Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldApril 30 2015

In stasis: Lebanon's economy stifled by Syria and political deadlock

The civil war in bordering Syria and a stagnant political scene have caused Lebanon's economy to grow at a slow pace in recent years. While factors such as the low oil price give some cause for optimism, the prevailing feeling of uncertainty in the country means few see it realising its full potential any time soon.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
In stasis: Lebanon's economy stifled by Syria and political deadlock

The crisis in neighbouring Syria, domestic political uncertainty and a deteriorating fiscal position have all weighed heavily on Lebanon’s economy over the past year. The Syrian conflict alone has been devastating to Lebanon, with the World Bank estimating that the fiscal impact on the country between 2012 and 2014 reached a cumulative $2.6bn, or about 6% of the 2013 gross domestic product (GDP).

These problems have been compounded by a fall in exports and the presence of more than 1.5 million refugees – equivalent to about 25% of the total population – now resident in the country.

The impact on real GDP growth has been appreciable. In 2014 it reached 2%, according to the International Monetary Fund (IMF), which was a marginal increase from the 1.5% growth registered in 2013. These growth figures compare poorly with the boom years that Lebanon experienced between 2007 and 2010, when the country enjoyed real GDP growth rates of between 7% and 9%.

Cause for optimism?

Nevertheless, while the picture today is somewhat gloomy, many observers feel there is still some room for optimism in this depressed environment.

“Lebanon has faced many exogenous shocks, particularly from the war in Syria, but in relative terms we have been dealing with these challenges well,” says Alain Bifani, director-general of Lebanon’s ministry of finance. “If you consider the regional context – where growth in Jordan has been sluggish, Turkey has faced a number of challenges and Libya is still struggling to gain momentum – our projected GDP growth of 2.5% in 2015 is relatively good news.”

Moreover, in response to the growing number of regional threats, including the presence of Islamic State forces on the country’s borders in 2014, the various organs of Lebanon’s security apparatus have worked resolutely to maintain stability.

"The army is mastering the eastern border with Syria and they are very confident about securing that border. Internally we have also been faring well with 12 months of stability," says Dr Freddie Baz, group chief financial officer of the country’s largest lender, Bank Audi.

Eurobond issuance

Under these circumstances, the market responded positively to Lebanon’s largest ever Eurobond issuance, valued at $2.2bn, in February 2015. The total orderbook for the issuance reached $4.9bn, while the transaction priced, as is custom for Lebanese sovereign bonds, more attractively than the country’s agency-designated rating, although only 15% of orders came from overseas.

“Despite the success of the placement, the issuance denotes the high borrowing needs of the government. The main reason why the finance ministry is paying low coupon rates, despite the wide fiscal deficit and the high level of the public debt, is because the local banking sector subscribed to most of the issuance,” says François Bassil, chairman and general manager of Byblos Bank.

Moreover, it seems unlikely this will be Lebanon’s sole Eurobond issuance for the year. Speaking to local media following the transaction, minister of finance Ali Hasan Khalil claimed that the ministry was looking to tap the market for a total of $4.4bn in issuances to meet expenditure requirements. Additional bond offerings will require parliamentary approval, however, as only $2.5bn-worth of issuances have been given the green light for 2015.

Plugging the public debt

Indeed, Lebanese banks have been playing an important role in propping up the sovereign. High volumes of remittances from the country’s global diaspora have helped the banking sector to finance public debt over the years, in turn giving the banks large exposure to low-rated sovereign paper. Fitch Ratings estimates that close to 60% of all government debt is held by local banks.

This dynamic has often been a source of criticism for the country’s banking sector, which typically comes under fire for its exposure to what are deemed to be high-risk instruments. On the ground, however, this perspective is disputed.

“They [government instruments] aren’t risky for a very simple reason, which is that the net equity position of Lebanon – despite the country’s debt ratio – is positive. This relates to the fact that the state of Lebanon still owns many assets, including public utilities,” says Mr Baz. "If I made an approximate calculation of the value of public utilities, conservatively, along with some prime lands which are still held by the state, I could easily reach a figure of $100bn to $110bn. This is not factoring for proven oil and gas reserves. This is set against $66bn of outstanding debt."

Despite this underlying strength, levels of government debt are exceptionally high, even by global standards. According to the IMF, it currently stands at 145% of GDP.

“The debt overhang is very high. We can’t live off remittances, which is why the country is now trying to focus on the productive economy. For example, we are seeing an increasing number of new start-ups, as well as success in new economic sectors, including the technology industry,” says Mr Bifani. “Economic growth is currently concentrated among the banking, construction and tourism sectors. We must diversify.”

Diversification needed

The Banque du Liban (BdL), the country's central bank, has been working hard to encourage its lenders to support start-up entities and small and medium-sized enterprises (SMEs). Circular 331, issued by the BdL in 2013, offers Lebanese banks a guarantee of up to 75% of their investments in in the capital of start-ups that meet specific criteria. In addition, a number of commercial lenders are pushing hard to engage with SMEs, as well as the country’s burgeoning green economy, to promote economic growth and diversification.

Fransabank, Lebanon’s fourth largest lender by Tier 1 capital, has for a number of years partnered with the International Finance Corporation (IFC) to meet these objectives. In 2014, the two combined to sign two lines of credit to support local businesses in their acquisition of green technology, to help reduce their costs and improve productivity.

Moreover, Fransabank’s use of an IFC risk-sharing facility in 2007 helped the bank to scale up its outreach to SMEs in Lebanon, which account for about 97% of total enterprises. Accordingly, between 2009 and 2013 Fransabank’s SME business expanded 2.9 times, with a compound annual growth rate of 24.1%. These initiatives, and others, will be important in progressing Lebanon’s economic development.

Structural reform

In addition to economic diversification, Lebanon is also in need of serious structural reforms. At present, the public sector remains bloated and inefficient, with the cost of wages, in particular, soaking up much of the government’s budget. According to the IMF, wages consume about 30% of government spending. In addition, reforming state-owned utilities would go some way to addressing the country’s economic challenges.

State-owned Electricité du Liban (EdL) presides over tariffs that have remain unchanged since 1996, when the cost of oil was about $23 per barrel. Estimates from 2013 indicate that 4.5% of GDP was transferred to the EdL to fund what are in effect generous energy subsidies. Moreover, the country’s energy sector is notoriously inefficient. Lebanon currently has about 2019 megawatts (MW) of installed generating capacity. This is matched against 3195MW of demand during peak periods, according to the IMF.

“The banking sector has been calling on authorities to implement structural reforms that would reduce the government's elevated borrowing needs,” says Mr Bassil. “The reforms include fighting tax evasion, improving tax and fee collection, reducing inefficient public spending, fighting corruption, selling non-performing real estate holdings, freezing recruitment in the civilian public administration, as well as liberalising the telecom sector and reforming the electricity sector, as the EdL is a drain on the treasury.”

Lebanon has some way to go before these challenges can be addressed, however. What is widely viewed as preventing meaningful progress is long-standing political gridlock. Despite forming a national unity government – after a 10-month wait – in March 2014, Lebanon has yet to achieve agreement on the election of a new president. In March 2015, the Lebanese parliament failed for the 20th time to elect a head of state.

On this topic, a Deutsche Bank research report in March noted: “This impairs the parliament’s ability to pass legislation and affects the work of prime minister Tammam Salam, who needed 10 months himself to form a new government early last year. Tensions between the Lebanese rival factions will remain high, further fuelled by the Syrian civil war and the advance of the Islamic State in the Levant.” 

Oil boost

Nevertheless, there is some cause for optimism in Lebanon. The dramatic fall in global oil prices that occurred in 2014 looks set to be maintained this year. With prices hovering at about $60 per barrel, the oil-importing countries of the Middle East and north Africa, including Lebanon, stand to benefit  

“Lebanon is benefiting significantly from the lower oil price. We saw some gains last year but we expect this to be fully realised later in 2015. It is estimated the country will save about $800m due to the fall in prices,” says Saad Azhari, chairman and general manager of Blom Bank.

The energy price fall is particularly fortuitous for Lebanon in light of the country’s specific energy production dynamics, according to Mathias Angonin, an analyst with Moody’s. He says: “The impact of lower oil prices is positive in the case of Lebanon. Lebanon is an oil-importing country and the energy sector is highly inefficient. A large share of electricity production is produced at the household level, which means a higher consumption of fuel. The pass-through rate of lower oil prices in Lebanon is among the highest in the region.”

In conjunction with the oil price drop, the depreciation of the euro has also emerged as a boon for the economy. The knock-on reduction on the cost of imports has provided Lebanese consumers with additional disposable income, considerably improving their purchasing power. This bodes well for the coming year, though beyond 2015 the implications of these trends are less clear.

“Longer term, the effects will be a little more mixed. Lebanon is now in deflation and there is a chance the country will enter into a deflationary cycle,” says Mr Angonin.

A need for unity

While Lebanon’s broader economic picture offers more nuance than its GDP numbers might reveal, solving the country’s political stasis will be the key to addressing its longer term challenges.

Government unity will be needed before the country can embark on a series of much-needed economic and fiscal reforms. For now, however, this seems unlikely. The war in Syria is not only adversely impacting the country in terms of coping with an influx of refugees and border conflict, it is also casting a long shadow over Lebanon's internal political environment. As the IMF notes: “Without a resolution in Syria, economic performance [in Lebanon] is expected to remain weak.”

As such, Lebanon clearly has a long way to go. However, it has endured crises of a far worse magnitude in its long history. Few Lebanese people doubt the capacity of their country to return to the kind of economic growth of which it is capable. The question will be, how long will this take?

“I don’t feel we are close to achieving real upside. Real upside would be 8% real growth in GDP over a minimum of five years, in order to close the output gap,” says Mr Baz.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East , Lebanon