situation update for... · 2020. 3. 27. · disclaimer this presentation (together with any...

Situation Updatefor Lebanon’s Creditors

27 March 2020

Ministry of Finance of the Republic of Lebanon

Disclaimer

This presentation (together with any accompanying oral presentation and any supplementary documents provided therewith, the “materials”) has been prepared to provide certain information to existing holders of Eurobonds issued by the Lebanese Republic. The materials are being provided for information purposes only and may not be used for any other purpose.

Certain information contained in the materials (including financial information) has been obtained from published and non-published sources, which may not have been independently verified or audited. No responsibility is accepted, and no representation, undertaking or warranty is made or given, in either case, expressly or impliedly, by the Lebanese Republic nor any of its ministers, officials, directors, officers, employees, affiliates, advisors or representatives (“Related Parties”) as to the accuracy, reliability or completeness of the information contained in the materials or as to the reasonableness of any assumptions on which any of the same is based or the use of any of the same.

The opinions presented herein are based on general information gathered at the time of writing and are subject to change without notice. None of the Lebanese Republic nor its Related Parties shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of the materials or its contents or otherwise arising in connection with the materials.

Unless otherwise indicated, all information presented in the materials is as of March 27, 2020. New information is being received on an ongoing basis, which may result in material changes to the information provided in the materials. Statements contained herein that are not historical facts are based on current expectations, estimates, and projections of the Lebanese Republic as of the date hereof (unless otherwise specified herein).

To the extent any information herein constitutes “forward-looking statements” (which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “outlook”, “estimate,” “intend,” “potential,” “continues”, “plan”, “target” or “believe” or the negative version of these words or other comparable terminology), due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in such forward-looking statements.

The materials are provided for informational purposes only and do not constitute an offer to buy or to sell or a solicitation of an offer to buy or sell securities issued by the Lebanese Republic nor shall there be any sale of securities in any jurisdiction in which any offer, solicitation or sale would be unlawful prior to registration or qualification of such securities under the securities laws of any such jurisdiction. No financial decisions or actions should be based solely on the information contained in the materials.

The materials herein may not be reproduced or provided to others without the prior written permission of the Lebanese Republic.

By attending this presentation and/or accepting a copy of this document, you acknowledge and agree to be bound by the foregoing.

2

Overview

While the Government continues to develop its macroeconomic reform plan, Lebanon wishes to update its creditors on the following areas:

• The building up of financial imbalances over the years

• Overview of the Government’s Recovery Plan

• Focus on Lebanon’s public debt restructuring

• Next Steps

The most recent figures in these slides are estimates based on preliminary figures in Government

databases and have not been independently audited or verified

3

1

2

3

4

1. The Building up of Financial

Imbalances over Years

4. Next Steps

3. Focus on Public Debt Restructuring

4

2. Overview of the Recovery Plan

Lebanon is going through an unprecedented economic crisis

Lebanon is going through an unprecedented situation compared to past crisis episodes

• Lebanon is faced with very large balance of payment imbalances:

• Years of persistent wide external current account deficit have deteriorated the country’s net external position

• Inflows of foreign deposits have dried up in recent months and are not likely to recover

• Banque du Liban’s FX reserves are on a rapid downward trend reaching critical levels

• The gap between the official and the parallel exchange rates keeps widening

• All economic indicators point to a prolonged and sizable real GDP contraction, while unemployment and poverty are rising fast, reaching dangerous levels

• Constant dollar inflow needs of past years resulted in years of large fiscal deficits, which pushed the stock of public debt to an unsustainably high level

• Lebanon’s banking sector is oversized, substantially above what is needed to fulfil its primary role of financing the development of a productive economy

5

1

2

3

4

a

b

c

d

Large current account deficits have accumulated over time

Sources: Lebanese Authorities, IMF World Economic Outlook (October 2019)

TRADE OF GOOD AND SERVICES BALANCE

23.9 20.6 20.9 19.3 19.8 19.1 19.2 19.6 18.4

(31.6) (32.5) (34.2) (33.7) (31.3) (31.2) (32.3) (33.2) (31.5)

(19.0%)

(26.9%)(28.5%)

(29.8%)

(22.9%) (23.6%) (24.7%) (24.8%)(26.9%)

2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E

Exports of good and services (US$bn) Imports of good and services (US$bn) Trade balance of goods and services (% of GDP)

• Domestic consumption fueled by massive foreign inflows in the context of an overvalued exchange

rate has contributed to persistently wide external trade deficits6

1a

Foreign capital inflows have dried up…

Sources: Banque du Liban

• Beginning mid-2019, bank deposits outflows have reached unprecedented levels and any resumption in inflows is not likely to materialize in the near future

• The US$11bn package pledged by the international community at the CEDRE conference in April 2018 has not yet materialized, pending the implementation of key structural reforms identified as pre-conditions to the disbursement

7

PRIVATE SECTOR DEPOSITS

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

Jul-1

9

Jan-

20

Private sector monthly deposit in/outflows (LBPbn)

1b

… Leading to a rapid depletion of Banque du Libanforeign currency holdings

8

BANQUE DU LIBAN GROSS FOREIGN CURRENCY HOLDINGS¹


Note: (1) Excluding Government Eurobonds held by BdL

1c

30.8 30.031.7 32.4

30.6

34.035.8

32.5

29.6 29.0

2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E Jan-2020E

Gross Foreign Currency Holdings (US$bn)

• Banque du Liban (BdL) FX holdings have come under high pressure, dropping to c. US$ 29bn in January 2020, of which US$ 22bn are liquid and US$ 18bn of those secure banks mandatory reserves in US$ are held at BdL for regulatory purposes

Also resulting in a widening between the official and parallel exchange rates

Sources: Bloomberg, lebaneselira.org as of 13 March 2020

LBP / USD EXCHANGE RATES

• Reduced access to external financing and foreign currency deposits accompanied by the sharp

decrease in FX reserves have led to the development of a parallel FX market and the

de-facto sharp depreciation of the Lebanese Pound

9

1

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20

Official LBP / USD Rate Unofficial LBP / USD Rate

+67.7%

d

The Lebanese economy is going through a deep contraction…

29.235.5

38.4 40.144.2

46.9 48.3 50.0 51.2 53.1 55.049.0

34.4

9.2% 10.1%8.0%

0.9%2.7% 2.6% 1.9%

0.4% 1.6% 0.9%(1.9%)

(6.9%)

(12.0%)

2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020F

Gross domestic product (US$bn) Real GDP growth


GROSS DOMESTIC PRODUCT

• Real GDP growth slumped in recent years, decreasing from 1.6% in 2016 to -6.9% in 2019.

• In 2020, real GDP could contract further by 12% as dollar shortage puts a massive drag on nonfuel imports and could be worsened with the additional impact of the Coronavirus outbreak

10

2

…Exacerbating the deterioration of social conditions

SOCIAL INDICATORS (2018/2019)

• Poverty Rate

• People living below the annual poverty line (LBP 4,729,000 per year)

• People living below the extreme poverty line (US$ 2.40 per day)

• Unemployment Rate

• Total population (aged 15 or more)

• Variation compared to 2011/2012 statistics

• Youth (aged from 15 to 24)

• Variation compared to 2011/2012 statistics

45.0%

22.0%

11.4%

+22%

23.3%

+29%

• On the back of a rapidly deteriorating social situation, on October 17th, 2019, a popular uprising erupted demanding better standards of living with equal opportunities for

all and led to the resignation of the previous government

• Risks of accelerating inflation fueled by the ongoing sharp depreciation of the Lebanese pound on the parallel market will further dampen social indicators

Sources: Lebanese Central Administration of Statistics, Labour Force and Household Living Conditions Survey 2018-2019

2

INFLATION

10.7%

0.8%4.0% 5.0%

6.6%4.8%

1.8%

(3.7%)(0.8%)

4.7% 6.1%2.9%

27.1%

2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020F

Inflation, Average CPI (% change)

11

Years of large fiscal deficits …


2019 LEBANON INTEREST BILL IN % OF REVENUE VS. PEERS

(9.9%)(8.3%)

(7.5%)(5.9%)

(9.1%) (9.0%)

(6.3%)(7.8%)

(9.6%)

(7.2%)

(11.4%) (11.3%)

1.4%2.5% 2.7%

3.5%

(0.9%) (0.9%)

2.4%1.1%

(0.3%)

2.2%

(1.6%)(0.9%)

2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E

Fiscal balance (% of GDP) Primary fiscal balance (% of GDP)

• Faced with constant dollar inflow needs, Lebanon is suffering from large fiscal deficits, peaking recently at -11.4% and -11.3% of GDP in 2018 and 2019, respectively

• Fiscal deficits were mainly due to the very high interest bill payable by the government: close to

50% of its revenues were dedicated to its interest bill in 201912

3

46.9% 45.3%42.1%

33.2%

28.5%

24.8% 24.3%21.5% 20.7% 19.8%

4.3%

World average: 8.5%

Lebanon Egypt S.Lanka Ghana Pakistan C.Rica Zambia India Angola Bahrain OECD

FISCAL POSITION

… pushed the stock of Lebanon’s government debt to an unsustainably high level

Sources: Lebanese Authorities, Bloomberg, World Economic Outlook (October 2019), Moody’s Statistical Handbook Country Credit (November 2019)

Note: (1) Other FC debt includes foreign private sector loans, Eurobonds, Paris II loans, and Special T-bills in foreign currency; (*) 2019 Debt figures are actual while GDP is expected

HISTORICAL GOVERNMENT DEBT STOCK OF LEBANON

79.3 80.987.0

95.7 100.4106.0

112.9119.9

128.3138.2

2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018A 2019A*

Local currency debt (LBPbn) Foreign currency IFIs debt (LBPbn) Other foreign currency debt (LBPbn) ¹

137% 134% 130% 135% 138% 141% 146% 149% 155% 178%

Total debt (% of GDP)

• Lebanon’s government debt has reached critical levels, up to 178% of GDP in 2019, and the ongoing economic turmoil is amplifying the risk of distress

• The high weighted average cost of government debt (6.7%) contributes to further rapid debt stock accumulation as interest service is financed with more debt

13

3

Banking sector is oversized way above what is needed to support the real economy

512%

422%

363%

289%242% 240%

110%83%

Cyprus Lebanon France UK Germany Jordan Egypt USA

30.334.2

37.841.5

45.448.0

51.053.6 52.3

44.2 42.6

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Jan-20

Loans to the local private sector (US$bn)

• The Lebanese banking sector is the 2nd largest in the world in terms of assets as a % of

GDP, standing at 422% of GDP. The size of our banking sector is therefore way above what is needed to fulfil its primary role of financing the development of a productive economy

• Additionally, the cost of attracting dollars through commercial banks is weighing heavily on BdL’sbalance sheet

TOTAL BANKING ASSETS (% OF GDP) AS OF DEC-19¹ LENDING TO THE ECONOMY

Sources: Lebanese Authorities, IMF World Economic Outlook (October 2019), Banque du Liban, SNL, St Louis Fed, Central Bank of Egypt, European Central Bank

Note: (1) All data are presented as of December 2019 except for Cyprus as of December 2018

14

4

The current Lebanese economic model is broken

Over recent months, multiple risks materialized: external capital flows dried up, deteriorating the net reserve position of the BdL and limiting access by the Lebanese people to their foreign currency bank deposits

• Confidence in the past economic model is shattered

• External and fiscal imbalances have become greater than Lebanon can bear

• Only a complete reshaping of Lebanon economic and banking systems will allow for the resolution of the current crisis

15

Our newly elected government decided to take immediate actions required to tackle this deep and multi-faceted crisis

• On 7 March 2020, following the extraordinary crisis Cabinet meeting, the Prime Minister of Lebanon H.E. Hassan Diab announced the decision to withhold coupon and principal payments on its USD1.2bn Eurobonds due 9 March 2020 and pursue structural reforms to stabilize and restart the economy of Lebanon

• The decision was driven by the necessity to safeguard BdL’s available foreign currency and allocate it exclusively to the payment of priority imports

• As announced on 23 March 2020, Lebanon will withhold payments on all its foreign currency denominated Eurobonds

16



4. Next Steps


17


Our recovery plan will draw on a comprehensive approach to resolve the Lebanon’s economic and financial crisis

18

THE RECOVERY PLAN

Exchange rate

framework

Availability of external

support- Dependent on policy responses

- Will smoothen the impact of

adjustments

• Fiscal trajectory• GDP growth path• Inflation path• FX rate path

Public debt restructuring

• FX debt

• LBP debt

Pro-growth and structural reform

agendaFiscal Reform Plan

Banking sector reform

• Restructuring of the commercial banking sector

• Role of the BdL

The Fiscal Reform Plan

• Reforming the electricity sector (3% of GDP) and the pension system to reduce transfers

• Rationalizing current expenditures and streamlining the government’s institutions and enterprises

• Improving tax collection, compliance rates and reorienting the tax system towards increasing the burden on rent income and privileges given on public properties and assets

A growth-enhancing structural reforms agenda

• Strengthening of the judicial system (continue ongoing reforms on bankruptcy law, procurement law, competition law, etc)

• Sectorial strategies with a focus on land reform, energy, water, waste management, education and health

• Promotion of new dynamic industries and development of productive economy

• Gather external support to finance high value-added infrastructure projects and initiatives

The reform of the banking sector

• Restructuring of the commercial banking sector (size and organization), including disentangling the links between commercials banks and Banque du Liban

• Ensuring banking sector role to provide credit to the real economy

Overview of the Government’s Recovery Plan

19



4. Next Steps


20


Perimeter of the public debt restructuring (1/2)

• A comprehensive public debt restructuring is needed to restore Lebanon’s debt sustainability:

US$ 31,314m

US$ 2,049m

US$ 57,072m

Eurobonds

Bilateral &Multilateral

loans (*)

Local T-bills and T-bonds (*)

Domestic debt restructuring in line with available LBP resources

Foreign debt restructuring in line with available FX resources

21

Lebanon public debt stock as of 31 January, 2020:

Note: (*) Stock numbers as at end of January 2020

Perimeter of the public debt restructuring (2/2)

22

EUROBONDS ANNUAL PAYMENT SCHEDULE

4,6894,164 3,999

3,411 3,227 3,214 3,1643,666 3,819

3,578

2,240

3,583

1,5581,962 1,839

2,376

54

777

2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F 2032F 2033F 2034F 2035F 2036F 2037F 2038F 2039F 2040F

USD-denominated Eurobonds - Principal payments (USDm) USD-denominated Eurobonds - Interests paid (USDm) USD-denominated Eurobonds - Interests payments (USDm)

Sources: Lebanese Authorities, Bloomberg

LOCAL CURRENCY T-BILLS DEBT ANNUAL PAYMENT SCHEDULE

10,317.99,282.8 9,145.5

8,405.67,187.7

8,776.1

7,180.6

3,349.74,657.3

6,448.9

1,507.7

2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F-2033F

Local currency debt - Principal payments (USDm) Local currency debt - Interests payments (USDm)

Main principles of the public debt restructuring

23

Refinancing Capacity

• Government budget gross financing needs dynamics consistent with manageable Lebanese pound and foreign currency debt rollovers

External Financing Balance

• Public sector foreign currency debt payments compatible with current account dynamics and foreign exchange reserve accumulation objectives

Reasonable buffer to protect against exogenous shocks such as global trade shocks, financial shocks and unpredictable events

Debt sustainability

• Government debt-to-GDP dynamics driven by medium and long-term government debt refinancing cost commensurate with economic growth trajectory and primary surplus target

1

2

3

4



4. Next Steps


24


Next Steps and Indicative Timeline

Engagement with Lebanon’s private sector creditors:

• Interactions with private sector creditors on Lebanon’s fundamentals

• Active negotiations with private sector creditors on restructuring parameters

• Expected agreement on the key financial and legal terms of the restructuring

• Closing of the public debt restructuring

25

Design and approval of a comprehensive economic recovery plan:

• Design of a detailed economic recovery plan

• Discussions with multilateral partners on potential external support

• Adoption of a comprehensive reform plan

• Required regulatory actions to be implemented

NEXT STEPS WILL BE PROGRESSED IN PARALLEL

FROM MARCH TO DECEMBER 2020

Creditor Engagement Principles

• The Government of Lebanon is prepared to engage in good faith discussions with its creditors to explore options to make Lebanon’s public debt sustainable

• Lebanon is committed to undertake consultations with its creditors on the basis of:

• Transparency both in terms of process and availability of information;

• Good faith efforts for a collaborative approach;

• Equitable treatment, so as to ensure fair burden-sharing among all stakeholders; and

• The need for a credible, permanent and sustainable solution to Lebanon’s structural debt problem

• Mindful of the exceptional circumstances of the COVID-19 crisis, the government of Lebanon will conduct consultations with its bondholders via audio and video calls and will prioritize interactions with bondholders/bondholder groups demonstrating significant holdings

• Bondholders willing to be part of these consultations should contact: [email protected]

• We invite all bondholders to participate in the identification exercise launched in cooperation with D.F. King

• Visit the following website https://sites.dfkingltd.com/republic-of-lebanon or contact the following email [email protected] to participate in the identification exercise

26

Logistics

• This presentation is available in English on the Ministry of Finance website at http://www.finance.gov.lb

• This Webcast will be available on replay during 48h following the investor presentation at http://www.finance.gov.lb/en-us/Finance/PublicDebt/Pages/Eurobonds-Restructuring-Information-for-Creditors.aspx

• A follow-up Q&A document, including answers to questions raised in writing during this webcast, will be posted subsequently on the Ministry of Finance website

27

http://www.finance.gov.lb/

http://www.finance.gov.lb/en-us/Finance/PublicDebt/Pages/Eurobonds-Restructuring-Information-for-Creditors.aspx

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