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Middle EastMay 4 2011

Lebanon brushes off external and internal upheaval

The collapse of its government earlier this year and subsequent political wrangling, together with less than optimistic trading figures, has left many fearing for the economic future of Lebanon. But the region has a long history of resilience in the face of adversity.
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Lebanon brushes off external and internal upheavalLebanon's economy has faced myriad challenges over the past few decades but has remained resilient

Lebanon faces a number of crises but as one banker puts it, as long as there is no shooting there is relative calm. Lebanon has survived many disasters, from the civil war of 1975 to 1990 to the assassination of prime minister Rafiq Hariri in 2005 and the Israeli invasion of 2006. While there is political turmoil in neighbouring states and across north Africa, and prime minister designate Najib Mikati has been struggling for almost three months to form a new government, Lebanon appears largely unperturbed and able to take the crises in its stride. 

Lebanon is used to political and economic upheavals and has somehow built inherent stability into its essentially volatile environment. Although the collapse of the Saad Hariri government in January and the ensuing months of political bartering have created uncertainty along with the regional troubles, Lebanon is far from distraught. The country appears to cope with adversity rather well and Saad Azhari, chairman of the country’s second largest bank, Blom Bank, is full of optimism that profits in 2011 will be even better than last year.

Bucking the trend

The 2008 global financial crisis hit many economies hard, but Lebanon, with its conservative, well-regulated banking sector and core resilience, was able to achieve strong and stable growth and real gross domestic product (GDP) growth rates of 8.5% in 2008, 9% in 2009 and a robust 8% in 2010, as banks increased lending to the private sector by 20%. As the International Monetary Fund Article IV Consultation last July noted: “Lebanon’s economic and financial performance has been remarkable in the face of the global recession. The economy bucked international trends during the global financial crisis, maintaining strong growth momentum despite the country’s large underlying vulnerabilities.”

While positive, the IMF report also highlighted those vulnerabilities: “Real GDP rose 9% in 2009, backed by a confidence rebound and large capital inflows, which fuelled activity in construction, tourism, commerce and financial services sectors. The output gap has substantially narrowed or even closed and momentum carried into 2010 with growth [is] now expected to reach 8%.”

It adds on a less positive note: “Domestic stability rests on the fragile political system that is split along [religious] lines and the country lies at the crossroads of regional tensions. The government debt, at 148% of GDP, still remains among the highest in the world and almost half of it is denominated in foreign currency. The large banking sector is highly exposed to the sovereign and dependent on short-term deposit inflows from non-residents. Bank lending is to a large extent dollarised, which creates exposure to unhedged borrowers. In addition, unless carefully managed, new vulnerabilities could emerge in the future from rapidly rising real-estate prices, plans to develop public-private partnerships or the ongoing regionalisation of local banks.” 

Future banking

So while Lebanon's banks performed well in 2010, with the top three boosting profits by an aggregate 18.4% to $861.3m, what is the outlook for the country's economy and the banks in 2011? The consensus of local bankers is that the economy will not perform as well as in 2009 and 2010, with some slowdown evident in 2011 caused by political uncertainties leading to growth of between 5% and 6%.

Outsiders are less sanguine. Barclays Capital recently projected real GDP growth of 5.5% for 2011, saying: “Domestic political uncertainty along with the rise in geopolitical risks in the [Middle East and north Africa] region, the absence of a government and constant political wrangling have led to a policy void, institutional paralysis and a lack of direction or timeline for much-needed fiscal and economic reforms.” With 50% of Lebanese exports bound for nearby Arab states, Barclays considers that weakening regional economies may have a negative impact on exports and Lebanese expatriates.

In early April, HSBC forecast real GDP growth of only 3.2% in 2011, the downturn due mainly to domestic factors. HSBC reflects on the vagaries of Lebanon’s economy, noting that the country’s improvement in public finances took place even though the government has not implemented any of the much-needed economic reforms over the past few years. HSBC expects foreign deposits in the banking sector to remain resilient, but to increase at a slower pace. It believes the banking sector will remain well positioned to meet the government’s expanding funding needs in the absence of a sharp reversal of capital inflows and deposits. It adds that the high level of central bank reserves ($60.4bn at the end of March 2011) suggests political risks are unlikely to jeopardise the currency peg.

Go figure

Analysing Lebanon’s situation and outlook is a complex task. Figures released by the Beirut Stock Exchange (BSE) indicate that total trading volume reached 25.2 million shares in the first quarter of 2011, constituting a 67% decrease from the same period last year. Meanwhile, aggregate turnover amounted to $149.8m, down 87.3% from a turnover of $1.2bn last year. But the downturn in BSE figures is not the only indicator to consider.

It is important to look more widely and consider the country’s history of weathering crises and resilience in adversity. A report from The Economist in March showed Lebanon ranked as the fourth most stable country among the 17 Arab countries included in the magazine’s Arab League Index of Unrest, indicating the countries least likely to undergo regime change in the region. The only countries ahead of it were the United Arab Emirates, Kuwait and Qatar. Also, a report from the Bloomberg Combustibility Index for the Middle East and north Africa placed Lebanon among the nations that are least prone to unrest in the region. Bloomberg ranked Lebanon as the seventh most stable country among 20 states in the region.

Lebanon is not without its problems as the difficulties in forming the new government in recent months and the BSE figures clearly show. But its strong economic performance over recent years and its healthy, well-regulated banking sector are also strong positive factors that make this country somewhat of an anomaly. Regardless of the regional circumstances, it is not wise to underestimate the capabilities and resilience of this country and the strong support from the Lebanese expatriate community.

Remittances inflows to Arab countries

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