Lebanon's private sector economy remained in contractionary territory in January 2024, but a slight improvement compared to the previous month offered a glimmer of hope.

This upturn is particularly noteworthy given the typical snow season in Lebanon, where businesses traditionally experience improvements during this period of the year, but overall business activity remained subdued.

Domestic political and economic uncertainties, coupled with the Gaza conflict, were cited as key constraints. Sales contracted further, hindering production, and new work intakes declined as businesses grappled with reduced demand and war-related security concerns.

In this context, the World Bank painted, in its December 2023 Lebanon Economic Monitor, a bleak picture of the country's already struggling economy, further strained by a recent conflict.

While Lebanon had shown signs of finding its footing after years of decline, the report warns that this "new crisis" has pushed it back into recession.

Prior to the conflict, a fragile 0.2% growth was projected for 2023, fueled by temporary boosts like tourism and remittances. However, the conflict caused tourism to plummet, and inflation is expected to skyrocket to 231%, further worsening the living conditions of the most vulnerable. Unsustainable debt and the lack of comprehensive reforms further hamper progress.

While the Central Bank has taken some steps, fundamental changes are needed, especially in resolving the banking crisis. Remittances, a crucial lifeline, cannot alone address the external financing gap.

The report's special focus on the conflict's impact highlights its devastating effect on tourism, a vital sector for Lebanon. With a potential GDP contraction of 0.6%-0.9%, the country desperately needs a comprehensive crisis resolution plan to prevent further erosion of its capital and long-term prospects.

As a step forward toward solution for the financial crisis, the government and monetary authorities are proposing a solution to the problem of USD deposits in excess of $100,000 that are stuck in the banking system.

The solution involves giving depositors zero-coupon bonds equal to the original deposit amounts, which will be redeemed after 40 years. Deposits up to $100,000 will be returned in cash. The total amount of USD deposits above $100,000 is estimated to be $44.5 billion. Zero-coupon bonds are debt securities that do not pay interest but are traded at a discount in the market.

The market price of the eligible USD deposits above $100,000 is estimated to be $7.1 billion. The solution is novel and potentially sellable, but there are two concerns: the discount on the bonds would be large, and it is unclear whether the bonds would assume all of the eligible USD deposits or be part of a Deposit Recovery Fund.

Moreover this month, the Lebanese Parliament approved the fiscal budget on Friday, 26 January 2024, after a marathon session.

The budget is balanced, with revenues and expenditures at 295.11 trillion LBP each. There is a potential surplus of 13.32 trillion LBP, if the recent draft report by the MOF's estimated revenues of 308.43 trillion LBP is true.

Current expenditures dominate the budget, accounting for 91.2% of total expenditures. Wages and salaries are the largest component of current expenditures, at 51.3%. Tax revenues make up 77.9% of total revenues, with VAT and excise taxes capturing the largest share (57.1%). The Committee cancelled all articles involving new taxes and fees. It also raised family deductibles to 450 million LBP and the threshold of taxable personal income to 360 million LBP.

An exceptional tax of 10% was imposed on the turnover of companies who benefited from subsidies (including oil companies) and of 17% on the income of entities (not persons) who benefited from Sayrafa transactions. The new official exchange rate is not included in the budget. The Committee declared that this doesn't fall under its mandate. The BDL is expected to announce the new official exchange rate on January 31, 2024.

Following September’s announcement of the Lebanese authorities regarding replacement of the Sayrafa monetary platform with Bloomberg, Banque du Liban (BDL) has recently urged Lebanese banks to register on its newly introduced Bloomberg Interbank Matching System.

This action signals the beginning of preparations and training for banks to take on the role of “market makers. The "Bloomberg Interbank Matching System" aims to unify the country's exchange rate, currently fragmented due to its economic crisis.

This platform will rely on banks acting as "market makers," ensuring liquidity by buying and selling large amounts of foreign currency. While some banks have already registered, the launch date and full participant list remain unknown. Delays stem from the Gaza war's impact and awaiting the 2024 budget's passage.

Key goals include transparency, market stability, and reduced central bank intervention. However, uncertainties linger regarding inflation, parallel market persistence, and the platform's effectiveness in liberalizing exchange rates. Despite these concerns, this initiative represents a potential step towards regulating and organizing Lebanon's foreign exchange market.

As for the Lebanese exchange rate, it has maintained a relatively stable exchange rate of approximately 89,700 USD/LBP in the past month, marking a departure from the prolonged depreciation since 2019.

It’s crucial to recognize that this stability isn’t backed by robust fundamentals, given the ongoing financial crisis and the absence of a recovery plan. While recent steadiness might be linked to the Sayrafa platform’s halt and reduced market speculation, concerns persist due to uncertainties about Lebanon’s future and the broader regional context.

 

On the economic front, Lebanon’s inflation rate remained sticky at high levels and ending the year at 192.26% by December year 2023.

Meanwhile, escalating political tensions in the Red Sea pose a significant threat to the potential closure of the Bab el Mandeb Strait, a vital global maritime passageway.

Such an occurrence could precipitate supply chain disruptions, an upturn in shipping costs, and consequently, elevated consumer prices. The implications of these developments may result a broader surge in inflation.

As for Lebanon, already grappling with the challenges of sustained inflation since late 2019, would encounter heightened difficulties in preserving price stability amid prolonged economic uncertainty.

In details, the cost of “Housing and utilities”, inclusive of water, electricity, gas and other fuels (grasping 28.4% of the CPI) added a yearly 206.71% by December 2023. Also, “Owner-occupied” rental costs increased by 327.93% year-on-year (YOY) and the prices of “water, electricity, gas, and other fuels” followed a significant increase by 106.05% YOY. Looking at the prices of “Food and non-alcoholic beverages” (20% of CPI), it surged by 207.60% yearly.

In turn, the average prices of “Transportation” (13.1% of the CPI) and “Health” (7.7% of the CPI) recorded hikes of an annual 123.88% and 173.59% respectively by December 2023. Also, “Restaurant and Hotels” (2.8% of CPI) increased yearly by 197.62% by end of year 2023. In the same token, costs of “Clothing and Footwear” (5.2% of CPI) surged by 160.79% by December 2023, and the prices of “Communication” (4.5% of the CPI) increased by 128.83%. Prices of “Furnishings and household equipment” (3.8% of CPI), “Alcoholic beverages and tobacco” (1.4% of CPI), and “Recreation, amusement, and culture” (2.4% of the CPI) increased by 143.14%, 203.49%, and 133.85%, respectively, by December 2023.

The latest statistics on activity at the Port of Beirut showed that container Activity up 17.82% by October 2023.Total container activity including transshipment (TEU+TS) increased by a yearly 17.82% to stand at 699,629 twenty-foot equivalent unit (TEU) for the month of October 2023, with transshipment activity (TS) adding 102.40% YOY to 238,630 TEU, while container activity (TEU) dropped by 3.16% on a yearly basis to 460,997 TEU by October 2023. On a monthly basis, total container activity increased by 21.62% to stand at 77,848 twenty-foot equivalent units (TEU).

In more details, container activity (TEU) added 25.41% for the month of October 2023 compared to same month last year to reach 57,865 TEU while transshipment activity (TS) grew by 43.43% to 19,983 TEU for the month of October 2023, compared to 13,932 TEU in October 2022. In more details, the transshipment volume of CMA CGM, one of the two major shipping lines operating at the Port of Beirut, increased annually by 90.04% to stand at 154,876 TEU by October 2023. Similarly, transshipment volume of MSC, the other major line, added 126.84% YOY to 46,605 TEU by the same month. Furthermore, the local volume of CMA CGM dropped by 9.35% to reach 142,930 TEU, and local volume of MSC fell by 14.46% to stand at 92,355 TEU by the month of October 2023.

Furthermore, according to the customs Administration, Lebanon’s trade deficit in August 2023 totaled $8.32B down from $10.36B during the same period last year.

Total imported goods dropped by 16.27% year-on-year (YOY) to $10.69B while total exports slightly decreased by 1.46% YOY to stand at $2.38B by August 2023. In details, the “Mineral products” grasped the lion’s share of total imported goods with a stake of 27.49%. “Pearls, precious stones and metals” ranked second, composing 13.98% of the total while “Machinery; electrical instruments” and “Vehicles, aircraft, vessels, transport equipment” grasped the respective shares of 10.27% and 6.15%, respectively. On an annual basis, the value of imported “Mineral products” dropped by 19.55%, from $3.66B to $2.94B by August 2023.

Furthermore, the value of imported “Vehicles, aircraft, vessels, transport equipment” dropped significantly by 52.64% from $1.39B to $0.66B by August 2023. On the Exports front, Lebanon’s top exported products were “Pearls, precious stones and metals” grasping a share of 17.33% of the total.

“Machinery electrical instruments” and “Base metals and articles of base metal” followed, with each grasping a share of 15.36% and 11.27%, respectively, of the total. The top two export destinations in August 2023 were UAE and Turkey with the respective shares of 14.45% and 9.08%.

According to the balance sheet of Banque du Liban (BDL), the central bank’s total assets fell by 42.50% compared to last year, to reach $107.68B by mid of January 2024, amid adopting the 15,000 LBP/USD official rate by BDL since February 2023. The fall was mainly due to the 99.65% year-on-year (YOY) drop in other assets and reached $317.21M by mid of January 2024 compared to 90,645M by January 15, 2023. Interesting to mention that based on Central Council decision number 23/36/45 dated 20/12/2023, all previous Central Council decisions related to Seigniorage were suspended and all deferred interest costs emanating from open-market operations were presented under a new line item. As a result, all deferred interest costs included in Other Assets and Assets from Exchange Operations amounting to LBP 118.97 Trillion as of 31/12/2023 were transferred to “Deferred Open-Market Operations”. Furthermore, the gold account, representing 17.59% of BDL’s total assets, increased by 7.81% yearly to reach $18.93B by mid of January 2024. Additionally, BDL’s foreign assets, consisting of 13.49% of total assets dropped by 3.24% YOY and stood at $14.53B by mid of January 2024, noting that BDL holds in its foreign assets $5B in Lebanese Eurobonds.

On the liabilities front, financial sector deposits, representing 82.63% of BDL’s total liabilities, decreased by 19.15% and reached $88.97B by mid of January 2024 compared to last year, of which more than 90% are denominated in dollars. Lastly, currency in Circulation outside of BDL, consisting of 3.54% of BDL’s total liabilities, plunged by 91.44% annually to reach $3.81B by mdi of January 2024 amid adopting the 15,000 LBP/USD official rate by BDL.

Furthermore, according to Ernst & Young Middle East hotel benchmark survey, the occupancy rate in Beirut’s 4- and 5-star hotels reached 46.4% percentage points (pp) by October 2023, down from last year’s percentage of 51.1%. It is important to acknowledge that the occupancy rate in Beirut 4 and 5 stars hotels experienced a decline in October especially after the eruption of the conflict between Israel and Gaza due to Hamas attack on October 7, 2023. In fact, it has rapidly become a cross-border threat for the region given the heightened tensions between Lebanese armed group Hezbollah and Israel. Since the day of the attack, thousands of tourists and Lebanese living abroad have been considering to cancel their trip to Lebanon out of fear of a potential war erupting between Israel and Hezbollah. In more details, the average room rate in dollars currency in Lebanon rose substantially by 151% to stand at $148, additionally the RevPAR increased by 127.98% to reach $69 for the month of October 2023.

On a regional level, hospitality markets in Dubai city and Madinah in KSA witnessed an increase across all performance indicators in October 2023 compared to October 2022. In more details, the occupancy rates in Dubai city added 6.4% to reach 81.2% while Madinah City occupancy rates added 3.7% to reach 75%. Madinah’s hospitality sector observed a remarkable RevPAR growth of 47% from $103 in October 2022 to $151 in October 2023. Meanwhile, average room rate in Madinah jumped by 39.8% from $144 in October 2022 to $202 by October 2023. As for Dubai city, the average room rate reached $468 October 2023, thus RevPAR increased by 8.7% to stand at $380 during the same period.

On a different note, the total number of cleared checks in the Lebanese financial system slumped from 1,557,226 checks by December 2022 to 434,348 checks by December 2023 as published by the Association of Lebanese Banks’ (ABL). Moreover, the cumulative value of cleared checks in local currency increased remarkably from LBP 27,146B by December 2022 to LBP 65,938B by December 2023. This upsurge is driven by a significant increase in value of Lebanese checks which reflects a larger percentage of discounting Lebanese checks in the market. Meanwhile, the cumulative value of cleared checks in foreign currency fell from $10,288M by December 2022 to $3,292M by December 2023. Moreover, the volumes of cleared checks in Lebanese Pounds and foreign currencies witnessed significant yearly drops of 60.57% and 86.43% respectively to settle at 340,048 and 94,300 checks, by December 2023. Accordingly, the dollarization rate of checks in terms of volume fell from 44.61% in December 2022 to 21.71% in December 2023.

Notably, the number of returned checks fell substantially by 69.62% YOY to stand at 3,363 checks. Moreover, the value of returned checks in foreign currency increased by 13.75% by December 2023 to reach $182M, additionally the value of returned checks in local currency increased remarkably by 176.45% YOY to reach LBP 857B by December 2023. Banque du Liban (BDL) recently issued Circular 165, which permits depositors to make payments by check starting from June 1st, 2023, as long as their accounts are in either fresh US dollars or Lebanese lira. To support this initiative, BDL has introduced a new clearing system, distinct from the one dedicated to pre-crisis deposits. This circular serves a dual purpose: it encourages customers to open new accounts in both Lebanese pounds and US dollars, while also aiming to decrease the country’s dependence on cash and stimulate economic recovery. As such, by December 2023, a total number of 2,395 checks were issued from fresh accounts, of which 1,179 checks are in USD currency amounting $16.107M and 1,216 checks are in LBP currency amounting LBP 2,354B. However, in December alone, number of checks issued from fresh accounts in dollar stood at 484 checks totaling $6,307,857 while number of checks issued from fresh accounts in LBP reached 331 checks amounting LBP 592B.

Moreover, the data released by the Ministry of Finance (MoF) indicated that Lebanon’s gross public debt hit $102.47B in January 2023, thereby recording an annual increase of 3.2% YOY. The rise is mainly attributed to the annual increase in foreign currency debt (namely in USD) by 7.35%, to stand at $41.57B by January 2023. In turn, total foreign debt grasped a stake of 40.57% of the total public debt by January 2023. It is worth mentioning that $14.43B represents the unpaid Eurobonds, their coupons and accrued interests, due to the default on government Eurobonds in March 2020. Meanwhile, debt in local currency (denominated in LBP) rose slightly by 0.57% to stand at $60.89B in January 2023, and constituted 59.43% of the total public debt. Looking at net domestic debt, which excludes public sector deposits with the central bank and commercial banks, it decreased remarkably by 13.97% YOY to $41.85B in January 2023.

According to the data from the Orders of Engineers in Beirut and Tripoli, the total construction permits witnessed a year-on-year (YOY) remarkable decrease of 39.49% to reach 10,915 permits by December 2023. Similarly, the Construction Area Authorized by Permits (CAP) plunged by an annual 45.96% to 4,537,427 square meters (sqm), mainly driven by public institution’s strike, decline of interests towards investing in real tangible assets and less overall income. In the same token, construction activity witnessed a significant decrease regionally compared to last year. Across the governorates, Mount Lebanon, grasped 34.92% of the total permits, and accounted for 3,811 permits by end of year 2023 compared to 6,985 previous years. However, for the South, it constituted 29.15% of the total permits; its respective number of permits reached 3,182 permits compared to 5,193 permits by end of last year. In Nabatieh which holds 20.95% of the total permits, its share accounted for 2,287 by December 2023. In Bekaa, 1,045 construction permits were issued by December 2023 down from 1,709 in last year, while in Beirut only 323 construction permits were issued by December 2023. The decrease is more notable given the lack of bank lending.

In 2023, Lebanon experienced a concerning deterioration in construction permits, reflecting the harsh impact of a persistent economic downturn over the past three years despite some breakthrough. The country is still grappling with political instability, exacerbating an already challenging situation. High construction costs and limited financing options further compounded the decline in construction permits, making it increasingly difficult for developers and investors to initiate projects. Additionally, Lebanon witnessed a notable shift in market demand for real estate, as uncertainties and economic challenges led to a reassessment of priorities among potential buyers and tenants. This confluence of factors has created a challenging environment for the construction sector in Lebanon, emphasizing the multifaceted nature of the issues influencing the decline in construction permits.

Furthermore, Real Estate Demand came lower by an annually 84.96% By End of 2023. According to the data from the General Directorate of Land Registry and Cadastre (LRC), the number of Real estate (RE) transactions stood at 14,979 transactions by end of 2023, compared to 79,990 transactions same period last year. The drop is mainly due to the ongoing nation-wide strike for the public employees which have led to major dysfunction for public services.

In the same token, the value of total RE transactions stood at $4.12B by December 2023 calculated at the new official rate of USD/LBP 15,000, which is 71.26% lower than $14.36B in last year.

On a monthly basis, the number of RE transactions stood at 3,340 in the month of December 2023, compared to 2,610 transactions in the same month previous year and 3,805 transactions in November 2023.  In details, South region holds the biggest share of real estate transactions at 835, or 25% of total RE transactions, in the month of December 2023, followed by North at 768 transactions or 22.99% of total RE transactions. Furthermore, Zahle grasped 22.96% of total RE activity in December 2023, and 12.84% or 429 transactions was the share that the Nabatieh grasped out of the total RE transactions, while Beirut held 412 transactions or 12.34%. Noting that no RE transactions was recorded in the area of Metn, Kesserwen, and Baabda for the month of December 2023. Moreover, the breakdown of RE activity by value for December 2023 showed that Beirut grasped the lion’s share of the total value of RE transactions, equivalent to 50.75% and worth $517.13M, while the South followed, constituting 23.50% of the total and worth $239.44M.

Meanwhile, Lebanese Cars Market Stabilized at Low Levels in 2023 with Little Increase by 0.23% YOY by December 2023.

In more details, the cumulative number of sold cars in 2023 recorded a total of 6,578 compared to 6,563 cars in 2022. On a monthly basis, 1,680 cars were sold in the month of December 2023.

The distribution of cars was as follows: Japanese cars took the highest share of 38.46%, European cars accounted for 24.59%, and Korean Cars grasped 19.27% of the total. Furthermore, the leading sellers of vehicles in Lebanon are Kia, Toyota, and Suzuki with number of vehicles sold in the month of December alone totaled 218, 186, and 142 respectively, out of 1,680 sold cars.

Despite a tentative rebound in Lebanon’s car sector, sales of passenger vehicles are significantly lower than 2018 and even 2020 levels. The demand for new vehicles is restricted by inadequate financing options, exacerbated by the depreciating exchange rates of the Lebanese currency.

According to BDL’s latest monetary report, the BOP recorded a surplus of $1.65B by November 2023, far beyond the deficit over the same period last year of $3.21B.

Accordingly, Net foreign Assets (NFAs) of BDL fell by $0.94B while the NFAs of commercial banks rose by $2.59B by November 2023. On a monthly basis, the BOP recorded a surplus of $185.6M in November 2023, where the NFA of BDL increased by $132.1M and NFA of banks rose by $53.5M.

For the latter, the changes were noticeable on both sides of the commercial banks’ balance sheet. On the assets side, claims on non-resident financial sector rose by $116.27M, deposits with non-resident central banks increased by $14.82M and non-resident securities portfolio increased by $8.75M, whereas claims on non-resident customers declined by $41.85M and other foreign assets dropped by $10.24M in November 2023. On the liabilities side, non-resident customers deposit declined by $34.74M while non-resident financial sector liabilities increased by $3.14M and non-resident debt securities issued increased by $1.56M in November 2023.

According to Lebanon’s consolidated commercial banks’ balance sheet, total assets decreased annually by 31.79% to stand at $112.58B by November 2023 amid BDL’s adoption of a new exchange rate of LBP 15,000 per USD.

On the assets side, currency and deposits with Central Bank represented a high figure of 74.95% of total assets; they dropped annually by 22.43% to settle at $84.37B in November 2023. Deposits with the central bank (BDL) represented 99.28% of total reserves, and decreased by 20.87% YOY, to reach $83.77B in November 2023.

Furthermore, Vault cash in Lebanese pound fell by 79.2% on a yearly basis to stand at $605.91M by the same period. The drop is attributed to the calculation based on the new official exchange rate of LBP 15000 per USD. Claims on resident customers, constituting 6.52% of total assets, shrank significantly by 61.2%, to stand at $7.34B in November 2023. Moreover, Resident Securities portfolio (4.97% of total assets) dropped by 61.53% in November 2023 to stand at $5.59B. More specifically, the Eurobond holding recorded a decline of 29.99% since November 2022, to reach $2.41B by end of November 2023. Additionally, claims on non-resident financial sector increased by 4.82% YOY to stand at $4.31B by November 2023.

On the liabilities side, resident customers’ deposits were the main account, representing 64.67% of total liabilities; they decreased by 26.51% since November 2022 to reach $72.8B by the month of November 2023. In more details, deposits in foreign currencies (95.4% of resident customers’ deposits) decreased by 5.99% YOY to reach $69.46B by November 2023, additionally deposits in LBP (4.6% of resident customers’ deposits) fell by 86.72% YOY to stand at $3.35B by November 2023. Noting that Lebanon has become dollarized and cash based.

As for Non-resident customers’ deposits, grasping 18.82% of total liabilities, they recorded a drop of 9.54% and stood at $21.18B in November 2023. In details, the deposits in LBP fell by 90.35% to reach $192.01M and deposits in foreign currencies declined by 2.03% to reach $20.99B over the same period. In addition, Non-resident financial sector Liabilities held 2.69% of total Liabilities and decreased by 29.92% YOY to reach $3.02B in November 2023. More importantly, the dollarization ratio for private sector deposits increased from 77.41% in November 2022 to 96.12% in November 2023.

In the same context, and according to November ABL’s publication of banking and monetary indicators, banks branch network decreased significantly from 1,058 branches by December 2019 to reach 737 branches in Lebanon by end of July 2023, while banking sector in Lebanon experienced a contraction of about 9,167 employees, from 24,704 employees by end of 2019 to 14,693 employees by July 2023.

Furthermore, deposits with Central Bank (BDL) dropped by 28.79% from $117,642M by the start of 2020 to $83,769M by November 2023 as of the official exchange rate of 15,000 USD/LBP. In addition, foreign assets of BDL excluding gold decreased remarkably from $30.98B in October 2019 to a low of $9.373B in November 2023 while foreign securities were down by 29.18% to stand at $4.929B for the same month. Commercial banks’ claims on private sector in LBP and USD contracted respectively by 50.39% and 79.83% to stand at LBP 12,118B and USD 7.722B in November 2023. Moreover, Lebanese Republic Sovereign Eurobonds (provisions deducted) were evaluated at $2.410B in November 2023 down from $ 14.859B in September 2019.

As for the netting of commercial bank claims and deposit of the non-resident financial sector, it experienced a significant transformation, as non-resident financial sector liabilities plummeted from $9.661B to $3.023B. Simultaneously, claims on the non-resident financial sector contracted from $8.976Bto $4.31B. This suggests a significant decrease in financial risk and a restructuring of the financial environment, as the difference between claims and liabilities becomes narrower.

These shifts in the balance of financial assets and liabilities are pivotal in influencing economic and sector stability. On the liabilities side, BDL’s foreign liabilities fluctuated during the last years from $2.401B in November 2019 to $1.707B by the end of November. Nevertheless, commercial banks resident customers’ deposits in LBP and USD recorded a substantial drop from LBP 69,592 B and USD 124.138 B in September 2019 to LBP 55,329 B and $ 91,284 B, respectively, by end of November 2023.

In summary, the Lebanese private sector showed signs of early stabilization in 2024, despite persistent economic challenges. This was driven by steady employment, a slower decline in production and new orders, and easing input cost inflation. Businesses raised prices to improve their margins. While the BLOM Lebanon PMI remained in negative territory, its rise from 48.4 in December to 49.4 in January suggests a positive trend.