Lebanon: Risk Assessment
Country Risk Rating
Business Climate Rating
- Important regional trading hub
- Strong potential for tourism
- Large budget and current account deficits
- Dependence on imports and foreign capital inflows
- Very high inflation, fragile currency peg
- Social instability due to deteriorating living conditions
- High political uncertainty
Stagflation expected to continue
The Lebanese economy, already hit in late 2019 by rising protests due to increasing income inequality and declining personal income, was severely impacted by a series of factors in 2020. Following the default on its USD 1.2 billion Eurobond in March 2020, the country experienced a drastic dollar shortage and a massive depreciation of the local currency (hitting an all-time low of 10,000 versus the U.S. dollar on the black market in July 2020 compared to the official rate of 1,507.5). Lebanon also suffered from several weeks of lockdown because of COVID-19 and a massive explosion in Beirut in August 2020 that killed nearly 200 people and damaged the main port through which 80% of imports were entering into the country. In 2021, the economy should continue contracting mainly due to deteriorated supply chains, the decline in private consumption in line with still skyrocketing inflation, and high fiscal and external pressures. The sovereign default and the lack of structural reforms will weigh on the country’s ability to attract capital inflows. The lack of external funds coupled with a deteriorated business environment will continue to weigh on investments. The ruinous situation of the electricity sector is another obstacle, as Lebanon does not have the capacity to supply 24-hour electricity across the country. The contribution of net exports to GDP will also remain in the negative territory: exports suffer from closed roads and regional tensions, but also from the dependence on imported inputs, as imports have become costlier due to the lack of dollars. The high level of inflation (hitting 131% in September 2020) will persist due to the loss of an important part of the import capacity after the Beirut explosion and the destruction of a grain silo that threatens grain reserves and food prices.
Current account deficit is narrowing, but very gradually
The Beirut blast caused a decline of around 45% in the port’s revenues in January-September 2020 compared to a year earlier. The country’s key export markets are the Gulf countries and the European Union. The slow recovery on those markets and the loss of local production capacities due to the economic and social crisis resulted in declining exports. The continuous crisis in Syria is also a drag on the land transportation of Lebanese goods. More importantly, imports are also expected to decline because of economic contraction. Given that imports outweigh exports, the trade deficit, which already narrowed by around 60% year-on-year in the first eight months of 2020, will continue to improve, but at a gradual pace. Services exports will continue to suffer from reduced tourism revenues induced by COVID-19 measures and lower local security. Tourism revenues, which reached USD 12 billion (22% of GDP in 2019), have declined by more than half in 2020 and are expected to slightly pick up to USD 8 billion in 2021. The country will also lack remittances (estimated at 13% of GDP in 2019 according to the World Bank) from its Gulf neighbors and the large Lebanese expatriate population. Finding other external resources will continue to be a difficult challenge for Lebanon. International donors condition their aid to the implementation of much-needed reforms on the exchange regime, transparency, and accountability. However, the delay in the formation of a new government has intimidated international donors. As a result, the central bank’s foreign currency reserves declined to a critically low level in 2020 (down by USD 11.3 billion in January-September 2020 to reach USD 25.9 billion, equivalent to around 30 months of imports). These factors are expected to weigh on the currency peg in 2021. The fiscal deficit will persist in the upcoming period due to the absence of fiscal reforms and a restructuring of the electricity sector, lower budget revenues because of the economic crisis, and the impact of COVID-19.
Rising poverty increases political instability
Following the massive explosion in the port, which has caused an estimated USD 7 billion in damage (around 14% of GDP), poverty increased in Lebanon (55% of the population live in poverty according to the United Nations, compared to 28% in 2019). Furthermore, the country faces an important refugee issue (estimated at 25% of the total population) that puts pressure on the country’s infrastructure and public services capacities. The crippling financial crisis, rising unemployment, and the strong depreciation of the local currency are causing basic goods shortages such as medicine and food, and the rise in inflation is leading the country to political instability. The political scene remains problematic, as the repartition of assembly seats is based on confession, which makes it difficult to find a candidate who can convince all the parties to implement structural reforms. Therefore, social discontent and protest will continue.