Nine months after the parliamentary elections in May 2018 – the first ones held since 2009 – Lebanon still has not been able to form a government. The ongoing political uncertainty has raised concerns among foreign investors and depositors. The country is highly reliant on deposit and remittance inflows from the large diaspora (USD8bn or 15% of GDP in 2017) in order to finance its huge twin deficits (annual fiscal deficits close to -10% of GDP; external deficits over -20% of GDP). But recently deposit growth has slowed and deposit dollarization has risen, despite higher interest rates. Moreover, funding costs for the government have gone up. Investors are alarmed by rumors about plans of a restructuring of the large public debt stock (approx. 150% of GDP). Against this backdrop, we agree with caretaker PM Hariri who is cited to have said that this week will be decisive in efforts to form a government. The longer the cabinet formation will be delayed, the higher the risk of stepped-up capital outflows and reduced remittances, which could be followed by the implementation of currency and capital controls.
