New crisis in Lebanon to hit economic growth

18 January 2011

A protracted political impasse following the January collapse of the unity government in Lebanon could hamper the country’s economic growth and reforms

Political instability has become the norm in Lebanon. When the country has a government in place, it is frequently paralysed by bickering. At least from the outside, a unity government gives the illusion of stability. Now, after 14 months of doing little, the government has collapsed creating even more uncertainty.

In mid-January, Lebanon’s main political bloc, the 8 March coalition was preparing to contest the prime minister’s post after nominating Oman Karami, a former prime minister, in a bid to oust the current caretaker, Saad Hariri.

The 14 March coalition and Hariri’s own Future Movement Party have nominated Hariri as their candidate for the premiership. Hariri has been in power since November 2009, following elections in June of that year. 

Easing political tensions in Lebanon

Regional leaders met in Damascus on 17 January in an effort to ease tensions between the country’s rival factions since the collapse of Hariri’s national unity government. Eleven ministers from the Shiite party Hezbollah and their allies walked out of the cabinet on 12 January, the minimum required to pull down the government.

Hezbollah’s Hassan Nasrallah has described the indictment as an ‘Israeli project’ and a plot to discredit him

Their pullout was in protest at Hariri’s refusal to convene a cabinet session to discuss the UN-backed tribunal, which was preparing to release its indictment into the assassination of Hariri’s father, former prime minister Rafiq Hariri, in a car bombing in 2005.

The Special Tribunal for Lebanon (STL) was set up in 2006 at the request of the Lebanese government in order to outsource an investigation that was too politically sensitive to be dealt with within the country’s borders. It has not made it any less controversial.

In a release on the STL website, Herman von Hebel, registrar of the STL confirmed that the tribunal prosecutor had submitted an indictment and supporting materials to the pre-trial judge, Daniel Fransen on 17 January.

“The contents of the indictment remain confidential at this stage,” says the statement. The identity of suspects is not expected to be made public until the indictments are endorsed by the court and warrants issued, but the tribunal is widely expected to implicate members of Hezbollah.

There has been a slowdown of inflows, but so far there has been no outflow of deposits

Banking source

Neighbouring Syria, a supporter of Hezbollah, which has long dominated Lebanese politics had previously been thought to be behind the killing. Hariri himself accused Damascus of his father’s murder, a view shared by many in Lebanon. However, Hariri later retracted his statement that Damascus was involved.

Hezbollah’s leader Hassan Nasrallah has described the indictment as an “Israeli project” and a plot to discredit him. The party has been pressuring Hariri and the government to adopt a position on the tribunal before its findings are made public. This could include a denunciation of the tribunal, casting doubt over its findings, or the withdrawal of judicial and financial cooperation, says the Carnegie Middle East Centre, a Beirut-based think-tank.

Show of force

Hezbollah’s actions are almost a repeat of events in 2007, when its ministers resigned from the government led by Fouad Siniora. The standoff resulted in a show of force in May 2008, when Hezbollah took control of Beirut’s vital arteries, rolling convoys of pickup trucks filled with paramilitary cadres into the Lebanese capital and threatening to bring down the government.

The recent resignation of cabinet members has brought an end to the 2008 agreement brokered by Qatar.

Almost three years ago, Hariri’s bloc and the Hezbollah-led opposition formed a tenuous unity government amid heightened sectarian tensions, with crucial veto power granted to Hezbollah.

The current political standoff has plunged Lebanon back into a pre-Doha paradigm in which the 14 March movement and Hezbollah are fundamentally at odds with each other.

Economic impact of crisis in Lebanon

The immediate impact of the crisis was seen in an 8.2 per cent drop in the price of shares of real-estate company, Solidere, a bellweather of economic confidence in Lebanon. Prices have since stabilised.

“The stock market in Lebanon is small and any movement reflects political sentiment rather than the fundamentals of companies and market,” says Nassib Ghobril, head of research at Lebanon’s Byblos Bank.

Politics have long-hampered Lebanon’s economy and there have been several examples of political shocks triggering economic downturns. However, the country has largely managed to weather these storms without suffering the debt crisis that many economists expected.

This has lead to the popular, but misleading notion, that while Lebanon’s politicians bicker and argue, its economy will continue to function normally.

The country’s real gross domestic product (GDP) growth was forecast to be at least 8 per cent in 2010, according to the Washington-headquartered International Monetary Fund. This is the fourth consecutive year of strong expansion, following growth of almost 9 per cent in 2009 and 2008 and 7.5 per cent in 2007.

The improved outlook came on the back of political stability in the wake of the Doha agreement. Hariri’s appointment as prime minister in 2009 fuelled hopes of a revival of investor interest in the country, following the conflict with Israel in 2006.

The conflict caused $4.6bn-worth of damage, according to local bank Credit Libanais. This is aside from any other loss of revenue such as fewer tourists visiting the country during the unrest.

“Last week was a culmination of what has been going on since July 2009,” says Ghobril.

“Ratings agencies and banks only look at the stability of public finances. Internal indicators, including public finance indicators, show a decline in consumer confidence going back to last summer.”

Recent upgrades to Lebanon’s sovereign ratings do not reflect reality, says Ghobril, as they are comparative assessments during the global economic and eurozone crises.

“They were not a reflection of any economic reforms in Lebanon,” he says.

This has lead to a rather optimistic outlook from investment banks. Analysts at the UK’s Barclays Capital say the dissolution of the government could considerably complicate the country’s political and economic outlook.

Although they did not express concern for the short term, the analysts say risks could increase should the deadlock be prolonged or tensions rise further.

US investment bank Merrill Lynch notes that Lebanon has successfully weathered similar past crises without significant damage to its economy, despite its high levels of public debt. However, this year’s outlook, according to US investment bank JP Morgan, looks grim with a deceleration in GDP growth to 4 per cent.

Bankers in Beirut say there has been a slowdown of inflows, but so far there has been no outflow of deposits from Lebanon’s banks, as happened when Hariri was assassinated in 2005, and during Israel’s invasion in 2006. “We are pretty far from this,” says Ghobril.

Lebanon’s economy may be some way from a complete collapse, but long-awaited reforms will face more delays due to lack of a functioning parliament.

Protracted crisis in Lebanon

Lebanon has enjoyed strong growth in the past two years, but its unity government already suffered months of political paralysis before it collapsed. It failed to get the 2010 budget through parliament or to launch significant reforms, including the power and telecoms privatisation programmes. 

With electricity shortages a common occurrence, Lebanon urgently needs to develop its infrastructure. But investment will not come until the government sets out clear plans for the sector. The Lebanese are just as accustomed to power cuts as they are to political strife.

The longer the impasse, the more repercussions there will be on the economy. If the current crisis continues for two or three months it will affect Lebanon’s economic growth. There is no panic yet, but there is anticipation of violence in the country.

Much now depends on the tribunal’s official findings and how they are dealt with when published. In Lebanon, events can gather momentum with dizzying speed and this is why the expectation of conflict is etched into the national psyche.

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