London/Beirut — Lebanon’s new government faces huge upcoming debt repayments and a currency peg at breaking point, but it may already have run out of the hard-cash firepower it needs to tackle these problems.
But as policymakers cling to the currency peg and with dollar flows having dried up, the question of how much ammunition the central bank has left has become ever more pertinent. Lebanon’s financial system has a complicated profile, with diaspora dollars attracted by high interest rates forming a major source of hard cash and local banks holding large amounts of external hard currency bonds.
“Estimates of BDL’s usable reserves were wide-ranging, given the complex linkage between BDL and the domestic banks,” Morgan Stanley strategist Jaiparan S Khurana wrote in a recent note to clients. Khurana also acknowledged that some calculations of reserves could end up with a negative number. Bteish estimates the shortfall between the central bank’s liabilities to commercial banks — or hard currency deposits parked by lenders at the bank — and its own reserves at about $40bn.The central bank also holds $13.9bn of gold and $5.7bn of government holdings of dollar bonds.
And while it is unusual for a country’s central bank and lenders to hold the foreign-denominated debt of their own sovereign, this could be a mitigating factor in the big debt repayments falling due soon, some analysts said.“Considering the foreign ownership is now 45%, the net impact on the BDL’s foreign reserve position from these payments will be smaller than what the headline number would suggest,” Morgan Stanley’s Khurana said.
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