Lebanon adopted a new official exchange rate of 15,000/US$ on 1 February, a devaluation of 90% from the official rate of 1,500/US$ that has prevailed for the past 25 years. The new rate will apply to banks and will replace the two separate rates of 8,000/US$ and 12,000/US$ currently offered on FX deposits. Central bank (BdL) Governor Riad Salameh says that banks will be given five years "to reconstitute the losses due to the devaluation".
The devaluation will have little practical impact on ordinary citizens, who have been largely unable to access their FX deposits (prompting a spate of armed robberies by desperate depositors last year). The economy is now largely dollarised and most currency transactions take place on the parallel market, where LBP traded at 64,500/US$ yesterday, bringing depreciation to an eyewatering 34% since the start of the year and 98% since mid-2019.
While Salameh says that the official devaluation is a step towards unifying Lebanon’s multiple exchange rates in line with IMF demands, it falls well short of what is needed. The new official rate is still nowhere near Lebanon’s other exchange rates, including the parallel exchange rate (which is still 77% below the official rate) and the BdL’s Sayrafa rate (which fell this week from 38,000/US$ to 42,000/US$ but is still 64% weaker than the official rate).
As such, LBP’s long overdue devaluation is a meaningless gesture that falls well short of what is required to restore a functioning currency market and satisfy IMF demands. The only way to satisfy these two conditions is to devalue to a market clearing rate in one fell swoop and allow the exchange rate to trade flexibly in line with market conditions thereafter. The BdL does not have the resources to defend a new peg, especially one that is still so blatantly overvalued.
Not only has Lebanon failed to deliver on exchange rate liberalisation, but it has also failed to implement any of the nine other prior actions required for IMF Board approval. Lebanon has been unable to form a government since parliamentary elections last May, leaving the current caretaker government with limited power to implement reforms. Likewise, lawmakers have now failed 11 times to elect a president since the expiry of outgoing President Michel Aoun’s term at the end of October.
Despite the worsening economic implosion and widespread suffering caused by the government’s inaction, opposing parties have refused to reach across the aisle. No candidate has received more than 44 of the 86 votes required to elect a president, with MPs routinely abstaining or spoiling votes. There is no sign of compromise anytime soon, with the last presidential vacancy dragging out for 29 months before Aoun took office in October 2016 and the most recent government forming in September 2021 after 13 months of negotiations under three different prime minister-designates.
The LBP’s implosion and BdL Governor Salameh’s continued presence at the helm of the bank despite an ongoing US$330m money laundering probe against him by five separate European nations has fueled anger, with protesters blocking roads and burning tires near the central bank in Beirut earlier this month. However, things have been surprisingly calm given the extent of the economic crisis and the callous refusal of Lebanon’s political elites to do anything about it, with a near doubling of remittance inflows over the past 12 months relative to 2018 so far staving off a more severe social catastrophe.
That said, we see little reason for optimism given the lack of progress on reforms or restructuring, and with no president or government to push the agenda forward. Yesterday’s devaluation is a meaningless gesture that brings Lebanon no closer to success on either of these fronts.
We retain our Hold recommendation on Lebanon’s eurobonds, with the LEBAN 7 03/23/2032 REGS Corp rising to US$7 on a mid basis at cob on 1 February on Bloomberg from US$6.08 at the end of 2022. It will likely continue trading in the single digits with a large degree of uncertainty at the margins.
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