“Resilient” is an oft-used word when describing Lebanon and its economy, and it is hard to come up with a better description. Despite political stasis and the continual threat of unrest, in the absence of desperately needed financial reform, and in conditions that ought to produce a failed state, the country grinds on.
Gross domestic product (GDP) grew 1% in 2015 to $51.2bn, according to the International Monetary Fund; a reasonable figure, but a far cry from the 8% to 10% growth in the years before Syria entered crisis mode. Spillover from the Syrian civil war is a drag on the Lebanese economy. Others are domestic political paralysis and low oil prices.
On the face of it, Syria is Lebanon’s biggest problem, though any regional solution should go some way towards breaking the domestic logjam. Syria and Lebanon have long been joined at the hip. The countries' two capitals are located only 80 kilometres from one another, and between 1976 and 2005 Lebanon was effectively Syria’s client state. Hezbollah – Lebanon’s armed Shi’ite political movement – has been fighting alongside the Syrian government in its war since 2013, which is now causing problems of its own.
These links came with economic positives which have turned negative since the Syrian civil war began in 2011. All of Lebanon’s land exports, roughly one-quarter of the country’s total exports, used to go through Syria. Because of the instability of shipping routes through Syria today, that has fallen to virtually nil.
No visitors
Tourism – like banking, one of Lebanon’s key industries – has been directly affected by this situation. Before Syria blew up, 20% of tourists to Lebanon came from Gulf Co-operation Council (GCC) countries. Nearly all of them travelled by car, via Syria. Today it is no longer safe to drive across Syria and GCC holidaymakers, instead of flying to Lebanon, are simply going elsewhere. In 2015, GCC tourists made up only 7% of the Lebanese total.
They are not the only ones staying away. Lebanese tourism as a whole has slumped by one-third since 2010, and numbers look set to fall further (though off a smaller base) now that Saudi Arabia and various Gulf states have ordered their citizens not to travel to Lebanon. This is further fallout from the devastating regional hostility between Sunni and Shia Muslims, and came about after (Sunni) Saudi Arabia halted $4bn in aid to Lebanese security forces, claiming Lebanon had been adopting hostile positions inspired by Hezbollah, Shi’ite Iran's regional proxy.
This prompted fears that Sunni Arab states could start expelling Lebanese workers, affecting the flow of their valuable remittances from around the world (worth $7.2bn in 2015, or 14% of Lebanese GDP). In a subsequent report, Bank of America Merrill Lynch noted that Saudi Arabia had not withdrawn its deposits at the Banque du Liban and said it expected the country to remain an effective financial supporter of Lebanon.
The Syrian war has also caused a slowdown in investment. “There is a wait-and-see attitude,” says Marwan Barakat, group chief economist at Bank Audi, Lebanon's largest bank by Tier 1 capital and assets. “Real domestic investment over the past five years has been 15% lower than in 2010. Foreign direct investment has contracted 35% over the same period.”
Refugee burden
The most visible side effect of the carnage in Syria has been an influx of refugees to Lebanon. On top of the Lebanese population of 4 million, the country is now host to 1.5 million Syrian refugees. While the refugees do contribute to the economy, they are also a heavy burden on the environment and on public infrastructure of schools, hospitals, power and water supplies, roads and waste management. The school-going population has almost doubled, and public schools are now running a two-shift system.
“We are working on absorbing an extra 200,000 children to ensure that all get access to education,” says Alain Bifani, director general of the Lebanese Ministry of Finance. “It’s the same for public hospitals and infrastructure.” Indirect costs since 2012 have reached $16bn, or 30% of GDP, he adds.
Lebanon’s response plan estimates humanitarian and stabilisation funding needs of $2.4bn for 2016 alone. It is looking for donor aid of $420m a year as well as concessional finance. In a World Bank-led initiative, eight countries and the European Commission recently pledged $141m in grants, $1bn in soft loans and $500m in guarantees in support of Syrian refugees and host communities in Jordan and Lebanon. As middle-income countries, they would not normally be eligible. “Our debt-to-GDP ratio has reached 140% so, if we want to increase it, we must compensate with the cost of debt,” says Mr Bifani.
The sovereign enjoys access to the international bond market and in April raised $1bn in eight- and 15-year papers with coupons of 6.65% and 7%, respectively. While government debt is unsustainable in the long term, two factors make it easier to bear, according to Mr Barakat. One is that the majority of it (87%) is held by the Lebanese, who are generally content to roll it over at maturity. The other is the country's creditworthiness, with $28bn in mainly US dollar foreign currency debt, as opposed to $48bn in gold and foreign reserves at the central bank.
Oil waste
The refugees have driven up unemployment in Lebanon, from about 11% in 2011 to 20% or higher, prompting even more young Lebanese to seek work abroad. On a positive economic note, refugees do spend money, if they have it, on basic items. This supports private consumption, which has continued to grow steadily, averaging 6% a year for the past five years.
“The defensive sectors are consumption-related – food and beverages, pharmaceuticals, education and energy,” says Mr Barakat. “More vulnerable to slowdown are media and communications, as institutions cut advertising expenditure, the hotel sector and construction-related sectors. That's because of slower demand for apartments and land from Lebanese non-residents and Arabs.” Banking remains sound and is at the heart of the country's resilience, though not immune to the slowdown (see story pXX).
With an estimated $200bn in unexploited offshore oil and gas reserves, Lebanon could start to repair its public finances, but only if politicians issue the enabling decrees. The stand-off is often seen in Lebanese politics, where the 'confessional' parliamentary groupings – including Sunni, Shi’ite, Druze, Maronite Christian, Greek Orthodox and Roman Catholic – will not pass legislation that benefits other parties but not their own. So parliament has not elected a president for the past two years, nor approved a budget since 2005. According to one observer, for many years the authorities have been unable to divide the spoils of offshore energy, and now the oil price is less supportive.
The presidential vacuum and Syrian spillover are not enough to explain the steep decline in economic growth, however, according to Nassib Ghobril, head of economic research and analysis at Byblos Bank. “The reason is structural weakness in the economy which imposes high operating costs on the private sector,” he says, adding that the economy has become less competitive thanks to political instability and weak infrastructure, with poor electricity supply, telecoms and roads. “Then there’s the cost of dealing with bureaucracy and the public sector.”
Lower oil prices may have benefited consumers, but they have also had a negative impact, according to Makram Sader, secretary-general of the Association of Banks in Lebanon. “For the past 25 years our economic model has been completely integrated with the economy of oil,” he says. Tourism, foreign direct investment, industrial exports and infrastructure finance have all depended largely on GCC or Arab countries – which are now suffering from the drop in oil revenues.
Fear factor
Some observers worry that 'terrorism' is at least as big a problem in Lebanon as refugees. They are referring to heavily armed Hezbollah militia who cut across state structures, not paying taxes and seizing revenue that should go to the government. Ineffective tax collection and corruption are issues across the board and, according to the IMF, the black economy accounts for 30% of the Lebanon total.
Hopes have been rising for a de-escalation in regional tension, which could open the way to electing a president. “If there is a rapprochement between Iran and the Saudis, we will have a president,” says one banker who wished to remain anonymous.
If that happens, the Institute of International Finance thinks growth in Lebanon could reach 2.3% for 2016 and more than 4% in 2017. If not, it sees GDP growth of less than 1% in 2016, a persistent large fiscal deficit, an increase in the debt-to-GDP ratio to 147% by 2017 and a further slowing of deposit growth.
Mr Ghobril believes structural reform is the key to renewed growth, and an elected president as the key to that reform. He wants to see public-private partnerships in infrastructure and greater decentralisation of administration, both now stalled in parliament. Hence his 2016 growth forecasts of 1.8% if nothing changes, 3.5% to 4% if a president is elected and zero to 0.5% with no president and “recurring security breaches”.
