After growth averaged 8 per cent between 2008 and 2010, Lebanon’s economy is now stagnating as the violence in Syria continues to take a toll on consumer confidence and investor sentiment. Published in MEED, 26 June 2013
Lebanon’s economy is ticking over these days, but only just. Gross domestic product (GDP) has grown by a mere 1.5 per cent a year for the past two years, according to the Washington-based IMF. This year it expects a slight improvement to 2 per cent, which is on a par with Egypt, but behind almost every other country in the region.
Inflation is on the rise and is expected to reach 6.7 per cent in 2013. The government continues to run a sizeable budget deficit of close to 10 per cent of GDP, while the current account balance is also in the red to the tune of 16 per cent of GDP.
All in all it makes for a rather bleak picture. “The economy is stagnating,” says Nassib Ghobril, head of research at the local Byblos Bank. “It’s an economy based in large part on confidence and we have seen consumer confidence and investor sentiment drop sharply in 2012 and they are still at a low level this year. So I don’t expect growth for this year to be more than 1-1.5 per cent in the best case scenario.”
The reasons for the economy’s poor state of health are clear enough. The conflict in neighbouring Syria is hurting the country in all sorts of ways, not least in terms of who is coming to Lebanon these days and, just as importantly, who is not.
On the one hand, Syrian refugees have been pouring over the border to escape the fighting back home, putting extra strain on Lebanon’s already creaking infrastructure. There are now more than 1 million Syrians in Lebanon, according to estimates by the Brussels-headquartered International Crisis Group.
On the other hand, tourists are staying away. GCC governments have warned their citizens to avoid Lebanon and 2013 is shaping up to be a bad year in terms of visitors. According to the local Bank Audi, the number of tourists fell by 23.7 per cent in 2011 and a further 17.5 per cent in 2012. In the first quarter of this year, the figure dropped by another 12.5 per cent to just 274,663 visitors – the lowest level since 2008.
“Tourism is shrinking at a fast rate,” says Marwan Mikhael, head of research at the local Blominvest. “Arab visitors are the main spenders among the whole spectrum of tourists, [and] the retail sector, in addition to hotel and restaurants, is feeling the impact of the decline in Arab tourists.”
The war has also blocked off a key trade route for Lebanon, meaning the country’s exporters have had to find alternatives to the old over-land route through Syria if they want to reach customers in Jordan, Turkey and beyond. Agricultural exports to Jordan, for example, are now sent on a far longer and more expensive journey down the Mediterranean and through the Suez Canal to the Red Sea port of Aqaba.
The sectors of the economy that appear to be suffering most include building materials, contracting, hotels and restaurants, and communications, according to Marwan Barakat, group chief economist at Bank Audi. Those that are performing slightly better include pharmaceuticals, energy, education services, and food and beverage retail – the latter perhaps helped along by the spending of Syrian refugees.
Other areas, such as agriculture, textiles, real estate, insurance, transportation and healthcare, have been performing in line with the overall economy, which is to say not particularly well.
Barakat says there has also been a noticeable “flight from quality” in much of the spending that is taking place.
“The imports of luxury products reported a drop of 23 per cent in 2012, while those of mass consumption products rose by close to double-digit,” he says. “The sales of new cars [have seen] positive growth for low-cost brands and a net contraction for luxury brands.
“Property transactions are showing a negative growth for luxury apartments in Beirut, along with positive growth in low to middle-cost housing. Five-star hotels have reported a net contraction in occupancy, while furnished apartments are reporting close to full occupancy levels.”
The caution of consumers and investors is understandable given the risk that the Syrian war could lead to another bout of sustained bloodshed in Lebanon.
To date, there have been only sporadic outbreaks of fighting, notably in the northern city of Tripoli, but Syrian rebel groups have threatened to take the war across the border as a reprisal for Lebanon-based Hezbollah militia fighting alongside Al-Assad regime forces. The nature of Lebanon’s domestic politics means it is not well placed to resist a slide into war. Perhaps only memories of the damage that previous conflicts have inflicted on the country can persuade people to abstain from throwing themselves into a fight.
“The local political scene is leading to a disproportionate impact of the Syrian conflict on Lebanon’s economy,” says Ghobril. “The political class has not worked seriously to shield the economy or to reduce or limit the impact of the Syrian conflict on the economy. On the contrary, they have increasingly got involved in the Syrian conflict.
“The economy is in need of a positive political shock to see some significant growth. Not just forming a government or holding parliamentary elections, which have been postponed for now. For me, what is needed is a solution to the Syrian crisis.”
If it were not for the diaspora continuing to send money into the country and a well-regarded central bank, the economy would be in far worse shape. Bank deposits reached $128.1bn at the end of March and the currency remains stable. There are other silver linings to the problems in Syria. All Syrians who have fled the conflict are now spending money in Beirut, Tripoli and other cities around the country, although their spending power does not match that of the tourists who are staying away.
“It is true that those refugees do not share the same spending attributes as tourists, but their average length of stay is much longer than that of tourists, providing an important support to sectors like basic consumption, real estate rentals and education services,” says Barakat.
At the same time, some trade activity has been increasing as Lebanon has become an ever more vital trade route for Syria, given that many of its land borders are closed or too dangerous. “Exports and re-exports to Syria are rising, leading total exports to increase by 9 per cent year-on-year up to April. Port revenues have also increased by 25 per cent year-on-year in the first five months,” says Mikhael.
Even so, Lebanon is clearly in a difficult position, something that is not helped by high oil prices. US ratings agency Fitch Ratings says the gap between the average sovereign ratings of energy importers and exporters in the Middle East is now at its widest since 1997 and could widen further in the future. The agency currently rates Lebanon at B.
In mid-May, rival US ratings agency Moody’s Investors Service changed its outlook on Lebanon’s B1 rating from stable to negative, citing the impact of the Syrian war.
In the longer term, the prospect of oil and gas discoveries in Lebanon’s Mediterranean waters gives some reason for optimism, but it will be many years before they will make a difference to the government’s coffers. In the meantime, there are plenty of reasons to worry.