Lebanon This Week 645

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Lebanon This Week 645

August 24, 2020

  • Claims from explosion at Port of Beirut to have limited impact on capital of European reinsurers
    Fitch Ratings anticipated that the explosion at the Port of Beirut on August 4, 2020 will exacerbate the pressure on the earnings of European reinsurers from the COVID-19 pandemic. However, it did not expect the blast to significantly affect the credit profiles of European reinsurers. It said that initial estimates from the local insurance industry suggest that insured losses in Lebanon could reach about $3bn, which are comparable to the losses from the explosion at the Chinese Port of Tianjin in 2015. It expected Lebanese insurers to undertake most of the primary insurance coverage, and for European reinsurers to share a large part of the losses. But it noted that claims from the Beirut Port explosion would have a limited impact on the reinsurers' capital positions, given that such claims are much smaller than the pandemic-related insurance claims.
     
    The agency did not expect the insured losses from the Port of Beirut explosion to exceed the losses from the Tianjin incident, given the low insurance coverage in Beirut and the type of property and goods that were damaged. It said that the insurance industry estimated that only about 30% of the economic losses from the explosion at the Port of Beirut were likely insured, and that the mix of the damaged property and goods has lower value than the destroyed property in Tianjin. It pointed out that Hannover Re reported net claims of €111m, while Munich Re and Swiss Re reported claims of €175m and of $250m, respectively, following the explosion at the Port of Tianjin. It anticipated that claims of this magnitude from the blast at the Port of Beirut would moderately exacerbate pressure on the 2020 earnings of the reinsurers. It noted that European reinsurers have yet to disclose their estimated losses from the explosion at the Port of Beirut.
     
    In parallel, Fitch considered that it is uncertain to what extent the European reinsurers will be liable for the losses. It said that, if the investigation of the Lebanese authorities concludes that the explosion was accidental, most insurance contracts will likely be honored, but it noted that there would be limits to the payouts. It also expected claimants without insurance policies to seek compensation from the parties they deem responsible for the explosion, and that the latter may then seek compensation from their own insurers. It noted that it is unclear whether the Lebanese government will bear some of the responsibility and costs.
     

  • S&P affirms sovereign ratings at Selective Default, warns of forming weak government
    S&P Global Ratings affirmed at 'SD/SD' (Selective Default) Lebanon's long- and short-term foreign currency sovereign credit ratings, and kept at 'CC/C' the country's long- and short-term local currency ratings, with a 'negative' outlook on the long-term ratings. The foreign-currency sovereign credit ratings of 'SD' are 12 notches below investment grade. In addition, the agency revised from 'CC' to 'D' (Default) the issue ratings on the January 2023 notes, the February 2025 bonds and the February 2030 bonds, due to the government missing coupons payments that were due in July and August. It indicated that the 'negative' outlook on the local currency ratings reflects the increasing likelihood that the government will decide to restructure its Lebanese-pound denominated debt, as part of a broader restructuring program to place the public debt on a sustainable footing.
     
    S&P indicated that the explosion at the Port of Beirut has deepened the country's economic crisis, and that a protracted political vacuum or a weak new government could further delay policy reforms, the disbursement of external aid, and the negotiations to restructure the public debt. It said that international donors committed about $300m in immediate humanitarian support to Lebanon, but stressed that additional support, including the $11bn pledged at the CEDRE conference, is contingent on the authorities' implementation of policy reforms. It considered that the resignation of the current government could diffuse some social tensions and allow a new government to fast-track reform efforts. It expected the implementation of fiscal reforms and the reduction of losses at state-owned enterprises to shape Lebanon's future recovery plan. It also anticipated the plan to include banking sector reforms, structural reforms to encourage private sector investment and productivity, the devaluation of the official exchange rate, as well as the formalization of capital controls. 
     
    In addition, the agency pointed out that, since the Lebanese government announced the suspension of payments on its external debt in March 2020, it has made limited progress in engaging with creditors on debt-restructuring negotiations. It added that key political players have yet to agree on the causes and scope of the country's crisis, which has made it difficult to reach a deal with the International Monetary Fund on a funded program. As such, it expected the debt restructuring negotiations to extend beyond 2020, without a strong commitment by Lebanese authorities to implement economic, fiscal and monetary reforms, and in the absence of a policy anchor provided by an IMF program. It considered that the authorities' challenges are exacerbated by the COVID-19 outbreak that has further weighed on the country's already weak economic activity and severe fiscal pressures. It added that progress on reviving the economy and financial system will depend on the time that political parties will take to form a new government, as well as on the Cabinet's composition.
     
    Further, S&P indicated that it could upgrade Lebanon's local currency ratings in case significant donor funding materializes, which would allow the government to implement immediate structural reforms; or if meaningful reforms led to sustained and strong economic growth. In such a scenario, the agency expected that the restructuring of the Lebanese pound-denominated commercial debt would become less likely. Also, it said that it would raise Lebanon's long-term foreign currency sovereign issuer credit rating from 'SD' and the country's issue ratings from 'D' in case the government completes the restructuring of its foreign debt.
     

  • Occupancy rate at Beirut hotels at 13%, room yields down 88% in first half of 2020
    EY's benchmark survey of the hotel sector in the Middle East indicates that the average occupancy rate at four- and five-star hotels in Beirut was 13% in the first half of 2020 relative to 70% in the same period of 2019, and compared to an average rate of 40.5% in 14 Arab markets included in the survey. The occupancy rate at Beirut hotels was the lowest in the region in the covered period, while it was the sixth highest in the first half of 2019. The occupancy rate at hotels in Beirut regressed by 57 percentage points in the first half of 2020, constituting the steepest decline in the region. In comparison, the average occupancy rate in Arab markets declined by 25.6 percentage points in the covered period.
     
    The occupancy rate at Beirut hotels stood at 3% in June 2020, constituting a decrease of 74.2 percentage points from 77% in June 2019. It was the lowest rate in the region in the covered month. The occupancy rate at Beirut hotels reached 25% in January, 30% in February, 10% in March, 2% in April and 3% in May 2020. In comparison, it stood at 60% in January, at 71% in February, at 79% in March, at 85% in April and at 45% in May 2019.

    The average rate per room at Beirut hotels was $130 in the first half of 2020, decreasing by 34.5% from $199 in the same period of 2019 and constituting the seventh highest rate in the region. The average rate per room in Beirut was lower than the regional average of $134.1 that regressed by 20.1% from the first six months of 2019. The average rate per room at Beirut hotels was $170 in June 2020, relative to $138 in January, $123 in February, $122 in March, $124 in April and $108 in May 2020, and down by 27.4% from $235 in June 2019. 
     
    Further, revenues per available room (RevPAR) were $16 at Beirut hotels in the first half of 2020, the lowest rate in the region, compared to $138 in the same period of 2019. Beirut's RevPAR regressed by 88.2% year-on-year and posted the steepest decrease regionally in the covered period. Beirut posted RevPAR of $5 in June 2020, down by 97.2% from $181 in June 2019. The RevPAR in Beirut, along with Makkah, were the lowest in the region in the covered month. In comparison, Beirut posted RevPARs of $35 in January, of $37 in February, of $12 in March, of $2 in April and of $3 in May 2020; while it registered RevPARs of $118 in January, of $132 in February, of $146 in March, of $174 in April and of $83 in May 2019. Abu Dhabi posted the highest occupancy rate in the region at 68% in the first six months of 2020, while Dubai registered the highest average rate per room at $216 and the highest RevPAR at $95 in the covered period.
     

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