Lebanon/Turkey’s Rearguard Refugee Roundup
Media and law enforcement reports that thousands of Syrian refugees in Lebanon and Turkey, out of the millions fleeing there from the 8-year civil war, had been forcibly relocated or detained heightened investor aversion amid recession, monetary and political risks. Through August their respective stock markets were down 4% and 21% on the Morgan Stanley Capital International Index, as Fitch downgraded Lebanon’s sovereign rating to “CCC” near-default with officials scrambling for more “financial engineering” to manage the 150% public debt/gross domestic product ratio. The Istanbul government threatened to remove up to half a million unregistered Syrians before an end-August deadline and take them to permitted provinces and border areas, as rumors circulated that ethnic Uighurs could also be deported at China’s behest.
Turkey hosts the largest population escaping the Assad regime conflict and claims to have spent over $35 billion on processing, infrastructure and social services since 2011. It signed a euro 6 billion deal with the European Union in 2016 to prevent onward migrant movement, as aid groups cite evidence that refugees have been returned to Idlib, the last opposition city holdout, in violation of international law. President Recep Tayyip Erdogan’s party lost the rerun of the Istanbul mayor’s race in part due to opinion surveys showing discontent with the influx amid economic slowdown.
In Lebanon refugees do not have the same rights to education and employment and children have joined parents in low-wage underground farm and factory work. Output will again contract this year around half a percent, with cement and car sales dropping 25% from January-July although tourist arrivals remained positive. The forecast does not yet incorporate the fallout from creeping Hezbollah-Israel reprisals as the Netanyahu administration tries to curtail the Iran ally’s military presence next door, where it is a member of the government coalition often against budget and state enterprise reforms.
Positive GDP growth in 2020 depends on fiscal, structural and banking sector adjustments that can also release over $10 billion in aid pledged at a Paris conference. The cash budget gap this year is estimated at 8% of national income with accumulated arrears to official and private contractors, according to a September Institute for International Finance(IIF) analysis. Banking deposit interest and individual income taxes were hiked, and lower oil import prices should reduce government electricity company losses. Next year value added and fuel levies will rise, and an independent tribunal is to fight chronic tax evasion. Interest servicing should decline with this consolidation and less pressure from the near 15% local currency yields the central bank offered in direct commercial bank deals over the summer.
The IIF believes this “feedback loop” could bring 2.5% economic expansion at around the regional average, especially if accompanied by monetary easing with the 1500 Lebanese/US dollar peg intact. In the past month banks attracted $2.5 billion in non-resident deposits to lift foreign reserves above $30 billion, but the high interest rate choked domestic credit at the same time, with construction and real estate portfolios souring. Capital adequacy and liquidity are solid, but bad loans are 11% of the total in International Monetary Fund classification, twice the central bank’s figure. Resident capital outflows run at an annual $2 billion, and the current account deficit is a whopping 20% of GDP. Exports are mainly gold and jewelry, and improved tourism earnings will be offset by weaker worker remittances from elsewhere in the Middle East. Benchmark 10-year Eurobond yields reached 13% recently on the ratings and geopolitical downgrades, and near-term normalization awaits convincing breaks with decades of competitive and corruption stalemate, the IIF notes.
In Turkey almost one-third of the outstanding $350 billion in foreign currency debt, two-thirds in private company hands, comes due over the next year. Borrowers rely on cross-border rollovers of bank trade credit rather than diaspora lines, and they were routine until the 40% lira depreciation and President Erdogan’s erratic economic and foreign policy moves the past year. With recession cramping imports a rare current account surplus was achieved, but investor anxiety has spiked with the abrupt sacking of the central bank head after he refused to modify the prevailing 25% interest benchmark. His replacement rapidly cut the rate 425 basis points and signaled more reductions to follow, with inflation still in the 15-20% range, in another suspect engineering feat.
