“It noted that a significant recovery in deposits would strengthen the banks’ ability to roll over sovereign debt, while successful fiscal consolidation would reduce the government’s funding needs,” it added.
It is one of the first positive reactions of investment banks to the drop in the deficit in the first four months.
Morgan Stanley indicated that the fiscal deficit narrowed by 28 percent year-on-year to LL2.1 trillion, or $1.4 billion, in the first four months of 2019 – equivalent to a deficit of nearly 7.5 percent of gross domestic product on an annualized basis.
It also noted that the primary balance shifted from a deficit of $365 million in the first four months of 2018 to a surplus of $23 million in the same period of 2019.
It said fiscal consolidation, which has been on the expenditures side, had increased investor confidence about the execution of the 2019 budget. A parliamentary committee has said Lebanon will aim for a fiscal deficit of 6.59 percent for 2019.
Morgan Stanley added that investor and expatriate confidence would further strengthen if fiscal results in the first four months of the year and Parliament’s enactment of the 2019 budget helped unlock part of funds related to pledges made at last year’s CEDRE conference.
The investment bank added that Banque du Liban’s high-frequency indicators showed that resident deposits in foreign currency increased by $1.1 billion between the end of May, when the Cabinet approved the 2019 draft budget, and early July.
It noted that the increase in foreign currency deposits constituted a shift from the period of deposit outflows that prevailed until the end of May.
“The rise in foreign currency deposits helped BDL increase its assets in foreign currency by nearly $630 million in the first half of July 2019, which alleviates near-term liquidity concerns,” the report said.
It considered that the Parliament’s enactment of the budget should also accelerate deposit growth from the diaspora in the banking sector.
“Morgan Stanley considered that, despite positive fundamentals, the yields on Lebanese Eurobonds remain elevated,” the report added.
A version of this article appeared in the print edition of The Daily Star on July 30, 2019, on page 4.