Comments on Lebanon’s crisis in Arabian Business, 4 Jun 2016

 

 

The original article titled “When will the crisis end in Lebanon?” was published on 4th June 2016 in Arabian Business; comments highlighted below.

Lebanon is in a state of economic paralysis. Crippled by political stalemate (the country has been without a president for two years), an inundation of refugees combined with a region-wide economic slowdown and a subsequent drop in remittances from its sizeable diaspora has hit a nation powerless to implement the reforms needed to change course.

The World Bank’s Spring 2016 Middle East and North Africa (MENA) Economic Monitor puts Lebanon’s real gross domestic product (GDP) growth last year at a “sluggish” 1.5 percent, downgraded from earlier estimates following an unexpected decline in economic activity in the third quarter, when thousands of people held prolonged protests over a rubbish crisis in Beirut that epitomised the country’s gridlock.

Lebanon’s central bank, Banque du Liban, renewed a $1bn stimulus package to shore up parts of the economy, in particular boosting tourism and private lending, said the World Bank.

However, the addition of 1.5 million Syrian refugees (according to the UN refugee agency UNHCR) is estimated to have cost Lebanon $7.5bn since 2011, the World Bank claims, and the country’s historically healthy reserves are shrinking as it seeks to compensate for external drains on its resources.

Official figures show total assets in Banque du Liban stood at $95bn as of May 15, 2016, while the debt-to-GDP ratio climbed to 148.7 percent in 2015, according to the World Bank.

Meanwhile, increasingly sour relations with the GCC after Lebanon refused to condemn Iran’s attack on the Saudi Arabian embassy in Tehran in February are expected to compound the situation.

Experts warn that as the Syrian crisis intensifies, and with it mounting tensions in Lebanon and elsewhere, the knock-on impact will be severe and growth could slow further to 1 percent or less in 2016.

“All the key indicators point to a downward trend,” says Keren Uziyel, an analyst and country risk service manager for MENA at the Economist Intelligence Unit (EIU).

“The uncertain domestic political scene and spillover from Syria’s civil war will continue to hinder investment, construction, financial services and private consumption.

“In the near term, low oil prices and the recent deterioration in relations with GCC countries will further retard economic growth, owing to the negative impact on tourism and reduced financial inflows, including remittances and deposits from overseas.

“We expect growth to slow to just 0.7 percent in 2016 and make only a weak recovery thereafter.”

Lebanon’s bleak outlook is a result of a toxic combination of factors at a time when the country is fragmented.

One factor is Lebanon’s reliance on remittances from its expat population. Although there are estimated to be upwards of 13 million Lebanese nationals in the world, only about 4.3 million live in Lebanon, and remittances from abroad make up 16.2 percent of its total GDP (about $7.2bn), according to the World Bank’s Migration and Development Brief, published in April.

Firas Abi Ali, senior principal analyst MENA at IHS Country Risk, says the large diaspora and Lebanon’s focus on services perpetuates the negative impact.

“Lebanon is driven by a political economy that focuses on investing in services and tourism rather than the productive [manufacturing-based] sectors,” he says. “One of the main results of this is that people buying such services, for example real estate, are priced out of the market in Lebanon. This drives a pattern whereby people migrate so they can make an income that allows them to buy what is on offer in Lebanon.

“Because they end up migrating to achieve that income, the whole cycle becomes self-perpetuating, in that if you are Lebanese earning in Lebanese currency, in Lebanon you can never compete with the prices that the expats living abroad can pay.

“This drives more and more people to migrate and seek employment elsewhere, while making sure that anybody who’s employed in Lebanon does not end up earning a decent standard of living. In sectors such as real estate and tourism, there is a huge majority that works for peanuts and a tiny minority that reaps all of the profit.”

With the regional economic slowdown resulting from persistently low oil prices, remittances from Lebanese expats have taken a hit. The World Bank revised its estimate of remittance inflows to Lebanon in 2015 by $340m, from $7.5bn to $7.16bn, showing that inflows decreased by 3.3 percent. That was the steepest year-on-year contraction of the 15 largest recipients of remittances in developing countries last year, behind Morocco at -7.3 percent. Since 2013, remittances have fallen 11.4 percent.

The knock-on impact includes a payments deficit and tightened public finances. “The economy is generally reliant on foreign investment, and the freezing of bank transfers, particularly remittances, which total billions of dollars, is likely to increase pressure on the country,” associate analyst at Control Risks Andrew Freeman says.

“Remittance flows — particularly from oil-exporting Gulf countries — remain a stable source of income, and the expulsion of some Lebanese families from these countries [for political reasons] will result in a downturn in remittances over the coming year given that approximately 65 percent of remittance inflows to Lebanon come from the Gulf.”

Lebanon’s economy has taken an additional hit from recent foreign policy disagreements with the Gulf. In February, it refused to condemn Iran’s attack on the Saudi embassy and consulate in Tehran — and this was not the first time it had declined to support resolutions against Iran during meetings of Arab and Muslim foreign ministers at the League of Arab States and the Organisation of Islamic Cooperation (OIC), GCC media reported at the time.

While the GCC rallied to support the kingdom, Lebanon persisted with its stance, prompting Saudi Arabia to conduct a comprehensive review of its relations with the country, including cancelling a $4bn arms deal for the Lebanese armed forces and security forces and withdrawing its deposits from the Lebanese central bank.

Later in February, Saudi Arabia imposed a ban on its citizens travelling to Lebanon and other Gulf states, such as the UAE, followed suit. This has served to shrink numbers of GCC visitors and negatively impact tourism in Lebanon.

IHS’s Abi Ali says: “Go to downtown Beirut and you will see a huge number of cafés that have completely shut down because they were dependent on Gulf tourists. This is having a big impact on the economy.”

The real estate sector is also expected to be hard hit as a result of Gulf withdrawal, as Saudis and other GCC nationals exit their investments. And locals are reportedly fearful that Saudi Arabia and other Gulf states could expel hundreds of thousands of Lebanese expats.

“The loss of Saudi financial support is a major blow,” Uziyel says. “Lebanon’s strategic importance will help it draw in some Western financial and military support — and Lebanon has stepped up these efforts, getting additional funds and military support from the US and France among others — but not sufficiently to fully offset the impact of Saudi Arabia’s withdrawal of funds or the knock-on impact of tensions between Lebanon and the GCC on other financial flows.

“There is little data yet to indicate how deeply this will affect Lebanon — March data for the commercial banks do not suggest a major change in flows. There had been reports of a halting in Saudi bank transfers to both individuals and firms in Lebanon but Lebanese banks have so far denied any problems.”

Indeed, Lebanese economists claim that, even if Lebanon’s economic situation continued to deteriorate, the risk to the banking system would be manageable.

Nassib Ghobril, head economist at Beirut’s Byblos Bank, told online news provider Al Monitor in March: “Even if private Gulf depositors withdraw their deposits from commercial banks, total non-resident deposits amount to $32bn and are mostly owned by expats and some foreigners, which means the Lebanese banking sector can still handle it.”

He said Lebanese bank assets amounted to $181bn, while the central bank foreign reserves stood at $32bn. “This means that if there were a massive shock, the central bank can withstand a rush on the Lebanese pound, especially since Lebanese deposits are mostly in US dollars,” he was quoted as saying.

Lebanese banks’ deposits are expected to grow by between 4.5 percent and 5 percent in 2016.

However, banks are no doubt concerned about potentially onerous due diligence required by a new US law targeting the finances of Hezbollah, Lebanon’s powerful armed group and political party. Lebanon’s central bank governor announced in May that Lebanese banks must comply with the US Hezbollah International Financing Prevention Act (HIFPA), which was passed in December and threatens sanctions against anyone who finances Hezbollah in a significant way.

The US classes Hezbollah, one of the most powerful political groups in Lebanon, as a terrorist group and has warned that failure to comply with the law risks isolating the country’s banking sector internationally. Control Risks’ Freeman says Lebanese banks are likely to comply with the law.

“The central bank of Lebanon and Association of Banks in Lebanon have both stated their willingness to comply with the act, and insisted that banks have already frozen blacklisted accounts. However, their willingness to define Hezbollah politicians as designated terrorists will give an indication of the seriousness with which they take sanctions.”

Uziyel from the EIU adds: “Hezbollah maintains that its money is not transferred through the formal banking system, but Lebanese banks know that the tightened legislation will require much greater scrutiny of money transfers.

“In particular, they will need to monitor transfers coming via West Africa, where expatriate Lebanese businesspeople remit large sums that US officials claim ends up in the hands of Hezbollah.”

Against this complex backdrop, Lebanon is struggling to accommodate hundreds of thousands of refugees displaced by the war in Syria. Abi Ali points out that the state was hardly able to provide basic services even before the Syrian civil war, with water, electricity and other resource shortages all commonplace.

“The influx of such a huge number of people has exacerbated the existing problems, so while electricity was not enough for 4 million people in Lebanon, it’s definitely not enough for 5 million.

“That is driving more competition for these scarce resources, which in turn is driving up the price.”

Nasser Saidi, president of Nasser Saidi & Associates and a former economy minister of Lebanon, claims poverty has increased by 10-15 percent in Lebanon since the influx of Syrian refugees.

Lebanon’s traditional growth drivers, including real estate, have taken a significant hit.

“The socioeconomic impact is huge — these refugees are desperate,” he says. “They are willing to accept extremely low wages and in doing so displace the poorest low-income Lebanese. They are also draining the economy in terms of service provision and infrastructure. For example, people are digging wells for water and waste management in the Bekaa Valley; these are becoming rivers of sewage and affecting public health.” 

Saidi calls for more financial assistance from the United Nations (UN) and Brussels. “Lebanon has received pitiful little aid to help us deal with the enormous influx of refugees. The number here is almost equivalent to a third of our population, so I’m afraid, when I hear complaints about refugees from EU states, it doesn’t add up — refugees make up less than one percent of European populations.

“Turkey has received far more aid than us even though most of the refugees are here — it is troubling how much the rest of the world is shunning Lebanon.”

The war in Syria has also affected trade flows in and out of Lebanon, further hitting the national GDP.

“More than 60 percent of Lebanon’s exports used to flow through Syria and Jordan to the Gulf and beyond — this is no longer possible and means trade has declined,” Saidi says.

Overall, the plight of refugees and the international response to it “is serving to destabilise Lebanon further and turn it into another ‘trouble hotspot’ in the Middle East”, he argues.

“By depriving the country of vitally needed aid that could help refugees secure proper jobs and contribute to the Lebanese economy, policy makers risk creating another lost generation of people susceptible to the influence of extremists groups like ISIL.”

Saidi urges world governments to work with Lebanon to help it establish a new parliament with an elected prime minister — even while the Syrian crisis is ongoing – in order to implement policy and fiscal measures that could help it to balance the books. At present, the political confusion and divide is preventing any of this from taking place — a deeply entrenched structural issue that was revealed in all its mess by the garbage crisis in Beirut last year.

“Monetary policy is very loose in Lebanon,” Saidi explains. “The central bank has been trying to inject more money into the economy, depleting reserves, and there are limited other tools, taxation or otherwise, to help Lebanon return to a firmer financial footing.”

It is a vicious cycle, says Control Risk’s Freeman, who warns Lebanon’s inability to enact legislation could see it lose out on crucial foreign aid in the meantime. “The Lebanese cabinet can enact legislation without a president, but this requires a bill to be unanimously agreed by all cabinet ministers — something that is unlikely to happen given the factional nature of its politics.”

The EIU’s forecast is similarly bleak. It predicts political deadlock will force the authorities to formulate spending plans in an ad hoc manner, making long-term budgetary planning difficult. As a result, the government is expected to run substantial fiscal deficits over the period 2016-2020, averaging above 8 percent of GDP, owing to high debt-servicing requirements, inflexibility in many other spending areas and a low tax base.

As Freeman says: “The failure to elect a president, a downturn in foreign remittances and the Syrian conflict will continue to negatively affect Lebanon’s economy over the coming year.”

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