Kronfol said it would be only “sensible” for authorities to consider a plan to buy short-dated debt and “re-issue discounted securities for longer tenors,” helping slash interest payments.

The move should come as part of a comprehensive plan that addresses issues such as tackling the public-sector wage bill, overhauling the electricity sector and curbing corruption, he said.

“When you think about the solution for the country, clearly you’re going to need some breathing room to address structural reform,” Kronfol said.

“Key among this is to reduce the interest burden. So if Lebanon were to enter into some sort of an agreement with the IMF, or some multilateral institutions or a collection of countries – that allows it to basically buy some time.”

Despite an unblemished record of bond repayment through war and political strife, Lebanon is coming to a reckoning with years of fiscal overreach. Still run by a caretaker government eight months after elections, the nation’s political discord has deepened with the crisis in neighbouring Syria.

Government debt is projected to rise to near 180% by 2023, second only to Japan’s, according to IMF estimates. Lebanon’s debt risk, measured by credit default swaps, has risen the most in the world over the past year, apart from Zambia and Argentina, according to data compiled by Bloomberg.

Kronfol, who currently doesn’t have any Lebanese investments, said Gulf aid increased “the odds of containing the short-term stress – to avert a crisis of confidence and stem outflows from the banking system.” It’s not enough to deal with the challenges further into the future, he said. — Bloomberg

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