Lebanon's Ministry of Finance, and its financial adviser (Lazard), held an investor presentation earlier today via webcast – the presentation and further details, and future creditor communication, will be posted to the ministry's website.
To summarise, there was nothing on restructuring terms, as should have been expected (clearly, it is too soon for that, despite some reports to the contrary). However, it did set out the perimeter of the debt, and confirmed that local debt will be included (and the eurobonds), as well as the government's restructuring principles (see below).
We think it looks set to be a lengthy process, as we have noted before. As a first step, the deadline for bondholder identification is 17 April.
The key highlights for us were:
1. The presentation set out economic developments and the context to the restructuring. This is probably well known by now, but some key figures were provided:
- Real GDP could contract by 12% this year, after -6.9% in 2019, due in part to dollar shortages. The impact of coronavirus presents additional downside risks.
- Inflation projected at 27% this year (annual average).
- Central bank reserves down to US$29bn in January, of which US$22bn are liquid and US$18bn of those are banks' mandatory reserves for regulatory purposes.
- Overall fiscal deficit 11.3% of GDP in 2019 after 11.4% in 2018. Interest accounted for 50% of government revenue in 2019.
- Public debt stood at 178% of GDP in 2019.
2. The government announced a moratorium on payments on all its foreign currency-denominated eurobonds on 23 March. This follows the decision on 7 March to withhold payments of principal and interest on the US$1.2bn eurobond due 9 March (see our note here). These decisions were taken to preserve reserves for priority imports.
3. The government's recovery plan consists of four pillars: 1) fiscal reform plan, including reforming the electricity sector and pensions to reduce subsidies, rationalising current expenditure, streamlining government institutions and enterprises, and improving tax collection and tax administration; 2) growth-enhancing structural reforms; 3) banking system reform; and 4) comprehensive public debt restructuring.
4. The perimeter of the debt restructuring is eurobonds and local-currency instruments. Bilateral and multilateral debt is not included. The presentation suggested that eurobonds will be dealt with first, local currency debt (T-bills and bonds) later. We think it is essential the latter (domestic public debt) is included in the restructuring in order to restore debt sustainability given its size (see our note, Lebanon: Restructuring inevitable, big haircut likely, dated 26 February). The table below gives a breakdown of the public debt stock from the presentation.
|As of January 2020||US$bn|
|Official sector (bilateral and multilateral)||2.0|
|Local instruments (T-bills and bonds)||57.1|
5. The debt restructuring will be guided by four main principles: debt sustainability, refinancing capacity, external financial balance and providing a reasonable buffer to protect against exogenous shocks. No figures or illustrations were given (pending more discussions with its different creditors).
6. Next steps were two-fold. First, the design and approval of a comprehensive economic recovery plan. This includes discussions with multilaterals on potential external support. There was no specific mention of an IMF programme. Second, engagement with private creditors. The sequencing on this included discussions on country fundamentals, restructuring parameters, agreement on key legal and financial terms, and finally deal close. The two steps would run in parallel – and, clearly, there is a circularity between the two. No specific deadline was provided but the presentation noted these steps would take place over March-December 2020. Any agreement is therefore not imminent (the process has only just started after all).
7. The government will engage in good-faith discussions with its creditors, abiding by principles of transparency, collaboration, equitable treatment and the need for a credible and sustainable solution. Bondholders with significant holdings will be prioritised in creditor discussions.
8. The government today launched an identification exercise for all bondholders. The deadline is 17 April.