Lebanon Bond Rally Resumes as FinMin Talks Enter Final Phase

Lebanese government bonds have extended their three-month-long rally, boosted by the election of army chief Joseph Aoun as president and the ongoing negotiations with international creditors. The bonds, which have been in default since 2020, have almost trebled in value since September, when the regional conflict with Israel weakened Lebanese armed group Hezbollah, long viewed as an obstacle to overcoming its political paralysis.

The rally in Lebanese government bonds can be attributed to several factors, including the ceasefire agreement with Israel, the election of Joseph Aoun as president, and the strong support for Lebanon both regionally and internationally. The ceasefire agreement on November 27 and the scheduling of a parliamentary session on January 9 to elect a new president for the country have contributed to the improvement in bond prices. The election of Joseph Aoun as president on January 31, 2023, after 12 failed attempts, has also boosted investor confidence. Aoun's victory was described as "a very positive development" by a bondholder, who expected a quick government formation and progress on reforms towards a deal with the IMF and banking sector restructuring.

However, the sustainability of this trend is uncertain due to several challenges. Despite Aoun's election, political risks remain high, with Hezbollah, although weakened, remaining a key political force. The voting process demonstrated that Hezbollah continues to have significant influence. Additionally, Lebanon's economy and financial system are still reeling from a collapse in 2019, and the recent conflict has exacerbated the situation. The World Bank estimates the cost of the conflict to be $8.5bn. Sovereign debt remains unsustainable, with a debt-to-GDP ratio of 179.2% in 2022. Comprehensive debt restructuring is necessary, but the absence of such a plan undermines the sustainability of the bond rally.

In conclusion, while the recent rally in Lebanese government bonds is a positive development, its sustainability depends on the successful implementation of reforms, the resolution of political risks, and the achievement of a comprehensive debt restructuring plan. The final phase of negotiations with international creditors will be crucial in determining the future of Lebanon's bond market and its economic recovery.