Blast in Beirut brings the Lebanese Economy to the brink of collapse (USD/LBP Analysis)

Introduction 

The world was in shock on Tuesday 4th August when a cataclysmic explosion ripped through the heart of Lebanon, Beirut, where it is estimated that 2,750 tonnes of ammonium nitrate ignited. The deafening explosion has claimed the lives of at least 137 people with over 5,000 wounded and 300,000 being left homeless. The magnitude and intensity of the explosion was so great, that it left behind a 124m wide crater and caused windows to be shattered as far as 150 miles away in Cyprus. In the past year, a breakdown in the Lebanese banking system and skyrocketing inflation, accompanied by the devasting impacts of a global pandemic, has already marred the prospective outlook of the economy. This latest turn of catastrophic events will undoubtedly cripple the country further in many dimensions. In this article, we will delve deeper in the economic implications predominantly but also access whether Lebanon will be able to recover from such a devasting situation. 

A picture containing outdoor, factory, building, water

Description automatically generated

Outlook before the explosion 

The situation in Lebanon made for grim reading before the blast. The Lebanese Lira (also known as the Lebanese Pound) had plummeted to record lows, losing more than 80% of its value since October 2019. This enormous depreciation can be observed in the floating currency chart in the Figure below. But just how did this transpire? 

The Lebanese pound has been officially pegged to the US dollar since 1997 at a rate of USD 1: LBP 1507. However, since this exchange rate is fixed, its integrity has been severely compromised courtesy of a black market for dollars, which allows purchases at a higher price than the market rate. Furthermore, the Lebanese banking system has been built on disillusion and deceit. Entering 2019, a shortfall in national revenue from the upheaval of neighbouring Syria compelled officials to implement new means of keeping the Lira stable and incentivise banking. They did so by making banks offer interest rates of 14% which, in turn, required more deposits to pay the higher interest rate, creating a Ponzi Scheme. When the notion of the scamming activity surfaced, thousands of Lebanese national demanded their money back. This activity showed a lack of honesty and transparency in the Lebanese banking system and hence its fragile state. However, when Riad Salameh, head of the Central Bank of Lebanon, issued an order requiring all money transfer offices, to pay cash out in Lira rather than dollars (even where transfers were specifically denominated in dollars) it signified that the Lebanese Banking system was in a much bleaker situation than initially envisaged and immediately signalled a looming currency crisis on the horizon. What happened next was inevitable, and over $25bn has flowed out of the economy since, causing it to contract by 6.5% in the last year. Additionally, the value of Lira has spiralled to new lows and USD 1 is now equivalent to LBP 8000. 

When these events are amalgamated alongside political corruptions, civil unrest, food shortages, 33% of the population being under the poverty line, national rolling blackouts and widening wealth inequality (amongst others), it demonstrates the fractious nature of Lebanon’s economy even before this latest turn of events.  

Figure 1 

Figure 1 

State of affairs after the explosion 

The massive explosion in Beirut on Tuesday flattened much of the city’s port, damaging buildings across the capital and sending a giant mushroom cloud into the sky. Photo: APEarly estimates as to the initial cost of this disaster are reckoned to be around $12-$15 billion which mainly consists of infrastructural and telecommunication damages. Beirut Port, which is the country’s main logistics hub and beating heart of the economy due to its provision of 60% of all imported goods to the nation, has been reduced to rubble after it was at the epicentre of the blast. This will have huge effects on the economy as the closure of the port will not only severely compromise the country’s balance of payments and trading position, but also threaten food security in the medium run, hence triggering further shortages. 80% of Lebanon’s stockpiled wheat has also been destroyed in the incident and this has already caused a noticeable spike in bread prices. Martin Keulertz of the American University of Beirut said he expects ‘the number of citizens to be under the poverty line to increase to 50%’, which will cause an urgent need for extra governmental support. 

Lebanon had been looking to secure a $10 billion loan from the IMF, but negotiations stalled last month over a lack planning to structurally reform the country’s banking environment. Accruing such a large emergency fund in the near future doesn’t appear simple either as just last week, Credit Agency, Moody’s, cut Lebanon credit rating to its lowest position, putting it on par with Venezuela. This is mainly a follow-on measure from events of March 7th, 2020 when Hassan Diab, the Lebanese Prime Minister, stated that the country would default in payment of a $1.2 million Eurobond. Furthermore, public debt has skyrocketed to $92 billion which is over 170% of GDP, which provides a strong indication that any funding given to Lebanon will not be utilised efficiently. 

Another major blow to the Lebanese economy is the impact on tourism. Tourism accounted for approximately 20% of Lebanon’s GDP in 2018 and it has been confirmed that close to 90% of the hotels in the capital city have been destroyed. Lebanon’s head of Hotel Federation for tourism labelling it a ‘disaster’ and mentioned that ‘occupancy rates at the hotels still open had slumped to between 5% and 15% because of fear, the increased risk of catching Coronavirus and also rioting. This demonstrates the immense and wide-reaching struggles facing Lebanon in both the short and long term. The ultimate challenge which faces officials now is how to lift a mourning country from despair and attempt to collectively build towards a brighter, more stable future despite all the aforementioned turmoil. 

Wider aid and support for Lebanon? But is it enough? 

In this time of desperation, it would be morally wrong to neglect the thousands of people affected by such a tragedy. Money and politics is one thing, but humanity is another. And thankfully this attribute has once again shone through as evidenced by the comprehensive global support which has been offered to Lebanon. Here are a few examples of specific packages which have been devised: 

  • European Union: Pledged $39 million in emergency aid 
  • Australia: Pledged $1.4 million 
  • UK: Has offered a relief package of up to £5 million 
  • Qatar: Has launched two field hospitals and urgent medical assistance to Lebanon 
  • China: Chinese peacekeepers will provide medical aid and troops will be organised into nine medical divisions including surgery to anaesthesiology. 

Despite the rapid mobilisation of a worldwide response, this simply isn’t enough. The total monetary aid given to Lebanon will be near the $150 million mark which is a mere 1.5% of the $10 billion funds they were seeking from the IMF. This percentage is even less when contrasted to the cost of the damages caused to the infrastructure in Beirut which does pose a puzzling dilemma: How will Lebanon progress in the future? 

The only way forward in receiving external credit in future seems to be via huge transformations to the banking sector in Lebanon, in particular its integrity, besides finding a fair compromise over the $1.2 billion Eurobond which the government defaulted on. Only time will tell but for now, the sole focus should be protecting Lebanon’s citizens who have unfortunately become indirect victims of the government’s corruption and shortcomings.  

Technical Trade Review of the USD/LBP 

A screenshot of a computer

Description automatically generated

Figure 2: Showing the USD/LBP Pair around the 4th of August 

The USD/LBP pair has shown drastic fluctuation over the August month period. The graph shows a lot of higher lows and lower highs indicating spontaneous change. There are no specific trends shown due to the sudden disasters that struck, however from 4th August onwards, a slow but gradual bullish downtrend emerged showing great economic decline in LBP against the USD resulting in buy trade potential. The average moving exponential is maximum +/- 1% change and so any currency price changes would be minimal.  

Timeline

Description automatically generated

Figure 3: Showing the USD/LBP Pair around the 4th of August with RSI Indicator 

From figure 3, it can be seen that the relative strength index around the 4th – 6th August, remains stable around 48. This indicates that the USD/LBP pair was neither overbought or oversold and so less trades were taken during this period. After the 6th August, a steep rise in RSI to approximately 79 indicated large buy trade potential, however due to the constant changing RSI beyond this point, the trends resemble a weak downtrend which is subject to change and so trades are not taken often. Overall, the trades taken during this period are unsuitable and cannot be risk managed efficiently. 

References 

TradingView. 2020. USD LBP Chart  Dollar Lebanese Pound Rate – Tradingview – UK. [online] Available at: https://uk.tradingview.com/chart/ %5BAccessed 8 Aug 2020]. 

Amlot, M., 2020. Lebanon’s Eurobond default: Here’s what happens next. [online] Al Arabiya English. Available from: https://english.alarabiya.net/en/features/2020/03/08/Lebanon-s-Eurobond-default-Here-s-what-happens-next [Accessed 7 Aug. 2020]. 

Anon, 2020. Beirut port blast: EU offers preferential trade as Lebanon faces economic collapse | DW | 06.08.2020. [online] DW.COM. Available from: https://www.dw.com/en/beirut-port-blast-eu-offers-preferential-trade-as-lebanon-faces-economic-collapse/a-54461035 [Accessed 7 Aug. 2020]. 

Anon, 2020. USD LBP Chart – Investing.com. [online] Investing.com. Available from: https://www.investing.com/currencies/usd-lbp-chart [Accessed 6 Aug. 2020]. 

Cochrane, P., 2020. How the Beirut blast will hit Lebanon’s economy. [online] Middle East Eye. Available from: https://www.middleeasteye.net/news/beirut-explosion-lebanon-economy-port-will-hit [Accessed 7 Aug. 2020]. 

Hincks, J., 2020. Beirut Was Already Suffering. Then Came a Deadly Explosion. [online] Time. Available from: https://time.com/5876052/beirut-explosion-lebanon-economy/ [Accessed 7 Aug. 2020]. 

Horowitz, J. and Dos Santos, N., 2020. Lebanon’s economy was already in crisis. Then the blast hit Beirut. [online] CNN Business. Available from: https://edition.cnn.com/2020/08/06/economy/lebanon-economy-beirut-blast-imf/index.html [Accessed 7 Aug. 2020]. 

Huang, K., 2020. Chinese peacekeepers deliver medical help after Beirut port explosion. [online] South China Morning Post. Available from: https://www.scmp.com/news/china/diplomacy/article/3096289/chinese-peacekeepers-deliver-emergency-medical-help-lebanon [Accessed 7 Aug. 2020]. 

Koffman, T., 2020. Lebanon’s Currency Crisis Paves The Way To A New Future. [online] Forbes. Available from: https://www.forbes.com/sites/tatianakoffman/2020/07/09/lebanons-currency-crisis-paves-the-way-to-a-new-future/#d9855fa6a176 [Accessed 7 Aug. 2020]. 

Macaya, M. and Wagner, M., 2020. Search continues after deadly Beirut blast. [online] CNN. Available from: https://edition.cnn.com/middleeast/live-news/beirut-lebanon-explosion-08-06-2020/index.html [Accessed 7 Aug. 2020]. 

Sullivan, H., Holmes, O., Ratcliffe, R., Elgot, J., Borger, J., Blackall, M., Bramley, E., Smith, H., Roth, A., Graham-Harrison, E., Chulov, M., Phillips, T., Doherty, B., Liston, E., Safi, M. and Beaumont, P., 2020. Death toll in Lebanese capital rises to 135 as about 5,000 people are wounded – as it happened. [online] the Guardian. Available from: https://www.theguardian.com/world/live/2020/aug/04/beirut-explosion-huge-blast-port-lebanon-capital [Accessed 7 Aug. 2020]. 


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s