Lebanon Succumbs To The Highest Debt-to-GDP Ratio In The World

Lebanon’s gross public debt increased by 8.9 percent annually to $93.40 billion in the first half of 2020, according to the latest figures released by the Ministry of Finance.

And it could exceed $95 billion by the end of August, according to economist and banker Nicolas Chikhani.

Chikhani told Arabian Business that he believes Lebanon’s GDP will collapse from $55 billion in 2018 to $32 billion at the end of July to close to $25 billion by the end of 2020 after the tragedy of Beirut port explosion which destroyed hundreds of SMEs and destroyed the port through which 70 percent of the Lebanese economy is processed.

At this pace, the debt to GDP ratio will exceed 375 percent by the end of 2020, the world’s highest debt-to-GDP ratio ever, Chikhani said.

Japan has second highest national debt in the world at 234.18 percent of its GDP, followed by Greece at 181.78 percent.

The debt in local currency (denominated in LBP) stood at $58.60 billion by June, registering a growth of 9.62 percent year-on-year. Domestic debt accounted for 62.74 percent of total public debt, down from 62.62 percent last year.

“In order to alleviate the debt-to-GDP ratio, Lebanon will have to opt to the devaluation of its official currency rate by more than 50 percent, reducing its public debt to $55 billion, and its debt-to-GDP ratio to 220 percent,” Chikhani said, adding: “But this is not enough to achieve the OECD requirement and get a debt/GDP ratio below 80 percent.”

The failure to pay off foreign debt since last March, the collapse of the currency by 80 percent and foreign reserves by more than $8.8 billion, hyperinflation that surged to 112 percent by the end of July and the repercussions of the coronavirus and the Beirut explosion will make things worse especially if the Central Bank of Lebanon lifts subsidies within the next 2 months on food, oil and medicine, as expected, he told Arabian Business.

In April, Lebanon outlined a financial recovery plan including an indicative debt restructuring plan, but no agreement was reached with external or domestic bondholders.

A number of interlocking factors have been hindering progress, including the need to also restructure the banking sector and the balance sheet of Banque du Liban (BDL), the central bank, domestic disagreement between the newly-resigned government and the financial sector over the restructuring process, failure to secure an IMF deal and now the need for a new government.

Looking at net domestic debt, which excludes public sector deposits with the central bank and commercial banks, it rose 10.23 percent annually to $84.30 billion by June, the latest figures showed.

#Lebanon : According to the Ministry of #Finance, the amount of public #debt rose from $ 85.8 billion at the end of June 2019 to $ 93.4 billion at the end of June 2020, i.e. an increase of 8.9% over a year. pic.twitter.com/W1jLFmOgOu— ECOMNEWSMED (@ecomnewsmed) September 10, 2020

Debt denominated in foreign currency (in US dollars), it increased by 7.82 percent annually to $34.80 billion over the same period. As a result, total foreign debt held 37.26 percent of the total public debt by June, up from 37.65 percent last year.

Notably, $3.52 billion of the total debt represents the unpaid Eurobonds, their coupons and accrued interests. The government announced in March that it will refrain from making payments on all dollar-denominated Eurobonds as it seeks to negotiate an arrangement with its bondholders and discuss the restructuring of its debt.

Last month, S&P Global Ratings maintained the “selective default” rating for Lebanon’s long- and short-term foreign debt, after the country first defaulted in March. However, three more bonds were downgraded from “CC” to “D”.