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French Version

Lebanon gets low marks on inflation risk

Fitch ratings scores Lebanese as second most vulnerable in mena region

Fitch Ratings' Inflation Vulnerability Index ranked Lebanon as the 29th most vulnerable country among 73 emerging economies in Europe, the Middle East, Africa, Asia and Latin America, and the second most vulnerable in the Middle East and North Africa (MENA) region, said the latest issue of Byblos Bank's Lebanon This Week.

The index measures the extent to which a country's vulnerability to inflation shocks could result in broader macroeconomic instability. In turn, the relative risk of inflation shocks - sparking broader economic volatility - could potentially damage a country's creditworthiness. The index included the 73 emerging economies that are rated by Fitch Ratings.

Globally, Lebanon ranked ahead of Azerbaijan and Bolivia and came behind Panama and Armenia. Regionally, Lebanon was less vulnerable to inflation shocks than Egypt and is considered to be more vulnerable to inflation shocks than Kuwait, Saudi Arabia, Bahrain, Morocco, Tunisia and Israel.

Lebanon ranked in 48th place globally and fourth place in the MENA region on the Inflation Dynamics Sub-Index. This category covers the combined ranking of inflation, percentage change in headline inflation in the 12 months to April 2008 and the volatility of inflation from 1995-2007. The latter criterion tries to capture the extent that adverse inflation history may affect expectations behavior. Globally, Lebanon ranked behind Brazil and Benin and immediately ahead of Uganda and Panama. Regionally, Lebanon ranked ahead of Egypt, Saudi Arabia and Kuwait, and behind Bahrain, Tunisia and Morocco.

Lebanon ranked in 40th place globally and third in the MENA region on the Domestic Overheating Sub-Index. This category combines the current account balance as a percentage of gross domestic product (GDP) and private credit as a percentage of GDP in 2007. It is used as a proxy for domestic overheating pressures, as reflected in the gap between domestic savings and investment, and it also reflects the impact of commodity prices on external trade. Lebanon ranked in 35th place globally and in fifth place in the MENA region on the Monetary Conditions Sub-Index. This category reflects the evolving stance of monetary conditions, including real short-term interest rates and exchange rates movements since the middle of 2007.

Finally, Lebanon ranked first among the 73 emerging economies on the Domestic Public Debt Sub-Index. This category measures the size of domestic debt relative to GDP. It serves as a proxy for the risk that higher inflation could aversely affect sentiment of foreign and local investors in the domestic bond market and captures the exposure of the public finances to domestic interest rate shocks.

Fitch Ratings said inflation affects creditworthiness of emerging-market economies' sovereign debt in various ways, with the most direct impact being through its influence on broader macroeconomic stability and growth. Macroeconomic volatility adversely affects sovereign-debt tolerance, because economic instability renders the public finances more vulnerable to shocks.

The Inflation Vulnerability Index is the average of a sovereign's rank in eight equally-weighted variables grouped in four different categories considered to be meaningful indicators of inflationary impact on economic stability. The indicators were inflation rate, change in inflation, volatility of inflation, the current account balance as a percentage of GDP, private credit as a percentage of GDP in 2007 relative to trend, real short-term policy interest rates, change in monetary conditions, and the size of domestic debt relative to the size of the economy.

Beirut 09-06-2008
The Daily Star

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