Lebanon: Risk Assessment
Country Risk Rating
Business Climate Rating
- Robust banking system which enjoys investor confidence
- Financial support from the diaspora and the international community
- Discovery of offshore deposits of natural gas
- Political divisions along religious lines and serious political differences over the Syria question
- Highly exposed to regional geopolitical tensions
- Very high public debt
- Political instability
Persistent Political Uncertainty
After President Michel Sleiman stepped down in May 2014, Lebanon went through an institutional vacuum which lasted until the 31st October 2016, the day on which the parliament elected Michel Aoun (a Christian former general), a member of the “March 8 Alliance”, named after the pro-Syrian rally held on that date in 2005 and mostly composed of Shiite (including Hezbollah and Amal) and Christian parties. On the 3rd November 2016, Saad Hariri, leader of the Sunni members of the Future Movement party - a bloc within the “March 14 Alliance” (named after the date of the rally against the Syrian presence that followed Rafik Hariri’s assassination in February 2005 and formed mostly of Sunni and Christian parties united by their opposition to the March 8 Alliance - was appointed Prime Minister and formed a National Unity Government. During a visit to Riyadh on the 4th November 2017, Prime Minister Hariri decided to resign. This surprise declaration caused “devastation and chaos” in the country among all factions and, according to Mr. Aoun, took place under pressure from the Saudi regime. On his return to Beirut on the 22nd November, Saad Hariri put his resignation on hold. The most plausible hypothesis is that he will stay in post until the next parliamentary elections scheduled for May 2018.
Fragile Growth in 2018
After recovering in 2017, the Lebanese economy has once again proved its resilience due to the stability of its banking system whose assets represent 350% of GDP and to substantial remittances from the diaspora. Nevertheless, activity is constrained by political uncertainty and regional instability, exacerbated by the presence of almost a million Syrian refugees in the country (almost a quarter of the population). Following the discovery of offshore oil and gas deposits in the Mediterranean, the government set up a legal framework to cover the taxation and exploitation of oil and gas activities in January 2017 and launched calls for tender. It seems unlikely that the impact on the Lebanese economy will be observed as early as 2018, despite the authorities’ avowed aim of beginning production from the beginning of the year as there is stiff competition with Israel over some fields. Tourism (15% of GDP in 2016) is likely to be only weakly affected by the call for nationals of Saudi Arabia (2.5% of tourists) and its allies in the Middle East to leave Lebanese territory.
Household investment is expected to benefit from the central bank borrowing rate of 1% (compared with the commercial bank rate of 8.4%). The rate is intended for low- and medium-income households in order to boost property sector growth, particularly in the Greater Beirut area. Regarding private investment, the law on public/private partnerships (PPP), passed in August 2017, is intended to facilitate involvement by private actors in infrastructure modernization projects (Beirut International Airport, Khaldé-Nahr Ibrahim motorway). Private consumption, despite the political uncertainty, is expected to rise because of the arrival of Syrian refugees.
The central bank is expected to maintain the Lebanese pound’s fixed exchange rate (since 1999) against the US dollar, a measure guaranteeing financial stability for investors in a highly dollarized economy. 60% of deposits on Lebanese accounts (which represent over twice the GDP), which are mostly held by the Lebanese diaspora, are in US dollars.
Significant Twin Deficits and Growing Debt
On the 9th October 2017, parliament approved its first budget since 2005. The draft budget included provision for a 16% increase in wages and pensions. Subsidies, especially those for the national electricity company Electricité du Liban (6% of total spending), continues to put pressure on the public accounts. To offset this rise in spending, VAT is expected to increase from 10% to 11%, corporation tax from 15% to 17%, tax on deposit interest from 5% to 7% and, finally, taxes on some products like cement or tobacco will also rise. All of these measures will contribute to deficit reduction. The primary balance will continue to show a surplus, with the large public deficit mainly due to payment of interest on the public debt (32% of spending in 2018), which is steadily increasing. The debt, which is at an exceptionally high level, is mainly held by Lebanese banks, with 60% of their assets in sovereign debt securities.
In 2018, the current account will still show a sizeable deficit due to the trade imbalance. Imports (34.5% of GDP in 2016) are expected to remain at high levels on the assumption of firm oil prices (21.2% of imports). Rising domestic demand for food and consumer goods, triggered by the population increase, will also encourage this trend. Exports to neighboring Syria, which have never stopped despite the war, will increase following the defeat of IS, especially in the agricultural sector. The large current account deficit is financed by current transfers from the diaspora and by FDIs (16% and 5.5% of GDP respectively in 2016).