Fiscal implications of the July war were extremely high due to both direct and indirect cost

Lebanese Economic Association Conference January 15, 2007

From Paris II to Paris III: Some Facts on Public Finances, Debt, and

the Economy

Presentation by BankMed Chief Economist Dr. Mazen M. Soueid

Back to power in 2000 on the back of a slowing economy, the government of late PM Hariri developed an ambitious economic reform agenda

In that context, Paris II was a mean of extensive financial support as well as a framework for the implementation of the long-awaited reforms

The economy posted, as a result, strong GDP growth rates in 2003 and 2004, particularly in the later year, when growth reached 7%

Lebanon Real GDP Growth Cycles

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: IMF

Revenue collection was boosted, and expenditures increase curbed

Fiscal Balance improved as a result

Fiscal Balance in Million USD

-4500

-4000

-3500

-3000

-2500

-2000

-1500

-1000

-500

0

2000 2001 2002 2003 2004 2005 Up to Oct.2006

But strong political divisions did not allow the privatization program, one of the main pillars of the reform agenda, to be implemented

As a result, the stock of debt (more dependent on privatization proceeds than on fiscal balance), and hence the debt to GDP level decreased only slightly

Gross Public Debt to GDP (%)

150

155

160

165

170

175

180

185

190

195

2000 2001 2002 2003 2004 2005 2006

Political earthquake in 2005- Assassination of PM HaririBig impact on financial but smaller impact on public finances

Military earthquake in 2006- July Israeli warSmall impact on financial but much bigger impact on public finances

Dollarization of Private Sector Residents' Deposits

50

55

60

65

70

75

80

Dec-9

7

Mar

-98

Jun-

98

Sep-9

8

Dec-9

8

Mar

-99

Jun-

99

Sep-9

9

Dec-9

9

Mar

-00

Jun-

00

Sep-0

0

Dec-0

0

Mar

-01

Jun-

01

Sep-0

1

Dec-0

1

Mar

-02

Jun-

02

Sep-0

2

Dec-0

2

Mar

-03

Jun-

03

Sep-0

3

Dec-0

3

Mar

-04

Jun-

04

Sep-0

4

Dec-0

4

Mar

-05

Jun-

05

Sep-0

5

Dec-0

5

Mar

-06

Jun-

06

Sep-0

6

September 11

PM Hariri Assasination

July War

Fiscal implications of the July war were extremely high due to both direct and indirect cost

The indirect effects are much higher:

Higher funding cost, at least for international market debt

Lost revenue from lost economic activity

Expenditures are up

The deficit is higher and the primary surplus is lower

Eurobonds Spreads: Lebanon and EMBI Global

0

200

400

600

800

1000

1200

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep

-02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

EMBI Global

EMBI Lebanon

Revenues- 6M Versus 10M Total in Million USD

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2002 2003 2004 2005 2006

Total January-June

Total January-October

Expenditures- 6M Versus 10M Total in Million USD

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2002 2003 2004 2005 2006

Total January-June

Total January-October

Fiscal Balance- 6M Versus 10M Total in Million USD

-2,500

-2,000

-1,500

-1,000

-500

0

2002 2003 2004 2005 2006

Total January-June

Total January-October

Primary Surplus- 6M Versus 10M Total in Million USD

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006

Total January-June

Total January-October

And this has undermined efforts since late 2000 to reduce the deficit and to increase the primary surplus…

…Which increased further the debt levels, and the already high and spiralling debt-to-GDP ratio

Fiscal Balance in Million USD

-4500

-4000

-3500

-3000

-2500

-2000

-1500

-1000

-500

0

2000 2001 2002 2003 2004 2005 Up to Oct.2006

Primary Balance in Million USD

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

2000 2001 2002 2003 2004 2005 Up to Oct.2006

Gross Public Debt in Million USD

0

5

10

15

20

25

30

35

40

45

Dec. 03 Dec. 04 Dec. 05 Oct. 06

LBP-Denominated

Foreign-Currency Denominated

Gross Public Debt to GDP (%)

150

155

160

165

170

175

180

185

190

195

2000 2001 2002 2003 2004 2005 2006

What about 2007?

Biggest challenge will be to fill the gross financing need of the government (estimated at around $10 billion) without a further increase in interest rates

Amortization Obligations in 2007 in Million USD

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07

Local Debt

Foreign Debt

And these are only part of large amortization obligations coming due in between 2007 and 2010 putting total gross financing need (amortization obligations plus fiscal deficits) at about $37 billion in the next three years…

…which in the absence of reforms will place a higher burden on the domestic commercial banks, keep interest rates high, and crowd-out the private sector

Lebanon Amortization Obligations in Million USD

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2007 2008 2009 2010

Local-Currency Debt Obligations

Foreign-Currency Debt Obligations

Distribution of LBP T-Bills by Owner

Banks

Central Bank

Public Institutions

General Public

It is in this sense, that a successful Paris III is no longer a luxury, but an imperative doorway to tackling the structural debt issue and lay down the foundations for Lebanon to reach potential growth rates of 7-8% as manifested in the first half of 2006

Middle East Countries GDP Per Capita in 2005

0 5 10 15 20 25 30 35 40

Yemen

Iraq

Egypt

Syria

Morocco

Jordan

Algeria

Iran

Tunisia

Libya

Lebanon

Oman

Saudi Arabia

Bahrain

Kuwait

United Arab Emirates

Qatar

Source: IMF

Middle Eastern CountriesAverage 1998-2006 Real GDP Growth Rates

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Syria

Lebanon

Libya

Saudi Arabia

Oman

Yemen

Morocco

Algeria

Egypt

Pakitsan

Tunisia

Iran

Jordan

Kuwait

Bahrain

UAE

Sudan

Qatar

Source: IMF

Thank You