Politics dampens growth

JP Morgan downgrades Lebanon to ‘underweight’ in light of higher political risks

July 27, 2011- Global investment bank, JP Morgan, downgraded Lebanon’s status to underweight in light of higher political risks and a rapidly deteriorating economic backdrop.

The deterioration in economic fundamentals, along with ongoing political instability in neighboring Syria, would continue to weigh on the outlook, JP Morgan said in its recently released Emerging Markets Outlook and Strategy. It said that although local banks could benefit from a lavish inflow of deposits over the short term, the potential repercussions of the situation in Syria could impact the outlook. The local political crisis that started in January “has taken its toll on economic growth,” the report said.

The investment bank recommended a buy on 5-year Lebanese sovereign debt Credit Default Swaps (CDS) protection.
Coincident indicators showed a real GDP growth below one percent in the first quarter of 2011. Growth in electricity production saw a sharp slowdown, dropping to one of its lowest levels in four years. Public finances deteriorated further as the primary budget balance posted its largest deficit since 2000. According to JP Morgan, the net deterioration in the primary balance would likely increase external debt this year after a period of relative stability since 2006.

JP Morgan said that the stabilization of the interest rate differential has contributed to reverse the downward trend in dollarization, which rebounded to 65.8 percent in March.