Lebanon: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Sluggish growth in 2016
The Lebanese economy is still affected by the sub-region’s worsening security situation and by the scale of the flow of refugees entering the country. The intensification of the war in Syria and the risks of the conflict being extended to Lebanese territory will continue to curb any real economic recovery in 2016. The usual drivers of growth, namely financial services, tourism and real estate, will continue to be affected by worsening household and business confidence. Since Q2 2015, construction and real estate have slowed and the prospect of a recovery in 2016 seems unlikely, with real estate sales down by 12% over the first three quarters of 2015. Consumption is expected to hold up in 2016 but will benefit imports, which account for more than 70% of GDP. The slowdown in Arab countries will also affect the purchasing power of Lebanese diaspora and put pressure on the banking and real estate sector. Meanwhile, in a context of tightening US monetary policy, the Bank of Lebanon could be forced to raise its rates, which would dampen a recovery in investment and lending to households.
Maintenance of balanced public and external accounts in a difficult economic and security situation
After improving in 2014 due to an exceptional transfer of arrears from the telecommunications sector to the State, the public account balance worsened in 2015. The sluggishness of the economy has led to a reduction in revenues derived from statutory contributions. The decline in transfers to Electricité du Liban, which benefited from low oil prices, is reflected in lower public spending. Moreover, the primary budget balance showed a surplus in 2015. However, higher debt service costs following the appreciation of the US dollar has exacerbated the public accounts imbalance. In 2016 the public finances will continue to benefit from a low energy bill limiting the size of the transfers made to the electricity company, but these benefits risk being negated by the poor prospects of a recovery and the inertia of the policymakers. The political paralysis in which Lebanon is bogged down limits any reform with a view to consolidating the public accounts.
The public debt, of which 40% is owed to Electricité du Liban, may fall slightly. However, since it is to a great extent held by the local banks, a decline in bank deposits could turn on a sovereign risk.
The effects of the drop in oil prices observed since 2014 materialized in a narrowing of the current account deficit in 2015. The impact of this fall on imports was effectively offset by the decline in exports, particularly in the agricultural and manufacturing sectors. The current account deficit is expected to stabilize in 2016, with exports benefiting slightly from the European recovery. Imports will continue to take advantage of low hydrocarbon prices. Expatriates' remittances and foreign direct investments will be affected by reduced activity in the Gulf Cooperation Council countries. The country has, however, substantial foreign exchange reserves (equivalent to 13 months of imports).
Political paralysis in a context of regional crisis
The political situation has been paralyzed since 2014. The presidency has been vacant since the end of Michel Sleimane’s term in May 2014 and the October 2014 elections were postponed because of the external threat to which the country is exposed. The July 2015 waste crisis, which resulted in widespread protests against the inertia of the ruling class, highlighted among other things, the problems of clientelism and corruption which undermine the country. However, the Lebanese army’s takeover of border control made it possible to repel the intrusions of the Islamic State Jihadists into Lebanese territory. The attacks of 12 November perpetrated by Islamic State and aimed at a Hezbollah-led neighborhood highpoint the risk of a spread of the conflict inside Lebanese territory. In addition to Lebanon being a target of Islamic State, the threat is increased by Lebanon's geographic proximity to its Syrian neighbor and by the direct involvement of Hezbollah’s forces in the armies of Bashar El Assad. Lebanon is also confronted by a constant flow of refugees from Syria: according to the HCR the number of Syrian refugees amounts to a third of the Lebanese population.