FROM THE ECONOMIST INTELLIGENCE UNIT
The Lebanese economy is flourishing, at least by the measures of official real GDP growth trends and the response of creditors to recent debt offerings. However, there is a growing risk that the tensions stemming from the Hariri tribunal will erode investor confidence and undermine the country’s vital services sector.
The chief prosecutor of the Special Tribunal for Lebanon (STL), Daniel Bellemare, is playing his cards close to his chest. However, it is widely assumed that he will announce the first indictments within the next few weeks for the assassination of Rafiq al-Hariri, and that the charge sheet will include members of Hizbullah, the Iranian- and Syrian-backed Shia movement that is the most powerful military force in the country. There has been a torrent of media leaks suggesting that the STL has compelling circumstantial evidence pointing to Hizbullah’s involvement in carrying out the assassination, although there remains some doubt as to whether Mr Bellemare believes that the evidence is strong enough to serve as the basis for convictions. Sayyed Hassan Nasrallah, Hizbullah’s, has made clear if members of his group are charged he will not tolerate any co-operation by the Lebanese authorities with the STL. Given the balance of forces in Lebanon, it is probable that the government, the judiciary and the security forces will do all that they can to avoid a confrontation with Hizbullah, but this might be difficult to achieve if Mr Nasrallah continues to insist that the government should formally repudiate the STL.
Spanners in the policy works
The Hizbullah-dominated March 8th bloc, which is a minority partner in the government, has already put a brake on economic policy, notably through blocking approval of the 2010 budget owing to its inclusion of a contribution to the financing of the STL. There is little chance of the 2011 budget being passed anytime soon, and long-standing plans to liberalise the telecoms and electricity sectors remain stymied, in large measure because responsibility for these reform is in the hands of March 8th ministers who have registered their opposition to them. The telecommunications minister, Charbel Nahhas, a member of the Free Patriotic Movement, a mainly Christian political ally of Hizbullah, has put further pressure on the government by refusing to hand over revenue from his sector to the Treasury. Telecoms income, coming mostly from two state-owned but privately managed mobile-phone networks, accounts for over 20% of government revenue.
However, this crisis has been brewing for months, and it has not yet resulted in any major disruption to economic activity—at least on the basis of the available data. The IMF has forecast 2010 real GDP growth of 8%, similar to the average over the past three years. The Economist Intelligence Unit has a slightly lower estimate of 2010 growth, based on signs of a slowdown in the second half, but at 7.2% this is still one of the best performances in the region.
According to Riad Salameh, the governor of Banque du Liban (the central bank), Lebanon has captured the biggest share of growth in deposits in the MENA region in 2010, despite a significant reduction in interest rates. The central bank expects that deposits will have grown by 10% over the full year. Credit has grown as well, although Lebanese banks remain relatively underlent, with a loan-to-deposit ratio of only about 40%: “Credit activity has been the cornerstone of the period of growth we are witnessing. It has expanded by more than 20% compared with last year, against an average increase in the Middle East region of 4%,” Mr Salameh told the Economist Intelligence Unit in mid-November.
Mr Salameh acknowledged the risk that political instability could trigger a reversal of the inflow of deposits to Lebanon. However, he said that any outflow of capital would be mitigated by the fact that most of the deposits are personal rather than by institutions. “Most people dealing with the banks in Lebanon are individuals, so there less mobility of capital than with institutional money,” he said. “We have been keen to limit borrowing from financial institutions to the treasury bills (T-bills) market because we wanted to maintain stability,” he says. “When there was high demand for T-bills, we had a pro-rata system where we only satisfied 5-10% of the demand. So if they withdraw it will not create a shock to the markets.”
Lebanon’s external debt stands at about US$35bn, a daunting 100% of GDP, but the appetite of creditors remains healthy (although local banks do account for a large portion of this debt). The government returned to the Eurobond market in early November with an issue that was larger than expected, and somewhat cheaper. The total issue was US$725m, with a US$500m tranche offering 5.15%, and a US$225m tranche offering 6.1%. The finance ministry said the issue was more than three times oversubscribed. Domestic lenders amounted for 70% of the first tranche, and 84% of the longer second tranche. In 2011, the government has US$2.1bn in of foreign currency Eurobonds maturing, with total redemptions reaching US$3.3bn for the year when interest payments are added. Strong capital inflows have enabled the central bank to more than double it foreign exchange reserves over the past four years. They currently stand at about US$44bn, which is sufficient to cover two years of imports.
Don’t put off the tourists
Tourism, banking and construction will remain the key drivers of growth. Tourist arrivals increased by 64% year on year in 2009, to 1.9m, and it is clear from the most recent data that 2010 will also have been another year of strong growth. Tourism indirectly supports about one-quarter of jobs and generates much of the demand that supports the booming construction sector. The main risks stem from the political and security situation, which will also deter the long-term investment in the broader range of economic activities that is required to ensure a more balanced growth path. There are questions about the quality of official GDP data, and timely economic indicators outside the three key sectors are in short supply.
There are starting to be some signs that the looming showdown over the STL is eroding confidence, and we have taken this into account in our forecasts for the next two years, when we expect real GDP growth to ease to just under 6% on average. Efforts are being made by a number of Lebanese and Arab leaders to minimise the impact of the indictments and eventual verdicts, and full-blown confrontation is by no means inevitable. However, Lebanon faces yet another period in which businesses will have to operate with a high degree of uncertainty.