Lebanon stuck between a rock and a hard place

The outlook for Lebanon’s economy is going from bad to worse. The most immediate threat is that the country could find itself caught in the crosshairs amid escalating tensions between the Gulf countries and Iran. One possible outcome is that Lebanon faces some form of sanctions due to Iran’s influence in the country, which could hit the economy hard – especially given the dependence on capital inflows to fund the large current account deficit. This comes at the same time as the government is struggling to tackle the dire public finances. The cabinet has been locked in talks over the 2019 budget for weeks. And recent protests by public sector workers highlight the difficulty that policymakers will face in pushing through austerity measures. We still think that a debt restructuring will be needed in the coming years and, as a result, dollar bond spreads are likely to widen further.