Lebanon needs more than US rate cuts to turn its economy around

Alamy via Reuters

• US rate cuts likely
• Morocco and Jordan to benefit
• Lebanon still struggling

Probable US interest rate cuts could help Jordan and Morocco attract additional foreign investments as well as easing their already manageable loan repayment commitments, experts predict, but Lebanon’s financial problems remain so acute that a reduced debt burden will make little difference.

US 10-year treasury yields – the most important determinant of government borrowing conditions worldwide – have soared following sustained US interest rate rises that have lifted the Federal Reserve’s benchmark rate to a two-decade peak of around 5.3 percent, up from near-zero in February 2022.

But in March, chairman Jerome Powell said the Fed aimed to make three rate cuts this year in what would mark a turning point in the interest rate cycle.

---

---

“There have been outflows from emerging markets as interest rates in developed markets rose,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“Prior to that – and since the global financial crisis – there had been no pricing of risk so more and more investors went into funds, into areas that helped cover the structural problems in some Mena countries.”

Rate rises reversed that investment flow, so renewed cuts could help to attract money back to emerging markets as investors again go further afield to earn high yields.

Morocco’s public debt will hit MAD 1.2 trillion in 2024 ($121 billion), S&P Global data shows. Interest payments will represent 9 percent of government revenue this year, or MAD 33 billion.

• Egypt will still feel the heat despite US rate cuts
• Economic activity in Lebanon remains sluggish
• UAE and Jordan to explore $2bn opportunities

Jordan’s debt interest payment will amount to 940 million Jordanian dinars ($1.3 billion), or 7.5 percent of government revenue, in 2024. Jordan’s foreign currency debts more than tripled between 2012 and 2022 to $19 billion.

“From a fiscal standpoint, Morocco’s and Jordan’s debts are manageable,” says Ryan Bohl, senior Middle East and North Africa analyst at Risk Assistance Network and Exchange, an intelligence company. “Both countries have done impressive work over the past decade to broaden the tax base, diversify the economy and attract foreign investment.”

Rate cuts could spark a global economic or investment boom, he said.

“Mena countries such as Morocco and Jordan can position themselves as a destination for foreign investors,” says Bohl. “The Gulf Arab states will likely be the biggest investors and will become more willing to invest in other markets if their holdings in the US and Europe are doing well.”

Lebanon's three economies

Lebanon’s interest payments will soar to 9,989 trillion Lebanese pounds in 2025 – nearly quadruple those of 2022 – although S&P data indicates the ratings agency expects Lebanon to make few interest payments this year after it defaulted on its debts.

Lebanon has devalued its currency by 98 percent after a longstanding peg to the dollar unravelled following multibillion-dollar losses in its financial sector. A broader crisis shrunk the country’s economy by 42 percent from 2017 to 2023; annual inflation was 123 percent in February.

“In the absence of any reconciliation between the political factions, there are three separate economies – the official, the black market, and Hezbollah’s economy in the south of Lebanon,” says Sami Hamdi, managing director of The International Interest, a geopolitical risk consultancy.  

“While people are focusing on the economics and the financial aspects of Lebanon’s crisis, without a political accord I don't see how it can be alleviated.”

Rate cuts may make the “haircuts” that Lebanon’s creditors will have to take a little less painful, says Bohl.

“But other than that, Lebanon is in such a deep hole there won’t be much benefit,” he adds.

Timothy Kaldas, deputy director of The Tahrir Institute for Middle East Policy, a think tank, says there is zero confidence in Lebanon’s financial sector.

“To whatever extent interest rate cuts will impact commodity prices it'll affect Lebanese people, but beyond that there will be no benefit,” he says.

“Many of Lebanon’s problems are external, but a lot are domestic. The leadership has found it can survive and, in some ways, thrive in this crisis. After the economy and currency collapsed… people have been forced to resume their dependency on sectarian oligarchs.”