Thus, marginal increases or marginal decreases in the price will only have a circumstantial and immediate effect. But you should not take the risk and bet that this price is final, as matters are linked to economic and political developments. So far, there are no clear projects for how to get rid of losses and restart the economy, neither for the president-designate to form the government, nor for anyone else as well. There are also no clear economic indicators in a positive direction. The prevailing belief that the balance between the lira and the dollar monetary mass in the market is sufficient to restore the balance to the imbalance in pricing, which is wrong. The criteria of supply and demand are not only related to the size of the blocks and their balances, but are also affected by what is possible with every step and every political and economic decision.
Pricing the national currency is not that easy. Currently, the price is controlled by a group of speculators, and a basket of unrealistic expectations that raise the price according to the market’s interests. Precisely here are these balances. Whose interest are you investing in, and what price do you need to absorb or release cash? There are many questions, but the only answer available is that the Banque du Liban is no longer the market maker as it is supposed to be if it intends to preserve “some stability” of the exchange rate.
Private sector debt has ballooned
Bank advances to the private sector are classified under the category of bank assets that will be recovered along with their interest over time. Due to economic factors, patterns of behavior of customer segments, and mistakes committed by banks in the lending process, this portfolio is exposed to a percentage of default that converts some of these assets into non-refundable bad debts, meaning that banks are exposed to losses in the credit portfolio. In exchange for the value of these expected losses, banks are required to take financial provisions financed from profits. In this process, guarantees, whether real estate or any other material guarantees obtained by the bank in exchange for lending to the customer, are calculated.
This is the simple overall track of the issue of dealing with bad or doubtful debts. In fact, it is a complex technical process and involves a lot of calculations. Including those related to the classification of customers, classification and calculation of losses Currently, there are two factors complicating matters; The first is that part of these debts are in dollars, and therefore dealing with it in light of a monetary – financial – economic crisis – is a radically different matter. The second thing is that the exchange rate of the dollar against the pound rose a lot and with it it modified the way provisions are calculated on these losses, which raises many questions about the value of these debts and the corresponding provisions and the recoverability capacity of banks.
In 2019, the value of loans to the private sector was about $ 46.9 billion. At that time, the gross domestic product was estimated at $ 52.5 billion, meaning that the debt was equivalent to 89.3% of the output. Today, according to the International Monetary Fund, the gross domestic product is equivalent to $ 18.7 billion, while BDL figures indicate that private sector loans that include residents and non-residents amount to $ 38.2 billion, of which about $ 2.89 billion belongs to serving borrowers abroad.
Calculating these debts according to the output estimates issued by the International Monetary Fund will not be realistic without unifying the calculation of the dollar exchange rate as calculated by the Fund. The latter adopted for issuing the GDP a dollar price of 6000 liras instead of 1507.5 liras on average. This means that the value of assets will increase, and with it default levels and the value of provisions will increase. The lower the output, the greater the likelihood of default, and the higher the dollar versus the pound, the greater the chances of stopping payment. Therefore, calculating the domestic debt in dollars at the price of 6000 liras is the key to the measurement relative to the estimated output of the fund. Consequently, the value of these assets will be completely different for all current accounts, whether those implemented by the government’s financial recovery plan, or those that the Association of Banks and the Bank of Lebanon deluded itself with. These figures come after all the rescheduling operations that banks have carried out with their customers over the past four years since the real estate sector began to falter. And when banks began to stop paying deposits and imposed illegal restrictions on withdrawals and transfers, default rates also increased, in addition to the impact of the deterioration of the economy and the austerity policies that successive governments tried to practice within the framework of controlling public finances.
The lower the output, the greater the likelihood of default, and the higher the dollar versus the pound, the greater the chances of stopping payment.
Out of the total value of the portfolio, there are private sector debts amounting to 22415 billion liras to the private sector, and domestic debts in dollars that were valued at 20.07 billion dollars based on the average exchange rate of 1507.5 liras, but today they are equal to 120420 billion liras. In addition to this, the dollar value of foreign debts, which amounted to 4,361 billion pounds, has become today based on the revised exchange rate of 17,340 billion pounds, which means that the total value of loans to the private sector is today equal to 160,175 billion pounds, equivalent to 142.7% of GDP. This ratio is sufficient to understand what will happen in bad debt or that will default.
In this regard, three scenarios can be calculated on the delinquency ratios of the local credit portfolio:
The first scenario, which represents the lowest expectations: defaulted by 10%. This percentage is equal to a value of 14283 billion pounds, equivalent to 2.3 billion dollars (at the price of 6000 pounds), or the equivalent of 12.2% of the GDP at the end of 2020.
The second scenario: you defaulted by 20%. This ratio is equivalent to a value of 28566 billion pounds, equivalent to 4.7 billion dollars (at the price of 6000 pounds), or the equivalent of 25.4% of the GDP.
The third scenario represents what could be called the maximum in light of the current conditions, that is, it does not take into account the liberalization of the exchange rate, nor any other political factors that may generate negative or positive paths: a 30% default. This default is equal to 42849 billion pounds, or the equivalent of 7.14 billion dollars (at the price of 6000 pounds), or 38.2% of the estimated GDP for the year 2020.
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