Lebanon is facing a financial meltdown so severe that the World Bank has branded it as one of the worst since the mid-19th century. The country is fast spiralling into a dangerous situation of state failure, marked by violent riots, escalating blackouts and spiking fuel price increases.

According to Rami Hajjar, portfolio manager at Allan Gray, the Lebanese crisis shows how things can go wrong when mismanagement of public policy and corruption are the order of the day.

“While South Africa is in a very different position to Lebanon, the events there act as a valuable lesson to understand how quickly things collapse if there is a lack of sound economic policy, fiscal discipline, and no strong, independent institutions to maintain a functioning economic and financial system,” said Hajjar.

He added that all too often, the root of a crisis lies in a country consistently spending beyond its means.

Looking at the unfolding crisis in Lebanon, Hajjar discusses the top flags that warn of a country’s near financial collapse.

1. Getting stuck in a debt spiral

According to Hajjar, Lebanon’s crisis was born out of the financial and economic policies it undertook to attract large foreign inflows to finance the reconstruction of the country. To do so, the currency was pegged (providing confidence in the monetary system), high interest rates were provided, and capital movements were fully liberalised.

“As the economy was coming off low grounds, and the tax base was tiny, the…

Read more…