Strategy Note /

Lebanon: Long-term macro outweighs short-term positives

    Christopher Dielmann CFA
    Christopher Dielmann CFA

    Director, Macroeconomic & Sovereign Research

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    19 November 2018
    Published by

    Despite recent comments from Prime Minister Saad Hariri that Hezbollah’s insistence on Sunni representation is causing a blockade in government, we still believe that the likelihood of a government being formed in Lebanon has increased in recent weeks, after months of deadlock.

    A new government would likely be able to pass the 2019 budget, which in turn would probably result in a positive stimulus for the country in the short term, as we discussed in our recent strategy report.

    Ultimately, though, our view is that these short-terms gains will be insufficient to outweigh the country’s longer-term macroeconomic challenges: most notably, low growth, high debt and a current account that continues on a downward trend

    Sovereign bonds: One Buy, three Holds

    The macro situation and risks to the country’s debt stock remain enormously high, but one bright spot for Lebanon is that its sovereign bonds tend to show a degree of resilience, likely as a result of a deep domestic financial market, large international investor body and relatively wealthy and engaged diaspora that appears willing to purchase anytime there is downward pressure on prices. USD-denominated bonds have seen an increase in yields throughout 2018, but much of this sell-off reflects global trends across all EMs.

    Near-term positives, including potential disbursements from the CEDRE Conference in April and the formation of a government, should offer a degree of upside in bond pricing, but we believe these positives are not sufficient to outweigh the longer-term risks.

    In this report, we issue a Buy recommendation on the November 2019 bonds on the back of the high yield that they offer – per our calculation, the highest-yielding dollar-denominated sovereign one-year paper currently available – and the reduced rollover risk stemming from the recent Banque du Lebanon (BdL) and the Ministry of Finance (MoF) swap operation (that has effectively been done to pre-finance this repayment); large external buffers provide further assurance of short-term repayment capacity.

    And we initiate Hold recommendations across the medium to long end of the curve based on the aforementioned macro risks, which outweigh the attractive returns for dollar assets.

    Equities: Attractive (but very illiquid)

    For those prepared for very low liquidity, Lebanon stocks (AUDI, BLOM, SOLA) offer compelling value. Clearly the catalyst of the new government and release of pledged international finance is needed.