Economic recovery constrained by violence in Lebanon

Lebanon’s economy is growing faster in 2012 than it was in 2011, but the continuing civil unrest in neighbouring Syria is harming growth. Published in MEED, 1 June 2012

After enduring a sharp slowdown in 2011, the Lebanese economy is widely predicted to recover this year. The Washington-based IMF, for example, expects a 3 per cent rise in gross domestic product (GDP) over the course of 2012. That is twice as fast as the 1.5 per cent achieved last year and in line with the forecasts of local banks, which range from 2 per cent to 4.5 per cent.

The evidence backing up those predictions is, however, decidedly mixed so far, and for every optimistic economist pointing to positive signs, there is another suggesting that little has changed over the past 12 months. What no observer can ignore is the mounting death toll across the border in Syria.

Most recent estimates put the loss of life since the uprising against President Bashar al-Assad began in early 2011 at more than 10,000. Under a ceasefire brokered by the UN, anti-government forces and those loyal to the president were to have halted fighting on 12 April, but the bloodshed has continued.

In the latest incident at the end of May, more than 100 civilians were massacred near the town of Houla in Syria’s Homs province. The continuing violence there is casting a gloomy shadow over the entire Lebanese economy.

Signs of economic progress

In purely economic terms, there are some signs of progress. The Finance Ministry has reported that tax revenues were up by almost 13 per cent in the first two months of 2012, compared with the same period last year. The government even ran a small budget surplus through January and February.

The value of cleared cheques, which the local Blominvest Bank suggests is a useful barometer for consumer spending, was up 2.3 per cent in the first quarter. New vehicle sales, meanwhile, climbed by 14.5 per cent to 7,930 vehicles, and freight traffic at the Port of Beirut increased 7.5 per cent.

“If we look at the first quarter of 2012 it’s better than the first quarter of 2011, that’s for sure,” says Marwan Mikhael, head of research at Blominvest.

As the statistics from the port suggest, trade levels are recovering. The total value of exports in the first three months of the year increased by 21 per cent to $1.15bn, according to the Lebanese Customs Administration. However, the value of imports climbed even faster, rising 31 per cent to $5.98bn, leading to a widening trade deficit.

In addition, Nassib Ghobril, chief economist at the local Byblos Bank, says consumer confidence is still very low, bank deposits and capital inflows have slowed down, and demand in parts of the real estate market is stagnant.

“The drivers that led to a slowdown last year are still very much here,” he says. “Frankly, judging from the indicators we have so far, economic activity this year is not going to be worse than last year, but it won’t be much better either.”

The critical element underlying all this is the situation in Syria. The ongoing crisis has meant that one of Lebanon’s most important trade routes has been severely disrupted and tourists from everywhere else are more wary of visiting.

Tourism drop in Lebanon

In 2011, the number of visitors to Lebanon fell by 24 per cent to 1.7 million. The signs are that tourist arrivals will fall further this year, with a drop of 7.9 per cent in the first quarter of 2012 compared with the same period last year, according to Bank Audi. Although the average spend for each person was up by 8 per cent this year, thanks to more spendthrift Arab tourists, that has not fully compensated for the shortfall.

“As long as we have the status quo in Syria, investors will remain wary of Lebanon and consumer confidence will remain low,” says Ghobril.

There are still some positive aspects of the economy, however. The currency is stable and confidence is high in the banking system, which has assets worth 350 per cent of GDP. Riad Salameh, governor of the Banque du Liban, is generally seen as one of the better central bank governors in the region.

Lebanon’s public debt

The government has also managed to bring down the level of public debt, relative to the size of the overall economy. At the end of 2011, the figure stood at £Leb80,869bn ($53.8bn), or 137 per cent of GDP. While this is high, it is markedly better than at the end of 2006, when it stood at 182 per cent of GDP.

The country can also continue to rely on its large diaspora and the remittances from expatriates living abroad. Indeed, Lebanon is one of the few oil-poor countries in the region that tends to benefit from high oil prices.

Not only can it can sell more goods to the oil-rich GCC states, but tourism and inward investment from the Gulf both tend to rise when oil prices are high and the many Lebanese working in the region also tend to send more money back home.

Inflation has started to rise again this year, up from 3.1 per cent in December to 4 per cent by the end of March, largely as a result of high oil prices, along with higher food costs. There could be more upward pressure on prices as a result of an increase in the minimum wage from £Leb500,000 a month to £Leb675,000. That was agreed by the cabinet in January and took effect for private-sector workers on 1 February, although public-sector staff have yet to benefit.

However, for the year as a whole, the consumer price index is not expected to rise above 4 per cent and should drop next year, according to the IMF.

Budget dispute in Lebanon

The change to the minimum wage had been at the centre of long-running political arguments, both within the cabinet and between the government, the General Labor Confederation and private-sector firms. The episode highlighted once again the fractious nature of politics in the country and the complex network of political interests within the coalition led by Prime Minister Najib Mikati.

Political disputes have also meant the budget for this year, which was first put forward by Finance Minister Mohamad Safadi in September, has yet to be endorsed by his cabinet colleagues. The proposed budget included an increase in spending worth 4 per cent of GDP. Among other things, the budget would have provided funding for the expansion of the country’s electricity generating capacity. Without cabinet approval the new budget, and by extension the new spending, cannot go ahead.

“The budget hasn’t been approved because there are great disagreements on two main issues: funding on infrastructure and electricity projects, and how fuel is priced in Lebanon,” says Ibrahim Saif, senior associate at the Carnegie Middle East Centre, a think-tank in Beirut.

“A delay in the budget is not something new in Lebanon. Normally, when the government does not approve the budget, it continues spending using the formula of the year before. But it is serious. Limiting public expenditure and not funding the much-needed infrastructure is a limiting factor for growth, in addition to the regional environment, which is also not encouraging.”

Finding compromises

Instead of building new generation capacity, the government has had to find short-term compromises where it can. For example, it has opted to lease several power-generating barges for three years, to produce 270MW of electricity.

Such workarounds, however, do not offer a long-term solution for the economy. Investment is badly needed in a wide range of areas, including transportation, water and telecommunications, as well as electricity, if the Lebanese economy is to meet its potential in the years ahead.

“We think that 2012 will remain better than 2011, but we will not get back to the growth rates of 8-9 per cent we had a few years ago,” says Mikhael. “Even if there is political stability, it will be difficult to reach these growth rates because the output gap that used to exist in the past has been closed during the past few years. We need some investment in infrastructure in order to increase our potential GDP and for the economy to be able to grow at a higher rate.”

It is a course of action the IMF has also been recommending, as Nemat Shafik, deputy managing director of the financial organisation, recently pointed out.

“Although growth is expected to pick up this year, the IMF’s projection of about 3 per cent is well below Lebanon’s potential,” she said, at the end of a three-day visit to Beirut in May. “In the medium term, creating a dynamic economy that can generate jobs would help reduce unemployment and poverty levels. This requires investment and reforms in infrastructure, as well as improvements in the business climate and the labour market.”

The absence of such things helps to explain why consumer confidence remains in the doldrums in Lebanon.

According to the consumer confidence index jointly produced by Byblos Bank and the American University of Beirut, the Lebanese people were particularly pessimistic towards the end of last year.

In the fourth quarter of 2011, confidence dropped to its lowest level since June 2007, when the index began tracking data. As Ghobril points out, the Lebanese public has had little cause to change its mind since the turn of the year.

Proven resilience

“The first quarter of this year is showing a small uptick in the consumer confidence index compared with the fourth quarter of last year, but it is basically the same; the trend is not changing,” he says. “Why would it rise? There is no reason for it to rise.”

Even so, the Lebanese people and their economy have proven resilient in the past in the face of challenges that might have overwhelmed another country. That alone gives some reason for optimism.

If the crisis in Syria can be contained, or even resolved, then confidence might start to slowly return. Until that happens and until Lebanon’s politicians can find a way to work together and agree on badly needed infrastructure investments, the economy will remain constrained.

“The resilience of the Lebanese economy has been confirmed,” says Mikhael. “If we can remain resilient to what’s happening in Syria, we can have a good performance, if not outstanding. Growth of 3.5-4.5 per cent this year is reachable and compares well to other countries in the region, such as Jordan or [the UAE]. I think it would be a decent achievement.”