Goldman Sachs recently released an edition of the CEEMEA Economics Analyst “Mapping out the Path to Lebanese Economic Recovery”, where it highlighted the prospective steps to be adopted by the newly-formed government over the upcoming period in order to launch the economic recovery process, along with the ramification of said steps on bondholders. In details, Goldman Sachs commented that the road to recovery must entail two phases, with the first phase centering on the government’s preparation and implementation of a detailed recovery plan in cooperation with the International Monetary Fund (IMF) and other stakeholders. This would form a prerequisite to the initiation of the second phase, which would include concluding a formal agreement with creditors over public debt restructuring, ratifying an IMF program and securing bilateral and multilateral financing particularly that related to the CEDRE conference in 2018. In details, and as far as Phase 1 is concerned, Goldman Sachs stated that the recovery plan prepared by the previous government must form the building blocks of any new plan, albeit some details may need to be modified. Said plan, however, should strive to satisfy the requirements of domestic stakeholders and external partners as well, given that the latter are essential to providing financing over the upcoming years. Goldman Sachs estimated the losses of the banking system at around $65 billion, while stating that while the previous plan proposed recovering part of said losses from those who transferred money abroad during the de-facto capital control period or via an anti-corruption campaign, said measures remain vague, necessitating a certain form of bail-in by depositors. Goldman Sachs also insisted that any reform agenda must be comprehensive, revolving around fiscal reform (EDL issue, expanding the revenue base and trimming expenditures), monetary reform (unification of the multiple exchange rates), economic reform (revamping Lebanon’s remittance-dependent model by boosting international competitiveness and improving export levels), and political reform (reinstating accountability and abolishing corruption). Said measures, however, could be derailed by a multitude of Lebanon-specific factors, such as sectarianism, vested interests and external influence only to name a few. However, Goldman Sachs commented that it remains “cautiously optimistic” on reform potential on the medium-term, since economic literature suggests that reforms are more implementable during crisis-stricken times as the cost of delay becomes much higher. As far as phase 2 is concerned, Goldman Sachs stated that an IMF program is a must in the light of the economic woes that have been ravaging Lebanon, citing in this regards the 90% depreciation of the local currency and an inflation rate that surpassed 100%, bearing in mind that it reached 150% in March. Said crisis also slashed government expenditures as a percentage of GDP from 29% in 2019 to 13% in 2020, while depressing the Gross Domestic Product by 21.8% in 2020, with expectations of a further 5.2% contraction in 2021. The importance of the IMF program stems from it being a cornerstone to unlocking further funding (notably CEDRE funding), its vitality to weather the impact of the economic recovery and the much needed technical assistance and expertise of the IMF in such situations. Goldman Sachs warned, however, that obtaining IMF assistance would not be a walk in the park, as an IMF intervention would limit the government’s ability to balance the conflicting needs of its internal stakeholders in addition to its capability to delay/soften the required measures. Goldman Sachs commented that the Lebanese government would have to prove to the IMF its commitment for reform implementation, especially in the light of Lebanon’s poor track record in this area, while adding that the IMF would at least require that the issue concerning the losses of the financial system be resolved before inking any agreement with the government. Goldman Sachs also referred to the CEDRE financing, commenting that it will also be bound by reform implementation, and that while it would not have a sizeable direct impact on the balance of payments since it would be on a project-by-project basis, it would positively affect fiscal performance by reducing capital expenditures. Finally, Goldman Sachs commented on the debt restructuring issue, labeling it as vital in order to restore confidence in the economy and to sustain a current account surplus.  In this regard, Goldman Sachs conducted an analysis for debt recovery based on a set of projections such as a long-term primary fiscal balance of 3% (considered as a realistic target in the event IMF required reforms are undertaken), and a real growth of 3% (buttressed by CEDRE financing of infrastructure projects). Also on the same note, Goldman Sachs estimated that the Lebanese pound would appreciate to the 8,000/USD level over the medium term, and that when taking into account the 75% improvement in the Real Effective Exchange Rate (REER) in comparison with the 2019 average, the current fair value of the local currency would stand at LBP 6,000 per USD. Accordingly, and as per Goldman Sachs, the current black market exchange rate significantly undervalues the currency. Always on the projections front, Goldman Sachs anticipated negative/low interest rates to prevail. In parallel, Goldman Sachs set forth some constraints, such as achieving a debt-to-GDP ratio of around 70%-to-80% by the year 2030, a similar treatment for local and external debt, the initiation of the restructuring process during the year 2022 and an average coupon rate for restructured debt at 3% over a tenor of 5 years. Taking all of the aforementioned factors into consideration, Goldman Sachs estimated the haircut on the nominal value of Eurobonds at around 75%.