Lebanon’s Presidential Election: A Gamble on Economic Recovery?
After a two-year vacancy, Lebanon is poised to elect a new president on January 9th. This crucial election holds the key to unlocking the nation’s crippling economic crisis and potentially reviving its distressed sovereign bonds. while past attempts have failed, recent market movements suggest a glimmer of optimism among investors.
Lebanese dollar-denominated bonds saw a remarkable 5.6% surge in the first two trading days of 2024, the highest among emerging markets. This follows a stunning 114% return in 2023, fueling speculation that a functional government coudl finaly implement much-needed reforms.
However, several hurdles remain before Lebanon can focus on economic recovery. The fragile 60-day truce between Israel and Hezbollah, a group designated as a terrorist organization by the U.S., is set to expire later this month. This precarious situation adds another layer of complexity to the already challenging political landscape.
“If Lebanon can elect a new president, I expect bonds to rise,” said Søren Mersch, portfolio manager at Danske bank AS in Copenhagen, which began buying Lebanese bonds in september. “Electing a president would likely mean appointing a prime minister and forming an effective government rather than a proxy one.”
Lebanese Bonds Surge: A Sign of Hope?
Lebanese bonds have climbed to over 14 cents on the dollar,their highest point since November 2021,a significant rebound from less than 6 cents a year ago. The country defaulted on its international debt in March 2020, triggering a cascade of economic woes including currency devaluation, hyperinflation, a banking crisis, and widespread poverty.The lack of an effective government has stalled debt restructuring and access to crucial international financing from sources like the International Monetary Fund (IMF).
Despite the ongoing challenges, investor interest in Lebanese bonds has persisted for months, fueled by anticipation of positive change. The November 27th truce,following a conflict that left parts of the country devastated,has further contributed to this cautious optimism.
Potential presidential candidates are also under close scrutiny. Tellimer research highlights General joseph Aoun as a prominent contender.
Analyzing the Market’s Reaction
“The bond gains were the result of discussions about electing a president, as Israeli incursions into Lebanese territory could unify the various factions that have failed to choose a president in 12 previous attempts,” Jimmy Fallon, an economist at telmer, noted on monday. “We continued to recommend hold. In December, our models showed limited potential benefits from any future restructuring.”
the political uncertainty presents a double-edged sword for bond investors. Laila Dagher, an assistant professor at the American University of Lebanon, explains that a reform-focused president could boost investor confidence, while continued stalemate could lead to negative sentiment, currency devaluation, and potential international sanctions.
Danske bank’s Mersch concluded: “If they fail to achieve a quorum, we will be back to square one in some way, and I expect bonds will suffer.”
The upcoming election in Lebanon is a high-stakes gamble, not only for the Lebanese people but also for international investors watching closely for signs of economic recovery and political stability in a volatile region.
