Category Archives: Economy

Why Lebanon’s economy continues to thrive

by Sune Haugbolle.

After a long hiatus due to the fact that I was finishing my book, here is an analysis of the Lebanese economy. It is somewhat baffling, and a nice piece of good news from the Levant, that in a time when Western countries fear a lapse into recession, the Lebanese economy continues to thrive.

Lebanese politics ended 2009 on a positive note with the visit to Damascus on December 20 of Prime Minister Saad al-Hariri. It was the first such visit since the assassination of his father in February 2005. His visit signalled that Hariri, backed by France and Saudi Arabia, is willing to accept a regional role for Syria.

This year has started in the same vein: Druze leader Walid Jumblatt, another staunch government critic of Syria, has now moved to what he calls a ‘centrist’ position, leaving open the possibility that he, too, will achieve reconciliation with Damascus. Since regional reconciliation holds the key to national reconciliation in Lebanon, the thaw between Syria and its enemies in Beirut bodes well for national unity, political reforms and economic progress during 2010.

By Lebanese standards, 2009 was a quiet year. The chief development was the drawn out government formation process, which concluded in November with the election of Hariri to the premiership. The improvement in political stability had a positive effect on the economy, which showed signs of having completed its recovery following the politically disastrous period of 2005-08.

Thus, Lebanon saw the second highest growth rate in the region after Qatar, with government and World Bank estimates at 7%. The conservative lending strategy of its banks protected it from some of the effects of the global recession. The World Bank estimates that growth will continue at the same rate in 2010.

Moreover, bank deposits grew by 20% thanks to increased savings from Lebanese nationals living abroad. Foreign exchange reserves also increased to a record level of 28.6 billion dollars. Despite the fact that many Lebanese expatriates lost capital in the downturn, this has been outweighed by the fact that local banks are now seen as a safe haven.

Stability also boosted tourism. In the first ten months of the year, Lebanon attracted 1.57 million visitors, an increase of 42.7% over 2008. Although average spending per tourist was down on previous years due to the global recession, the tourist sector thrived on increasing numbers rather than fewer but wealthier visitors from Arab and European countries. Finally, the balance of payments recorded a surplus of 12 billion dollars, the highest in recent history.

Lebanon’s remarkable ability to prosper amid the global recession has boosted investor confidence, both at home and abroad. Yet the heavy debt burden continues to cloud the outlook: it is now estimated at 51 billion dollars, or 155% of the country’s GDP, and is expected to rise by a further 5 billion dollars this year.

Inefficiency and corruption are endemic in state institutions and must be addressed if the country is to reduce its debt. Finance Minister Raya Haffar Hassan has vowed to focus public spending in 2010 on a number of key areas.

One of them is transport. A high-speed railway has been proposed along the coast to alleviate the heavy environmental costs imposed by road traffic. New roads are also planned, with special emphasis on integrating the underdeveloped northern regions into the economy.

Another important area to address is modernisation of public education is planned in order to bridge the gap between public and private schools, and to alleviate sectarian divisions among the youth. Moreover, new power plants are envisaged to alleviate frequent power cuts and reduce high electricity prices, and the government has promised to improve efficiency of the information and communications technology sector, which is so crucial to facilitate private business activity and attract foreign investment.

Such large public projects are likely to require an increase in Value Added Tax (VAT) — a move which could undermine the government’s current popularity. On the other hand, these projects will create new jobs and further reduce unemployment, which was down from 18% in 2008 to 10% last year.

Reform of infrastructure and education are in line with the pledges made to donor states at the Paris III meeting in 2007. So far, only half of the total 7.6 billion dollars pledged to help authorities reduce the public debt, achieve reforms and stimulate the economy, has been disbursed. The remainder is tied to proposals that are still awaiting parliamentary approval, the most important of which involve privatisation. Here the government will find itself in some difficulty:

The composite nature of the coalition and deep divisions among ministers threaten to stymie economic reforms. Hizbollah, which holds two ministries, is opposed to privatisation. Its ally, Michel Aoun’s Free Patriotic Movement, controls the Telecoms and Energy and Water Ministries, seen as crucial to privatisation efforts.

Telecoms Minister Charbel Nahas has expressed concern that selling the entire cellular network to private companies could turn a public monopoly into a private one. However, the current providers will come under scrutiny and be forced to improve their services, which are among the most expensive in the world.

Although Lebanon is plagued with an acute power shortage, and the national Electricite du Liban is in poor financial shape, a viable private alternative is still lacking. This suggests that no restructuring of the electricity sector, which accounts for almost half of the national budget, is likely in the short term.

Despite these difficulties, the prospects for 2010 look good for Lebanon’s economy. Barring major political crises, the economy will continue to expand, even if sharp divisions in the government will impede its ability to conduct the much-needed economic reforms.

Lebanon’s economy continues to surprise

by Sune Haugbolle.

As a small distraction from the dramatic events in Iran, and Rasmus’ great coverage of them, here is an in-depth analysis of Lebanon’s curious economy, which has been booming in the midst of a financial crisis.

Now that the elections are over in Lebanon, it is time to look forward. It is likely that the formation of a new unity government will take some time, the sticking point being March 8’s wish for a blocking third of the cabinet.

Meanwhile, let’s take a look at Lebanon’s economy which so far has shown an amazing ability to weather the international financial crises of the last year. There have been predictions lately from the Central Bank that economic growth could exceed 6% this year. The figure contradicts earlier predictions of a 2009 growth rate of 3%, down from 8% last year.

An unlikely success story

Lebanon has, indeed, been one of the unlikely success stories of the global financial crisis. The vital tourism and construction industries are booming, and capital is flowing into the country. As optimistic Lebanese leaders, bankers and businessmen have emphasised, the success is primarily due to conservative bank-lending and bank-investment regulations, limiting exposure to mortgage-backed instruments and other products that have hurt the balance sheets of other international banks, including many Gulf countries.

A result of the country’s long experience with perpetual instability in the national and regional political environment, conservative lending policies, backed up by a solid flow of remittances from millions of Lebanese abroad, have immunised the Lebanese economy from political turmoil. Apart from the months immediately following the 2006 war with Israel, the Lebanese economy has experienced uninterrupted growth since 2001.

Healthy bank sector

A few years back Lebanon’s state regulations were subjected to heavy criticism from domestic and international bankers. Now the financial crisis has turned Lebanese banks into a safe haven in the region, and the economy has thrived.

The proof is in the pudding: Bank deposits have grown steadily, rising 15% in the first three months of the year from the year-earlier period, foreign currency reserves were estimated at 17.6 billion dollars in January 2009, up from 9.8 billion at the end of 2007, and foreign liquid assets stood at 22.3 billion at the end of March 2009, a record high.

Danger signs

The banking sector’s success is remarkable but does not detract from the fact that Lebanon’s economy is well integrated into the global economy and will therefore inevitably feel some effects of its downturn in 2009. There are particular reasons for concern:

First, private investors have incurred great losses in national and international investments. The Beirut stock market alone has lost more than 5 billion dollars since mid-2008.

Second, the lack of capital investment will be felt in the crucial construction, telecommunication and service sectors in the medium term, particularly if the crisis continues throughout 2009.

Third, growth in recent years has mainly been restricted to these sectors. Although the construction sector has continued to expand in the first months of 2009, over reliance on construction is problematic because it is linked to remittances and Gulf capital.

Fourth, the stability of the Lebanese housing market depends on continued construction.

Remittances

A serious slowdown in remittances could therefore potentially start a domino effect in the Lebanese economy, hitting construction and real estate. Somewhere between a quarter and a third of Lebanon’s GDP comes from remittances from the more than 12 million Lebanese living overseas.

The IMF estimates that remittances will decrease globally by up to 10% over the next year. This means that thousands of Lebanese work in the Gulf countries, whose economies have been badly hit by the crisis. Furthermore, decreased investment from the Gulf would affect the real estate sector, which has been one of the main drivers of Lebanon’s growth.

Despite suggestions of the opposite, it is unlikely that unemployed highly skilled migrants will actually return to Lebanon and invigorate the economy as long as wages are so low. Statistics suggest that Lebanese migrant workers who have lost their jobs in 2008 have eschewed the low wages in Lebanon and instead preferred to look for work in emerging markets outside the Gulf, such as Iraqi Kurdistan and India.

Official figures suggest that repatriated capital has continued to increase in 2009 so far, but those figures could change as job losses begin to take effect. Lebanese exports to the Gulf are also expected to fall.

Public debt

The downside of Lebanon’s success story is enormous public debt, currently at 47 billion dollars, or 170% of the country’s GDP, and growing by 8%. More than 60% of that debt is locally owned, with more than a quarter of the Lebanese banks’ assets in treasury bonds. Public debt is around 60% of total credit owned by the banks which is, by international standards, very high. The Lebanese banking system is therefore highly exposed to the sovereign.

Reforms?

The state will continue to borrow heavily from local banks and international financial groups until the government adopts radical reforms to reduce haphazard spending and increase revenues. This is because the state continues to record budget deficits, in the first quarter of 2009 of 1.8 billion dollars.

On the positive side, the economy has proven capable of dealing with the negative numbers. Excessive liquidity in the local markets means that local banks will have no problem financing outstanding bonds in 2009.

Finance Minister Mohammed Shatah is one of the heroes of this situation. He has been lauded by US officials for his willingness to implement economic reforms. In April, Washington provided a grant of 50 million dollars in recognition of the Finance Ministry’s efforts to improve Lebanon’s fiscal position and set a stronger economic growth path as part of a 250 million dollar package linked to progress on economic reform.

Outlook

March 14’ victory in the June 7 elections is unlikely to detract from the overall positive outlook for the Lebanese economy. If anything, new Prime Minister, whether Fouad Siniora, Saad Hariri or a third choice, will team up with Shatah and his team of financial advisers. The result could be a renewed push for more wide-ranging privatisation.

In conclusion, Lebanon’s economy will continue to do well in the rest of 2009. This is mainly the result of clever financial policies from the central bank and a flexible banking sector. Barring a sharp fall in remittances, the banking sector will continue to safeguard against a downturn in the Lebanese economy in the short to medium term.