Transcript Some Facts on Public Finances, Debt, and the Economy

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
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1992
1993
-1.0
-2.0
Source: IMF
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Revenue collection was boosted, and expenditures
increase curbed
Fiscal Balance improved as a result
Fiscal Balance
in Million USD
0
2000
-500
-1000
-1500
-2000
-2500
-3000
-3500
-4000
-4500
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 (%)
195
190
185
180
175
170
165
160
155
150
2000
2001
2002
2003
2004
2005
2006
Political earthquake in 2005- Assassination of PM
Hariri
Big impact on financial but smaller impact on public
finances
Military earthquake in 2006- July Israeli war
Small impact on financial but much bigger impact
on public finances
ec
M 97
ar
Ju 98
nSe 98
p
D -98
ec
M 98
ar
Ju 99
nSe 99
p
D -99
ec
M 99
ar
Ju 00
nSe 00
p
D -00
ec
M 00
ar
Ju 01
nSe 01
p
D -01
ec
M 01
ar
Ju 02
nSe 02
p
D -02
ec
M 02
ar
Ju 03
n
Se -03
p
D -03
ec
M 03
ar
Ju 04
nSe 04
p
D -04
ec
M 04
ar
Ju 05
nSe 05
p
D -05
ec
M 05
ar
Ju 06
nSe 06
p06
D
Dollarization of Private Sector Residents' Deposits
80
PM Hariri Assasination
75
September 11
July War
70
65
60
55
50
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
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
Jan-05
Nov-04
600
Sep-04
Jul-04
May-04
Mar-04
Jan-04
Nov-03
Sep-03
Jul-03
May-03
Mar-03
Jan-03
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Jan-02
Eurobonds Spreads: Lebanon and EMBI Global
1200
EMBI Lebanon
1000
800
EMBI Global
400
200
0
Revenues- 6M Versus 10M Total
in Million USD
4,500
4,000
Total January-October
Total January-June
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2002
2003
2004
2005
2006
Expenditures- 6M Versus 10M Total
in Million USD
7,000
Total January-October
6,000
Total January-June
5,000
4,000
3,000
2,000
1,000
0
2002
2003
2004
2005
2006
Fiscal Balance- 6M Versus 10M Total
in Million USD
0
2002
2003
2004
2005
-500
-1,000
-1,500
Total January-October
Total January-June
-2,000
-2,500
2006
Primary Surplus- 6M Versus 10M Total
in Million USD
700
600
500
400
300
Total January-October
Total January-June
200
100
0
2002
2003
2004
2005
2006
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
0
2000
-500
-1000
-1500
-2000
-2500
-3000
-3500
-4000
-4500
2001
2002
2003
2004
2005
Up to Oct.
2006
Primary Balance
in Million USD
800
600
400
200
0
2000
-200
-400
-600
-800
-1000
-1200
2001
2002
2003
2004
2005
Up to Oct.
2006
Gross Public Debt
in Million USD
45
40
Foreign-Currency Denominated
35
LBP-Denominated
30
25
20
15
10
5
0
Dec. 03
Dec. 04
Dec. 05
Oct. 06
Gross Public Debt to GDP (%)
195
190
185
180
175
170
165
160
155
150
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
1800
1600
1400
1200
Foreign Debt
1000
800
600
Local Debt
400
200
0
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
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
10000
9000
Foreign-Currency Debt Obligations
Local-Currency Debt Obligations
8000
7000
6000
5000
4000
3000
2000
1000
0
2007
2008
2009
2010
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
Qatar
United Arab Emirates
Kuwait
Bahrain
Saudi Arabia
Oman
Lebanon
Libya
Tunisia
Iran
Algeria
Jordan
Morocco
Syria
Egypt
Iraq
Yemen
0
Source:
IMF
5
10
15
20
25
30
35
40
Middle Eastern Countries
Average 1998-2006 Real GDP Growth Rates
Qatar
Sudan
UAE
Bahrain
Kuwait
Jordan
Iran
Tunisia
Pakitsan
Egypt
Algeria
Morocco
Yemen
Oman
Saudi Arabia
Libya
Lebanon
Syria
0.0 Source: IMF
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Thank You