Lebanon: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: B
Risk Assessment2
Economic situation highly dependent on political climate
The easing of political tensions and the improvement in relations with Syria following the Doha Agreement in spring 2008 resulted in renewed confidence on the part of consumers, investors, depositors, and tourists, spurring a strong economic rebound. Economic activity slowed only slightly in 2009 with the delay in the formation of a national union government led by Sunni Muslim Saad Hariri in November neither giving rise to violence nor affecting economic growth. In 2010, the new political paradigm and the warming of relations with Damascus bolstered political stability and were crucial to the private consumption, tourism, construction, and financial sector that drove growth.
In 2011, economic activity is expected to remain buoyant, provided the verdict of the Special Tribunal for Lebanon (under UN mandate to investigate the 2005 assassination of former Prime Minister Rafic Hariri) does not spark serious unrest. Growth is expected to be driven by household consumption, buoyed by transfers from expatriate workers and the diaspora. It will also be fuelled by services (over half of GDP), thanks mainly to the continuing tourist boom, and by property investments from Gulf nationals.
High twin deficits, excessive public debt and huge foreign debt
The need to compose with divergent interests within a weak coalition complicates the development of economic policies. Crucial reforms to consolidate public finances are thus unlikely to be launched in 2011, in particular those aimed at restructuring the state-owned power company Electricité du Liban and broadening the VAT base. The chronic problems inherent in a bloated and heavily state-subsidised public sector are compounded by the cost of post-civil war reconstruction and explain the country's weighty public debt burden, although it has been easing slightly (130% of GDP expected in 2011). Interest payments absorb almost 50% of budget revenues, leading to the persistence of large public deficits.
The economy's export dependency remains low, as attested by the structural trade deficit. Thanks to the expansion of tourism, including a booming medical tourism sector, the invisibles surplus is expected to help contain the current deficit in 2011, covered by the constant inflows of capital, mainly from the diaspora. There has moreover been moderate growth in foreign direct investment (luxury real estate and tourism), mainly from the Gulf States. In this context, foreign exchange reserves are expected to remain high (80% of GDP). Nevertheless foreign debt, although gradually declining, continues to weigh heavily on the economy. Should serious political unrest occur, capital flight would cause financing problems, although if such a situation did arise Lebanon would probably receive support from friendly nations.
Banking sector, though robust, exposed to sovereign risk and partially dollarized
The banking system is one of the key strengths of the Lebanese economy. Banks remain well capitalised, very liquid and profitable, with non-performing loans in decline. In 2010, deposits maintained a brisk pace thanks to attractive rates of return and depositor confidence (among the diaspora and non-residents from the Gulf) inspired by the Lebanese pound's peg to the dollar, a trend expected to continue into 2011. Banks prefer to cover a significant portion of the state's financing needs rather than grant loans to the private sector. They are thus overexposed to sovereign risk and vulnerable due to highly dollarized deposits.
Strengths
- Financial support from the international community and the diaspora
- Strong banking sector: the main economic asset
- Good capacity to rebound
- Steady corporate payment behavior
Weaknesses
- Very high public debt, almost half denominated in foreign currencies
- Exposed to regional geopolitical tensions
- Limited development of the productive apparatus
- Political divisions on faith lines maintain a latent risk of civil war
- Political uncertainties impede necessary reforms intended to consolidate public finances