Global investment bank Goldman Sachs considered that the formation of a new government in Lebanon would have a positive impact on sentiment over the short term. It indicated that there is an emerging broad consensus among the country's political class on economic reforms, which would bode well for economic policy. It said that policymakers appear to have a clear focus on a set of economic priorities that they intend to address in the immediate term, specifically fiscal consolidation, electricity reforms and implementing projects under the CEDRE conference. 

The bank pointed out that the drive for fiscal consolidation is motivated by concerns about the sustainability of Lebanon's public finances, as well as by the need to narrow the fiscal deficit as a condition to unlock the funds that the international community pledged at the CEDRE conference. It said that policymakers consider that reducing Treasury transfers to Electricité du Liban (EdL) would yield rapid fiscal savings, which they project at about $2bn per year, equivalent to 3.5% of GDP, starting with fiscal savings of up to $1bn in 2019. However, the bank considered these short-term targets to be ambitious. It added that implementing policies that lead to higher GDP growth would help reduce the fiscal deficit-to-GDP ratio. It noted that policymakers believe that there are limited prospects for other initiatives, such as freezing recruitment in the civil service, a possible recalibration of the tax system, or increasing taxes and fees.  

Further, it considered that the CEDRE-related projects are unlikely to have a significant impact on economic growth in the near term, given the time needed to prepare for the projects and the relatively limited government capacity to implement them. 

In parallel, Goldman Sachs indicated that the $5.5bn debt swap that the Ministry of Finance conducted with Banque du Liban (BdL) in May 2018 can finance maturing Eurobonds up until April 2019, which would limit short-term refinancing risks. It added that BdL and the Finance Ministry do not intend to carry out additional debt swaps, as this would undermine confidence in debt markets and distort pricing. It noted that Lebanon would tap the market to meet its financing requirements next year and could issue debt in smaller sizes and more frequently in order to achieve better pricing.

The bank noted that BdL would continue to encourage deposit inflows through its financial engineering operations until the prospects for such inflows improve through the formation of a new government, as well as the implementation of policies that would support economic activity and narrow the fiscal deficit. It estimated the aggregate returns for banks on their financial operations with BdL at about 17.5%, which consist of a 7% return on their deposits in US dollars at BdL and a positive carry of 10.5% on their operations in Lebanese pounds. It said that this has enabled banks to offer customers interest rates of up to 15% on five-year Lebanese pound deposits that get converted from US dollar deposits. It noted that BdL's operations focus on lowering the dollarization rate of deposits by encouraging the conversion of dollar deposits to Lebanese pounds. 

Goldman Sachs indicated that BdL's average cost of US dollar funds from local banks is 5.3%, while the negative carry with respect to BdL's conventional reserve placements is 3%. It indicated that BdL is offsetting these costs through high yielding holdings within its foreign currency portfolio, which include Lebanese Eurobonds, as well as through returns on other assets, including gold, real estate, and dividend-paying company holdings. It noted that other sources of BdL's income include revenues from its local currency portfolio and seigniorage income. The bank expected sentiment to improve following the formation of a government and the start of the reforms drive, which would ease funding pressure in the near term. But it noted that it is too early to know if the anticipated increase in deposits inflows would be enough to allow BdL to scale back its financial engineering operations.