Solidere Stock Conjures Dystopian Safe Haven

The Beirut Stock Exchange is up more than 100% over the past year on the MSCI Frontier Index, triple the 33% composite advance, despite Lebanon’s overlapping economic, financial sector, health, and political crises. With the country’s March 2020 debt default and currency collapse, lack of a functioning government, and bank accounts largely frozen, local investors have chosen to park available cash in a few stocks.  The LBP has lost nearly 90% of its value against the USD over the last 18 months after unraveling of the decades-old official peg.

Solidere, incorporated in 1994 by the Hariri family with father/son prime ministers to redevelop downtown Beirut after the country’s 15-year civil war, dominates with 45% of the exchange’s USD 9.2 billion market capitalization. Following last summer’s port blast,  investors are betting on another round of rebuilding benefiting the conglomerate.. Even the 4 listed banks at over one-third of capitalization, have attracted inflows despite  system assets 60%  in the form of central bank deposits and certificates of deposits frozen in place, and 11% in local T-bills and defaulted Eurobonds, according to Standard & Poor’s.

The World Bank, in its latest Lebanon Economic Monitor, stated that “conditions in the financial sector continue to deteriorate,” noting “highly regressive” deleveraging as depositors can only partially draw on accounts at the official overvalued exchange rate. Restructuring banking sector debt with requested IMF support still awaits a functioning government. According to S&P, the cost will range from 30-134% of GDP, and depends on eventual Eurobond value. The rater believes that depositors will be “bailed-in” through deposit to equity conversion or full deposit return at an artificially low exchange rate since shareholder and external aid contributions will fall short.

The central bank, after a series of confusing public messages that prompted further civil unrest, just announced that depositors will have greater access to foreign currency accounts on July 1.  However, the monthly amount is limited to USD 400, and banks do not have the hard currency on hand. The central bank guidance finally elaborated formal capital controls.  Last year the banking sector simply barred customers from dollar accounts as the pound collapsed.  The “official” rate still stands at 1,515/USD – the level it was pegged at nearly a quarter of a century ago – while the informal rate surged above 14,000 this month.

The central bank has plowed through half of its reserves since late 2019, and is running out of room to subsidize critical imports, including medicine and supplies to combat Covid-19. While the monetary authority reports gold holdings at USD 17.5 billion, auditors have not able to verify the physical commodity in decades, according to local media reports. Longtime governor Riad Salame is under investigation in France and Switzerland over “aggravated money laundering” after offshore companies he set up after a career as a Merrill Lynch executive invested USD 100 million mainly in overseas real estate. Salame claims the suspicions are “false news” and politically motivated.

The World Bank estimates that after GDP contracted by 27% the past two years, it will plummet a further 9.5% this year.  Inflation is well into triple-digits after 85% in 2020. It placed the current economic and financial crisis as “likely to rank in the top 10, possibly top 3, most severe globally since the mid-nineteenth century.” It also warned that without immediate credible stabilization reserves could run out with a “disorderly and highly disruptive exchange rate adjustment.” Foreign distressed equity investors can no longer participate since MSCI downgraded the index to standalone, and another catastrophic twist as the bank sketched will squash the same residual value hopes desperate savers hope to salvage.

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