Stuck in a rut

Trapped between nagging domestic security worries, pressure from big trading partners and worrying levels of debt, Lebanon’s efforts to keep its economy on track are making little headway
Lebanon has one of the highest debt-to-GDP ratios in the world.
By Mona Alami
Fri 23 Aug 2013 11:45 AM

Lebanon is facing extreme economic conditions that are among the most challenging since the end of the 1975 -1989 civil war. In recent months, the economic forecast seems to be taking a turn for the worst, with recent EU and GCC decisions to place Hezbollah, one of Lebanon’s main political factions, on the terror list.

The country is also facing disastrous economic figures. “GDP for this year is estimated at between 1 percent to 1.5 percent due to the weakening of domestic economic activity and the prospects of increased instability,” points out Lebanese economist Dr Ghazi Wazni.

Lebanon posted the fourth-steepest decline in tourism arrivals in 2012, recording a 17 percent drop in visitors compared to the previous year, according to the Byblos Bank report Lebanon This Week, while tourism receipts dropped by 14.8 percent between 2011 and 2010.

“The tourism sector, which is a major industry in Lebanon, is among the most hurt by the current economic slump,” says Wazni. Tourist arrivals to Lebanon have contracted by 14 percent in the first six months of the year compared to the same period last year.

“There are fears that this contraction might reach 20 percent by year-end,” the economist warns. There was only 55 percent occupancy of hotels in the capital for the first part of the year, compared to 75 percent a year before, while they stagnated at 20 percent outside Beirut this year against 45 percent a year before, he says.

Lebanon’s trade activities have also borne the brunt of the political uncertainty, with trade registering a 20 percent drop, which is expected to rise to 25 percent by the year’s end. “More and more stores are closing down indefinitely,” says Wazni.

In addition, investment in residential real estate has retreated significantly, according to Lebanon This Week.

“The real estate sector continues to suffer from reduced appetite from GCC investors and Lebanese expatriates, partly due to the Syrian conflict and wider political uncertainties,” says Nassib Ghobril, chief economist at Byblos Bank. While the demand from Syrians fleeing the violence next door is providing some cushion to rental prices, revenues from real estate registration fees still decreased by 26.2 percent to $97.9m, and receipts from built property taxes fell by 2.6 percent to $59.8m, according to Ghobril.

“We estimate that 15 percent of buyers are waiting for prices to drop further,” adds Wazni. The economist emphasises that measures taken by the Lebanese Central Bank, which earmarked a $660m credit line for property buyers, have supported the real estate sector to a certain extent.

But Lebanon’s main economic risks essentially revolve around the country’s mounting public debt, estimated now at about $60bn, with a widening deficit amounting to 9 percent of GDP in 2013.

At the end of 2012, Lebanon’s debt-to-GDP ratio was 128 percent, with the CIA World Factbook ranking the country as the sixth-highest in the world.

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The rise in spending this year is also expected to exacerbate the fiscal deficit. According to Lebanon This Week, the nominal fiscal deficit will increase this year due to stagnant tax receipts along with a rise in public expenditures. “Figures released by the Finance Ministry show that the fiscal deficit reached $782.6m in the first quarter of 2013, widening by 16.9 percent from $669.3m year to year. The deficit was equivalent to 26 percent of total budget and treasury expenditures, compared to 22.3 percent of overall spending in the first quarter of 2012,” points out Ghobril.

Lebanese banks, which are the main subscribers to Lebanese bonds, are still bankrolling the government. “However, a further deterioration in the domestic, economic and political situation would increase yields, which would negatively affect Lebanon’s debt,” says Ghobril.

Yet in spite of the gloomy prognosis, Lebanon’s banking system remains strong, both economists say. “The sector indicators remain at a stable level, with  banks showing a solid 8 percent growth in deposit levels this year, while profit margins showed healthy results estimated between 3 percent to 5 percent,”  adds Wazni.

In addition, the level of deposit dollarisation and lending in local currency continue to be stable, reflecting the confidence of depositors and borrowers in the local currency despite the political volatility. The Central Bank’s foreign reserves, which can be used to shore up the Lebanese pound, have increased from $3bn in 2012 to $37.5bn in 2013. This, experts believe, shows there is no real pressure on the currency.

“Banks are safe as long as they continue to post deposit increases of more than 5 percent, which allows them to finance the debt. If the growth levels drop below this level, this could be worrying for Lebanese banks,” says Wazni.

Besides a slump in economic growth due to the deterioration of domestic security, Lebanon has also been challenged by two recent decisions by the EU and the GCC to put Hezbollah on their lists of terror organisations. Lebanon is reliant on both trade partners in many ways.

Bilateral trade between the EU and Lebanon had been increasing steadily over the past years, with an average annual growth of 13.6 percent since 2008. In 2012, the EU was Lebanon's top trading partner, taking up almost 32 percent of Lebanese trade. Exports to the EU were about $1bn, while imports from Europe were estimated at roughly $8bn, according to Wazni. Foreign direct investment (FDI) to Lebanon, while limited, has amounted to about 320 million euros under the European Neighbourhood and Partnership Instrument.

The EU decision adds a degree of uncertainty to the future, although Wazni believes that “the EU’s financial and economic assistance to Lebanon are supposed to continue for now”. The European agency's representative to Lebanon, Angelina Eickhorst, has said that the EU’s financial and economic assistance to the country is scheduled to carry on as normal.

While there is no short-term impact as a result of the EU decision, a further degradation of relations could possibly usher in economic restrictions, ones that would be aimed at Hezbollah via the Lebanese banking sector.

“The EU decision further undermines confidence in the economy. However, the real danger resides in a deterioration of relations with the US, because of Lebanon’s high dollarisation, and, more importantly, the use of American banks in all transfers,” says one Lebanese banker speaking on condition of anonymity, as he is not allowed to speculate on the situation with the press.

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The GCC decision to sanction Lebanese residing in the Gulf has much more widespread and serious implications. The Gulf countries have already declared that they would take measures against members of Lebanon’s Hezbollah over the Shi’a movement’s military role in Syria against the rebels, which would affect their residency permits and financial and commercial transactions. The GCC also advised the Lebanese government to face up to its responsibilities with regard to Hezbollah’s behaviour.

The Lebanese people and Lebanon itself  are largely reliant on other Arab countries for their livelihood. According to a report by As-Seyassah newspaper in Kuwait, the country’s Interior Ministry is planning to take action against some 2,000 Lebanese citizens in the state by ending their residency.

The anti-Hezbollah move by the GCC has stirred fears among the many Lebanese who work on the Gulf. About 60 percent of total expatriate remittances to Lebanon, about $8bn, comes from GCC countries, according to Ghobril.

“In addition, FDI from the GCC represents about 75 percent to 80 percent of FDI in Lebanon,” he adds. In 2011, FDI fell from $4.8bn a year earlier to $4bn. During the recent boom years of the real estate sector, about 70 to 75 percent of real estate demand in Lebanon was external, with a significant share of it coming from Lebanese expatriates in the GCC and, to a lesser extent, from GCC nationals,”adds the economist.

Gulf tourists have always been welcomed by Lebanese. The Lebanese tourism industry is widely dependent on Arab money, as tourists from Saudi Arabia, the UAE and Kuwait account for 35.3 percent of Arab tourist arrivals to Lebanon and for 12.3 percent of total arrivals, highlights Ghobril. Tourists from Saudi Arabia account for 25 percent of tourist spending in Lebanon, while those from the UAE, Qatar, Kuwait and Bahrain make up 20 percent.

Saudi nationals alone accounted for 11 percent of hotel clients in Lebanon in 2011. Apart from the Lebanese themselves, visitors from Saudi Arabia were the most frequent users of hotels and furnished apartments in Lebanon in 2011. On the trade level, exports to the GCC contributed to about 20 percent of total Lebanese exports in 2011.

The economic situation in Lebanon is also closely tied to that of the GCC. As an example, a 1 percent rise in the income of the GCC economies would generate an estimated 1 percent increase in remittances to Lebanon, says Ghobril. In addition, a 1 percent increase in the price of oil would result in a 0.21 percent rise in passenger arrivals to Lebanon and an average increase of 0.26 percent in Lebanese exports to the GCC during the following four quarters.

The deteriorating Lebanese economy cannot face these new challenges without risking putting more pressure on its strongest sector, local banks. Relations with large trading partners such as the EU,the US and Gulf countries need to be maintained in order to avoid a major economic crisis, which would be catastrophic for a country on the brink of dislocation.

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