Pressure is building on Lebanon’s economy: gross domestic product (GDP) growth is sluggish and estimated to hit between 1% to 1.5% over 2017 and 2018, according to the International Monetary Fund (IMF).
Public debt is high, at 150% of GDP, and is likely to deteriorate as fiscal deficits in the range of 7% to 10% are anticipated over the short term. The country’s current account deficit is also swollen, at close to 20%, with little sign it is set to improve. Inflation, meanwhile, reached 5% over the course of 2017 as higher oil prices and the rising cost of imports pushed prices higher.
To compound these woes, prime minister Saad Hariri announced his resignation on a visit to Saudi Arabia in November 2017, citing a fear of assassination and the threat of growing Iranian influence across the whole of the Middle East. Nearly a month later, he officially withdrew this resignation and returned to his role, though the uncertainty around his visit to Saudi Arabia and the manoeuvring between Lebanon’s various political factions and their foreign backers spooked the markets. As noted by the IMF, spreads on Lebanese Eurobonds in relation to emerging market peers jumped by 200 to 300 basis points, though they had settled by January 2018.
Little change at the top
Lebanon has since held parliamentary elections, in May 2018, for the first time in nearly 10 years. The outcome, on the face of it, was relatively clear: Hezbollah and its patchwork of allies made some headway by securing 43 seats, while Mr Hariri’s Future Movement lost one-third of its seats. But few observers expect any radical shift in the structure of government, even if a number of new faces have now made it to the parliament.
“We haven’t seen a major change. Some traditional parties have lost; others have gained in relative terms. More or less the overall landscape is still the same,” says Freddie Baz, general manager and group strategy director at Bank Audi.
Instead, most observers expect Mr Hariri to once again form a unity government and appoint a fresh cabinet. Nevertheless, towards the end of May most of the details were still unclear. “Lebanon has an opportunity to form a cabinet that reflects the new parliament and the outcome of the election. Hopefully the government will appoint an economically minded cabinet that can address the country’s challenges,” says Nassib Ghobril, chief economist at Byblos Bank.
We haven’t seen a major change. Some traditional parties have lost; others have gained in relative terms. More or less the overall landscape is still the same
Whatever the cabinet’s composition, the reform task facing the new government is huge. “The domestic economy suffers from deep and diversified imbalances, which the government should deal with to lessen its extent and repercussions. This is a significant prerequisite for strengthening growth rates, expanding job opportunities and improving fiscal and social conditions in the coming years,” says Nadim Kassar, general manager at Fransabank.
The IMF has indicated that Lebanon's fiscal policy must be developed with a wider programme of consolidation. In March 2018, the then cabinet agreed a 2018 budget with a projected deficit $145m lower than in 2017. While this is a positive step, it needs to be deepened and repeated in the coming years if the country is to get a grip on its finances.
Although the challenges are steep, bankers inside the country are keen to emphasise that Lebanon is not destined for chaos. Mr Ghobril says: “We have to differentiate between stagnation in Lebanon and stability. We have heard things like we are heading for a Greece-like scenario. This is unjustified. It’s true we have fiscal challenges but it doesn’t mean that the situation is dire. Public finances are stable, the monetary system is stable and the pound is stable.”
Optimism persists
It is true that Lebanon’s economy marches to its own tune. Indeed, its ability to weather massive distortions has seen it endure decades of profound difficulty. Much of its strength comes from the Lebanese diaspora sending deposits to the home market. Historically, this has accounted for about 40% of GDP and enabled the Lebanese economy to sustain high structural imbalances. But, as the IMF has noted, the rate of these inflows has slowed in recent times. In 2017, private sector deposit growth was 3.8%, which is lower than the historical average, making reform ever more urgent.
Encouragingly, there is reason to believe change might be afoot in the coming years. At a meeting of international donors and investors in Paris, the so-called Conférence Économique pour le Développement, par les Réformes et avec les Entreprises (Cedre), about $11bn in loans and grants were pledged by governments and institutions from more than 20 countries in support of Lebanon’s capital investment plan (CIP), an infrastructure development programme. About $4bn will come from the World Bank, €1.1bn from the European Bank for Reconstruction and Development, and there will be a renewal of a $1bn credit line from Saudi Arabia, with the remainder coming from various other international partners.
“The Paris conference provides a very strong message that the international community is invested in Lebanon’s economic well-being. This is a very positive signal to international investors and Lebanon’s private sector alike,” says Mr Baz.
PPP hope
The CIP – which, including Lebanese government and private sector spending, will amount to $15.5bn of expenditure up until 2028 – will see huge investments in transport, water and irrigation, wastewater, electricity, telecoms and solid waste infrastructure, alongside investments in the country’s tourism sector. The hope is that, by investing in Lebanon’s core infrastructure, it will stimulate the economy and energise the private sector. Much of this investment will be executed through public-private partnerships (PPP) following the passage of a new PPP law in late 2017.
Hopefully the government will appoint an economically minded cabinet that can address the country’s challenges
“The PPP law that has been voted in recently offers tremendous opportunities to invest in and finance projects in Lebanon. However, international financial support [from the Paris conference] was [given on the condition] that Lebanon should implement fiscal, structural and sectoral reforms. Such reforms constitute a real challenge for domestic political authorities,” says Mr Kassar.
The funding commitments made at the Cedre will cover the entire first investment cycle of the CIP, amounting to $10.1bn. The second investment cycle has a total value of $5.4bn. Investments in the energy sector will bring an additional 1000 megawatts of electricity to Lebanon through two gas-fired combined cycle power plants in Zahrain and Selaata at a cost of $600m each. Both projects will be developed as PPPs.
Infrastructure upgrade
Meanwhile, about $7.4bn has been allocated to Lebanon’s transport infrastructure, most of which is going towards the completion of the country's highway network. In addition, an upgrade and expansion of the port at Tripoli has been earmarked, as has a railway linking the port to Syria, according to research from Société Générale de Banque au Liban.
“As soon as the new government starts to improve the investment climate, beginning with electricity, road networks and telecoms, you will see huge investments from the private sector through PPPs,” says Mr Baz.
Indeed, Lebanon has a pressing need to upgrade its infrastructure. A report published by Blominvest Bank, the investment banking arm of Blom Bank, has highlighted some of the challenges facing the country and its private sector. About 50% of municipal solid waste is dumped at illegal sites, displaced Syrian refugees incurred $313m in energy costs in 2017, while the country faces a near 50% water supply deficit thanks in part to the effects of the Syrian conflict.
But the Cedre commitments that underpin Lebanon's hope for an economic resurgence have come with conditions. In return for financial backing, the conference participants have asked the Lebanese government to accelerate its reform programme. In response, Mr Hariri pledged to reduce the budget deficit to 5% over the next five years. The sticking point here is that Lebanese government officials have a long history of promising much-needed reforms on which they have too often failed to deliver. But private sector leaders remain hopeful genuine change may be in the air.
“I think – and I always like to stay optimistic – that a representative government will be formed in the near future, and will have economic and governance reforms high on its agenda, so as to bring back dynamism to the economy and, just as important, to benefit from the Cedre loans promised to the country,” says Mr Azhari. “This seems to be the urgent consensus among major politicians and policy-makers. So I am hopeful that we do not encounter these risks and that we see a reversal in the economy’s fortunes.”
Foot on the gas
The other development that might come to shape the future of the Lebanese economy is the country’s offshore oil and gas potential. Seismic studies indicate Lebanon holds about 700 billion cubic metres of gas. But these reserves are yet to be confirmed by drilling and it is still unknown to what extent these offshore holdings are commercially viable. In February 2018, the government signed its first exploration and production agreement (EPA) for two of the country’s 10 offshore blocks with a consortium of major producers including Total, Eni and Novatek. The first exploratory well will be developed in 2019 in Block 4.
A second well will be developed in the contentious Block 9, which is disputed by Israel. According to Total, about 8% of the block’s territory lies in contested waters. As a result, the producer intends to drill its first well in the area about 25 kilometres from the maritime border with Israel. Nevertheless, Lebanon is pushing ahead with its offshore gas ambitions. The Lebanese Petroleum Administration has been tasked with commencing a second offshore licensing round by the Ministry of Energy although it is unclear when this might begin.
Lebanon’s public and private sector leaders are hoping that offshore discoveries will lead to a genuine energy renaissance in the country. The EPA contracts stipulate, for instance, that 80% of workers employed by the energy consortium should be Lebanese. In addition, preference is being given to Lebanese companies in terms of support functions and the oil and gas supply chain. If, in the coming years, Lebanon can develop an independent hydrocarbon industry, it could be the kind of game-changing event the economy needs.
But private sector leaders are quick to caution that much work needs to be done. “We should not start counting revenues from oil and gas because we do not know if we have enough commercially viable reserves. We should not take into consideration the impact of that sector until we know more,” says Mr Ghobril.
Crunch time
Lebanon’s oil and gas potential is just one more question mark hanging over the future of Lebanon’s economy. The next few years are likely to be some of the most important in the country’s recent history. There is a risk that with a continued failure of political leadership, Lebanon could suffer a protracted period of economic stagnation. But if the new leadership team can seize the opportunities presented by the Cedre and execute a meaningful reform programme in tandem with its capital investment plan, there is every chance that Lebanon could secure a path to prosperity.
Much will also depend on the outcome of events in Syria. The destabilising impact of the conflict on the national economy continues to be severe. But, if some form of political settlement is achieved, Lebanon’s role in Syria’s reconstruction could be significant.
It is clear that the Lebanese economy has abundant potential. The private sector, and in particular the banks, stand ready to elevate the country to the next stage of its growth. If all goes well, this could happen sooner rather than later. As always, however, Lebanon’s economic destiny lies in the hands of the politicians. Only time will tell if they seize the opportunities afforded to them, reform the economy and improve the lives of the Lebanese citizens that they serve.
