A comprehensive economic plan is critical to crystallise a foreign financing envelope/Shutterstockby Bloomberg
Oxford Economics said that Lebanese authorities will be reluctant to announce a default on debt payments until a functioning government is formed, pushing back any plans for a bond restructuring to later this year.
Investors can reap a 13 per cent return if they buy Lebanon’s dollar-denominated note due on 9 March 2020. While there is an 85 per cent probability that those bonds will be repaid at maturity, dwindling foreign-currency reserves mean a default may still be announced in the second half of 2020.
According to Oxford Economics, the chances of Lebanon repaying its $2.1 billion bond maturing in April 2021 are slim.
The recommendation comes after a record slump in the March bond last week last week, fuelled by reports that Lebanese lenders have been selling the instruments to avoid participating in a central bank-initiated voluntary debt swap.
Additionally, Oxford Economics also noted that paralysis in the Lebanese leadership will prompt the Banque du Liban and the caretaker government to delay any decision on a debt restructuring beyond the March 2020 maturity. While President Michel Aoun appointed former education minister Hassan Diab to form a government last month, progress has been slow with protesters demanding a cabinet of experts.
Oxford Economics’ Nafez Zouk, said that the likely strategy, for now, is to buy time, adding that a political vacuum is preventing the coalescence around a credible and comprehensive economic plan. A comprehensive economic plan is critical to crystallise a foreign financing envelope, within which debt restructuring can take place.
Since the resignation of Prime Minister Saad Hariri in October 2019, Lebanon faces a debt load that is climbed to more than 150 per cent of economic output.