Beirut prospers in a vacuum

25 April 2008
Despite being without a head of state for nearly six months, Lebanon is in an unusually favourable economic position.

Ratings agency Moody’s Investors Service recently changed the outlook on Lebanon’s sovereign ratings from ‘negative’ to ‘stable’, citing the impressive resilience of Lebanon’s public finances in the face of numerous political shocks affecting the country since the assignment of a negative rating outlook in November 2006.

Key external financial donors show no sign of deserting Lebanon, with Saudi Arabia promising an additional $1bn in financial support in February.

The Finance Ministry claims $4.4bn worth of commitments to the Paris II deal, which promises a total of $7.6bn in loans and grants.

The latest economic growth figures suggest the country is experiencing a positive period.

The International Monetary Fund (IMF) estimates that Lebanon’s gross domestic product (GDP) grew by about 4 per cent in 2007, while inflation was a modest 4.4 per cent - a dramatic turnaround from the 5 per cent GDP contraction the previous year, when the country was subject to a month-long Israeli bombardment.

The currency is also stable with no sign of external pressure on the Lebanese pound. According to Moody’s, the health of the country’s public finances has improved modestly since its November 2006 rating guidance, and the government’s short-term funding needs are manageable.

The government says it can handle a massive public debt burden estimated at more than $42bn. Finance Minister Jihad Azour says the country faces no obstacles to rolling over local currency debt, or foreign currency eurobonds - the latest $700m increment due to mature in August.

Narrowing deficit

The budget outlook also looks benign. The overall fiscal deficit narrowed to 10.3 per cent of GDP in 2007, from 13.3 per cent in 2006.

A further reassurance, says Moody’s, is that the central bank continues to hold a large stock of foreign exchange reserves, which amounted to about $9.8bn, or 40 per cent of GDP, at the end of January. “Given the resilience of the government’s finances and the manageability of short-term funding pressures, it seems that all but the most extreme of political shocks would be unlikely to trigger a default,” says Tristan Cooper, a senior analyst at Moody’s.

Other indicators suggest a residual level of confidence in the local economy. Overall bank lending is increasing as Lebanese companies expand overseas. The local real estate sector has also picked up strongly since the August 2006 war, with property tax receipts increasing by 32 per cent in 2007 to £Leb459.7bn ($305m).

The situation looks better than some of the more gloomy recent forecasts for Lebanon‘s economy. Ratings agency Standard & Poor’s lowered its ratings in January to reflect the impact of the political impasse. In March, investment bank Merrill Lynch recommended investors put Lebanese eurobonds in an underweight position in their portfolios - again citing the ongoing political crisis.

Who then to believe? The truth is somewhere between. “S&P was too pessimistic and Moody’s too optimistic,” says Nassib Ghobril, head of economic research and analysis at Beirut-based Byblos Bank. “The system has proved to be resilient to the political uncertainty and the deterioration in security. Bank deposits are growing, remittances continue to flow in and economic activity is moving along. But we are still missing opportunities from the regional economic boom.”

Lebanese companies, which have in the past made significant earnings from servicing Gulf oil booms, are constrained from yielding the full profits of the liquidity boom this time around.

The IMF has also warned that the ability to meet $4.5bn in financing needs for 2008 will be jeopardised if the political deadlock is not resolved, a potential trigger for foreign deposit flight.

The political situation is not comforting. There is still no sign of a president being elected any time soon, after 17 failed attempts to nominate the agreed consensus candidate, army commander Michel Suleiman. Parliament remains shut down, causing legislative paralysis.

“You could make the argument that financially the situation is stable, but in terms of the overall outlook it is not positive,” says Ghobril. “The cabinet is not able to take decisions and there are delays in structural reforms, specifically the mobile phone privatisation.”

A worst-case scenario of default and capital flight looks unlikely so long as the political stalemate does not deteriorate into anything more serious. Lebanon is, in effect, proving what it has demonstrated many times before: its economy can prosper in a political vacuum.

What Beirut cannot do is register medium-term advances that will deliver lasting economic growth to the Lebanese, which could ultimately help to overcome the political barriers that so frequently set the country’s sects against one another.

Most Lebanese would probably trade the short-term financial stability for some kind of viable long-term political settlement. Meanwhile, they will have to make do with what they have: a financial cocoon underwritten by donor support and a relatively favourable regional economic climate. It could be far worse.

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