Lebanon formed a new cabinet after a 13-month governance vacuum due to its fragmented political environment. Prime Minister Najib Mikati enjoys a closer relationship with both the EU and the Arab region than ex-PM Hassan Diab. Political decohesion remains a severe challenge in Lebanon, as the treaty between ex-PM Saad Hariri and the leader of the FPM party, Gebran Bassil, has been severed in the past 13 months.
The new cabinet now faces a short window until the general elections in May 2022 to implement effective reforms. The risk of the general elections being delayed due to a lack of agreement from the political parties regarding new electoral rules remains high, keeping overall confidence in the market fragile despite the cabinet formation.
Since the government formation, the lira’s volatility has improved slightly. Lebanon received US$ 1.13 billion from the IMF in form of special drawing rights (SDR) and has resumed IMF talks over a bailout, as well as resumed debt restructuring negotiations with its lenders. Lira volatility eased slightly under Mikati, appreciating from LL 21,000 to about 16,000 after the formation of the government.
Our View
PM Mikati’s new cabinet formation will slow economic deterioration in Lebanon rather than drive a marked recovery. Positively, with a formal government, Lebanon can begin negotiating with the IMF over a bailout and implement reforms. However, a 13-month formation timeline is indicative of the political fissures, with FrontierView expecting various challenges in the smoothness of policymaking. Lebanon will require wholesale strict reforms before the FX-reserve situation improves. The IMF, Lebanon’s only realistic source of lending now, will mandate severe austerity measures and reforms before finalizing a program. Amid Lebanon’s reform bill planning, talks of devaluing the lira will resume. FrontierView expects the lira to be devalued markedly from its current peg of LL 1,500: US$ 1 to LL 8,000–10,000 against the US dollar. This is far lower than previously forecasted; however, protracted depreciation on the black-market rate and depletion of reserves make it impossible to claw back.
Business Implications
Political instability and a protraction in the economic crisis will result in further contraction in private consumption in 2021, but consumer spending is expected to return to recovery—albeit very gradually—in 2022 supported by stronger improvements and softening lira volatility. Transactional challenges, financial strain, and import restrictions will persist for businesses in Lebanon through 2022.
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