Dan Azzi
[This article was first published in An-Nahar in July 2019]
I know what you’re thinking — my editor missed a typo and the title should be “Devaluation of the Lebanese Lira.”
It’s pretty clear, with the balance of payment (BoP) deficit (binging on imports, i.e. US dollars leaking outside the country month after month); that we’re heading towards a steep cliff. True, every now and then, we are momentarily able to plug this hole through the so-called financial engineering transactions, paying exorbitant interest rates, but this just kicks the can down the road for a few weeks or months.
The last FE paid banks a 21% interest rate, of which they offered a portion to rich, but less savvy clients. 14.2% annual interest, masquerading as 40% over 3 years, with some bells and whistles, like the 10% upfront payment, to obscure the actual rate and the fact that they were keeping 7% annually for themselves. More financially sophisticated rich folks realized that they had the upper hand, and negotiated, thus reducing bank margins, and extracted higher rates, like 16% or more.
Either way, people who are familiar with the global market levels, in which many junk bonds are now yielding negative rates, realize that there’s something wrong with this picture. Thus, current subscribers to these products are making a bet, that when the game of musical chairs ends, they’ll still have a chair to sit on, or that in 3 years, new players will be seduced, adding more chairs, allowing the old subscribers to exit the game, leaving the new players holding the (empty) bag — the “greater fool theory” à la Libanaise.
The government executed a valiant effort to plug the hole in the fiscal deficit, not exactly addressing the crux of the problem, but tangentially related. However, employee strikes and road closures proved that in typical Lebanese fashion, everyone was saying “solve the problem elsewhere, but don’t touch my own entitlements.” I gave some suggestions on how to deal with the BoP deficit in a previous article, but, again, the affected segments all lobbied to be excluded.
Policymakers have politically trapped themselves in removing (or more precisely, postponing) the one option from the table that deals with this problem in one clean swoop, which means that at the rate we’re going, capital controls are coming, because there isn’t a sufficient supply of dollars to cover our demand for imports, conversions from Lira to dollars, and the steady capital flight to overseas accounts.
Today, it’s a trickle, and at this rate we might have a couple of years, based on published reserve numbers, but if it accelerates, which is looking likely, D-Day would strike in 2020. We’ve already experienced some of the distortions of this situation. Try to transfer money overseas and your banker will give you a dozen excuses why he can’t do it, or, postpones it a few days or weeks, but after a lot of screaming or threats or wasta, finally executes it. Similarly for conversions from Lira to dollars (making people “freeze” their converted dollars 6-9 months). This conjures up images of the war years and waiting in line to buy a “rabta” of bread. An average citizen waited in a queue for hours to get his quota, while, every now and then, an armed militiaman (the “screamer”) jumped the line and stole his quota and that of a dozen others.
However, if you write a check to another person, no problem, they’ll cash it (as long as it’s deposited). Do an online conversion from dollars to Lira and presto, you get 1514.5, the upper limit of the peg band, but nevertheless within the band established by the central bank. Try to do a conversion at a Sarraf, for cash and you might get a rate of 1525-1540. Why? Because, the Sarraf transaction is for real dollars not ether dollars. The online transaction is an accounting entry, similarly to the check. The check cashing is a computer entry that changes the ownership of the amount from you to the other guy, but net net, Lebanon’s deposits have remained the same.
As Sherlock Holmes said, “Once you eliminate all other possibilities, whatever is left, no matter how unlikely, is the truth.” So let’s analyze a scenario where cash withdrawals are rationed and overseas transfers are curtailed, in a triage, with the highest priority to buy fuel (for heating and electricity); then necessities, then luxuries. You can write as many checks as you want from your account as long as it’s deposited in another local bank, so what happens to our economy then? It becomes similar to the board game Monopoly. You can buy Park Place or Pennsylvania Avenue or a train station on the board game, from anyone else playing the game. You can use Monopoly money to avoid going to jail. You can do any deal you like with other players. You can go and have a great day at the beach. But can you take the Monopoly money and spend it in Paris at the fancy Le Cinq Restaurant? Nope. The owner of that restaurant isn’t a player in our board game.
You could write a check to a guy here and buy his apartment in Solidere for “$2 million.” He can only deposit the check in his bank but can’t take it out. He can buy a large piece of land in Faraya or an apartment in Achrafieh. Conceivably, that apartment can even go for $10 million — after all, it’s Monopoly money, that can’t be used anywhere outside the Lebanese board game. In some sense, our economy becomes largely based on bartering, like what happened in Russia after the collapse of the Soviet Union. Of course, if you pay for the apartment in real dollars, not Monopoly money (i.e. from an account outside Lebanon to an account outside Lebanon or in cash); you can get the same apartment for $500,000. Thus it’s even imaginable to see a mini-boom in real estate, as more and more rich people (or people who thought they were rich) decide that it’s safer to have their wealth in something tangible and stop believing the numbers printed on their bank statements. A very sharp friend of mine, Ramzi A., who’s a portfolio manager, told me the other day that he can envision a scenario in which banks, who have a lot of illiquid repossessed real estate, could even offer depositors choice apartments to clean their book, in return for deposits that their clients can’t withdraw. Offer him the choice that his deposit is stuck with them due to capital controls or taking ownership of a shiny new apartment, with no further claim on the bank, and he might just go for it.
The end result would be a two-tier system, with a dollar in an account outside the country worth 3 times a dollar trapped in the country, that can only be spent in the Lebanese Monopoly board game. But don’t worry, the Lira hasn’t been devalued; it’s still at 1507.5 to the dollar … or is it?
