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French Version

'Paris II' expected to lower interest rates... - The Daily Star

'Paris II' expected to lower interest rates bankers, analysts weigh up impact - The Daily Star.

Merrill Lynch: While the loans will stimulate the economy, they are not enough to extricate Lebanon from its deep financial hole.

As Prime Minister Rafik Hariri continues his whirlwind tour to drum up support for the 'Paris II' donor conference, bankers and financial analysts are forecasting the impact of $3 billion or $5 billion in soft loans expected from the meet on debt servicing, the economy and interest rates.

There is a general agreement among bankers that the soft loans, which are aimed at replacing some of the short-term and high-yield bonds with lower yield, longer maturity bonds, will definitely change the structure of interest rates in Lebanon next year. International investment bank Merrill Lynch, which has been monitoring developments closely, recommended a buy on some of the Lebanese sovereign eurobonds in an investment report this month.
'Over the next three to six months, we expect to see increased official bilateral support, significant inflows from securitization and better fiscal policy,' Merrill Lynch said. But the investment bank said that these developments are necessary, but not sufficient to extricate Lebanon from a deep fiscal hole.

'However, we believe that they (the Lebanese) will suffice to allow Lebanese eurobonds to outperform,' the report said.
Economists stress that the government will have a grace period of less than two years to put its finances in order. In other words, the government must speed up privatization, securitization and reduce spending next year to take full advantage of the grace period.

According to one of the several scenarios being circulated, the Central Bank will add the new bonds or deposits obtained from the Paris II conference to its existing holdings of treasury bills, eurobonds, dollars and Lebanese denominated pounds.
In theory, this step means that the government will stop tapping the local market to finance the public debt and other services for a period of time.'If the Central Bank decides not to offer new T-bills at the existing interest rates, the commercial banks will probably have to revise their policies concerning interest rates on these bonds,' said the secretary-general of the Association of Banks in Lebanon, Makram Sader.
He added that if the supply of T-bills and eurobonds exceeds demand, interest rates should drop gradually. Lebanese banks are the largest subscribers of sovereign T-bills and eurobonds. Interest rates on the outstanding eurobonds range from 9 percent to 10.5 percent and the two-year T-bills earn 16.14 percent.

Sader declined to speculate how much the interest rates would drop if the government succeeded in securing soft loans from Europe, Arab states and some Asian countries at the Paris meet. 'This all depends on the amount of money the government manages to secure from Paris II, privatization and securitization,' Sader explained.
He added that it is important to know the form of the expected soft loans, that is whether they are long-term deposits or bonds. Finance Minister Fouad Siniora has said that Lebanon is seeking soft loans with 6 percent to 7 percent interest rates. Bankers said some Asian countries such as Japan may offer Lebanon a soft loan with less than 3 percent interest.

The government believes that it can reduce debt servicing by almost $1.7 billion a year if it generates $10 billion from Paris II and privatization. Debt servicing is estimated at $3 billion in the 2003 draft budget.
To send a positive signal to the international market before Hariri holds talks with the countries taking part in the conference in France on Nov. 23, the government released an ambitious draft budget for 2003 that projects a budget deficit of only 25 percent. The draft budget was hailed by some economists and criticized by others.

'Hariri wanted to demonstrate to the world that he is very serious in tackling the $30 billion public debt,' one economist said. He added that the World Bank and International Monetary Fund were alarmed by the magnitude of the public debt and feared that the government is running out of choices.
'To appease the World Bank and IMF, Hariri used his personal relationship with French President Jaques Chirac to press for a meeting in Paris to raise soft loans for Lebanon,' the economist said. He added that the prime minister is using all his trump cards in an attempt to check the growth of the public debt.

Hariri also submitted a draft proposal calling for the issuance of $7 billion in T-bills and eurobonds with long maturity and lower interest rates.
The prime minister thinks that the government can save a lot of money if it swaps the new $7 billion issue with existing T-bills and bonds. Hariri's top advisors seem confident that the government can reduce the ratio of public debt to the gross domestic product from 176 percent to 100 percent in the next five years, if all the reforms are adopted on time.

In addition, bankers say that a drop in interest rates would stimulate the economy and encourage direct investment. Interest rates on loans will automatically fall, prompting investors to seek new credit lines to finance their businesses.

Beirut 16-11-2002
Osama Habib
The Daily Star

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