Lebanon, back to work
By admin • Jun 1st, 2008It was easy to write off poor little Lebanon. For decades, the country has considered by many to be the sick man of the Middle East, which is no small feat. But despite its political paralysis (which for seven months made it impossible to elect a president) and what felt like imminent civil [...]
As TRENDS went to press this month, Lebanon had just experienced its worst political violence since the end of the 1975-90 civil war. During the second week of May, Hezbollah occupied swaths of the capital, causing numerous businesses to shut down. But on May 20, the interested parties agreed in DohaLebanon back to work. to end the political deadlock and get
Before all that, though, and despite the political squabbling, the country’s gross domestic product (GDP) was estimated to grow at 3.5 percent in 2008-2009, according to a study by global finance and investment firm Credit Suisse. However, that’s still far below the rest of the Middle East and Africa region, which the study notes should grow by more than 5 percent. “The GDP could have reached almost $31 billion instead of $24 billion if the stability existed,” the report says. Maybe now it can.
There’s no question Lebanon’s in trouble economically. The country is burdened by $42.3 billion in public debt, which is almost twice its GDP. Although the economy grew by 7.4 percent in 2004, the assassination of former Prime Minister Rafik Hariri decimated that prosperity. The political bickering that followed – and the war of 2006 – left the economy shrinking.
Still, some saw reason for optimism. “Even through the political crises, Lebanon’s economy has shown a great potential, and competitive advantages,” says Nassib Ghobril, head of the economic research and analysis department at Byblos Bank. “It was able to attract tourists and Foreign Direct investments (FDI).” But, he cautions, the economy is only able to grow if Lebanon can achieve political stability, structural reforms and a stable national currency.
One of the main pillars of the Lebanese economy is the massive cash inflow from Lebanese expatriates. This rush of money pumps much needed foreign capital into the local economy.
“The inflow [of] remittances averaged almost $5 billion per year, nearly $1,200 per capita, [and] has helped keep economic activity going on,” Ghobril says. He adds that the real estate sector also boomed thanks to increased demand from Lebanese expats.
None of this is surprising to those who are Lebanese. The country’s financial system has shown a resilience to shocks despite its public debt, and according to a recent working paper by the International Monetary Fund (IMF), that resilience depends on three main factors: the country has never defaulted on any debt; its debt is owned mostly by local banks, dedicated investors and depositors; it’s perceived to benefit from an implicit guarantee of support by international donors. Indeed, the January 2007 Paris III conference brought in pledges of $7.62 billion in grants and loans to help rebuild and reform the Lebanese economy in the wake of the July war 2006.
High performance. While reforms are needed to put the Lebanese economy back on track, some sectors, such as banking, still managed to post impressive growth figures. Last year, the banking sector’s consolidated assets grew by 10.7 percent to $82.3 billion – almost three times the country’s GDP – with customer deposits hitting $67.3 billion, according to the Central Bank. The beginning of 2008 looked promising for the sector as well. In the first quarter, foreign currencies holdings in the Central Bank grew by 8 percent to $13.4 billion. Banks also increased their gold reserves by 12.8 percent to $8.62 billion, a healthy cushion to soften any blows to the financial system. Ghobril credits the strength of the banking sector to the stability of the Lebanese pound, which, in addition to the remittances, attracts deposits.
However, Lebanese banks aren’t the only sector standing firm. Real estate, insurance and shipping have also enjoyed stealthy – and healthy – growth. According to the Investment Development Authority of Lebanon (IDAL), the bulk of Lebanon’s $3 billion in Foreign Direct Investments (FDI) in 2007 was in real estate. And IDAL believes that market will continue to grow. “Today, the Lebanese real estate market is doing well,” says Raja Makarem, managing partner of RAMCO, a real estate advisory company. “Despite the political squabbling, demand for both residential and commercial is going upwards.”
Many Lebanese saw the country’s ongoing crisis as temporary and this buoyed the residential market from its 2007 levels, Makarem says. While Gulf Arabs and others largely abandoned the Lebanese market, locals and expatriates remained a major source for demand.
However, this great demand for residential properties has jacked up prices by between 40 percent and 50 percent from last year. The rise in the cost of building materials and land has also made property prices more expensive. Still, real estate experts expected the sector to boom once the political situation in the country stabilized.
Similarly, the shipping industry has been regaining ground after it was hurt by the summer 2006 war. Once more, it’s becoming a transshipment hub to surrounding countries, mainly Turkey and Syria. In the first two months of 2008, freight activity at the port of Beirut reached 971,000 tons, up a quarter over the same period last year.
The port of Beirut has played a role as a major transshipment center for other regional ports since the 2005 inauguration of the Beirut Container Terminal Consortium (BCTC), says Elie Zakhour, president of the Chamber of International Navigation. “Today, the shipping lines are using the port of Beirut because of its good services,” he adds.
Another sector with more growth than expected is the insurance industry. Profits from life insurance premiums rose by a third in 2007, reaching $278.4 million. In fact, all of the top 10 life insurers posted increases in their premiums. Bank assurances more than doubled.
“A 25 percent increase in new demands for premiums is the main reason behind the jump in profits,” says Abraham Matossian, CEO of El Machrek Insurance. “The bancassurance along with the compulsory insurances related to bank loans are another reasons behind this growth.”
High inflation. Despite progress in some economic sectors, inflation continues to hammer the Lebanese economy. It reached almost 7 percent in 2007.
The appreciation of the euro has affected the prices of commodities imported from Europe, which account for more than half of Lebanon’s imports. Consumer purchasing of all non-essential items tends to be postponed. In 2007, the consumer price index rose 9.3 percent, then to 11 percent in March 2008. Energy and water prices have increased by a fifth, food products by 14.8 percent.
Inflation has become so bad that the government was forced to raise the minimum wage $100 to $300 a month.
Even as economic prospects continued to be held hostage by political developments, predictions for Lebanon’s economy weren’t always so grim. Before Hezbollah’s “coup,” Credit Suisse forecast that government debt would fall to 157 percent of GDP at the end of this year, while Lebanon’s inflation rate was expected to drop to 3.5 percent in 2008. Will that happen now? The Lebanese must wait and see.
Still, many are hopeful about the future. Byblos Bank’s Nassib Ghobril expects the Lebanese pound to remain stable, and the remittances to continue flowing in. He says Lebanon is a country with plenty of potential for growth, and an economy expected to boom now that the political situation has stabilized.
