The Lebanese Economy - Bucking the Global Trend -

Wall Street Journal- Special Lebanese Supplement
By Scherzando Karasu

“This is a very resilient system, one with truly solid foundations. It is clear that the global financial crisis [has] not impacted Lebanon in any significant way. We have been isolated from [its] impact, and that was not by chance but due to determination and planning.” - Fouad Siniora Prime Minister of Lebanon

Despite considerable challenges, Lebanon’s economy has made solid gains. But the government elected on June 7 will need an appetite for reform. The most important characteristic of the Lebanese is their will, determination and capacity to adapt and adjust,” says Prime Minister Fouad Siniora. Few would disagree.

Re-emerging from the crippling civil war of 1975-90, Lebanon spent 15 years reconstructing its shattered infrastructure and housing stock, only to have its renaissance checked by a roadside explosion in February 2005 that killed former Prime Minister Rafik Hariri. Eleven subsequent assassinations, the 2006 “July war” with Israel, and near-complete political paralysis from November 2006 to May 2008 – which suggested Lebanon’s religious and sectarian divisions had rendered it ungovernable – led many to argue that the dark days of the 1970s were back. Yet contrary to expectation, last May’s Doha Accord, which brought about a factional truce, the appointment of Michel Suleiman as President, and the establishment of an effective government of national unity, turned 2008 into a year of solid gains. And the trend has continued into 2009.

“Any one of these crises could have tipped Lebanon over the edge. The fact none did shows that Lebanon has as much chance of returning to the 1970s as Spain has of going back to the 1930s: although the divisions remain, there is absolutely no appetite for civil war,” reckons Nadim Shehadi, Lebanon specialist at Chatham House in London, a leading think tank on international affairs.

With all eyes now on the June 7 elections, observers have pointed to the huge sums Iran, Egypt and Saudi Arabia have spent supporting political groups, and the tightness of the race between the pro-Western March 14 coalition and the Hezbollah-led opposition. Last month, Secretary of State Hillary Clinton visited Beirut to urge moderation. But those who watch Lebanon understand that although this election is vital – both in the way it is conducted and in the government it creates – any attempt by one group to hold sway over another will be held in check.

“What is really key is what happens in the weeks and months after June 7, and whether an effective government can emerge to press ahead with much needed reforms,” says Hani Sabra, Lebanon analyst with the Eurasia Group in New York, a leading political risk research and consulting firm.“The good news is that so far political tensions have not impacted greatly on the economy.”

Indeed not. Lebanon’s economy has defied the skeptics and bucked a global trend, delivering GDP growth over 2008 that the Banque du Liban, the country’s central bank, recently revised upward to around 9% from an earlier estimate of 7.5%. Industrial exports rose 24%,net capital inflows surged 46%, which contributed to a $3.5 billion balance-of payments surplus, this boosted central bank reserves to $22 billion, almost twice the 2007 level. An impressive performance, especially given that in most other countries confidence evaporated in the wake of the international banking crisis. Growth for 2009 has been forecast by the IMF at a perky 3%.

“This is a very resilient system, one with truly solid foundations,”the Prime Minister says.“It is clear that the global financial crisis and its implications have not impacted Lebanon in any significant way. We have been isolated from the impact of this tsunami, and that was not just by chance, but due to determination and planning.”

He credits Riad Salamé, the Banque du Liban’s veteran Governor, with the “preemptive regulations” that imposed strong capitalization and liquidity requirements on the country’s banks and – crucially – with anticipating the destructive potential of securitization.“We were determined not to get involved in things that we are not able to control, understand or be well versed in. That’s why the central bank discouraged banks from going into derivatives and structured products,” the Prime Minister says, himself a former central banker.

Deposits in Lebanese banks surged 15% to $94 billion in 2008. Private-sector deposits (residents and non-residents) surged by a further $1 billion in February alone.“This is a vote of confidence by the Lebanese and by the international community, not just in the resilience and strength of our financial system,but also in its appeal as a safe haven,”the Prime Minister says.

The international investment community agrees: ratings agency Moody’s changed its outlook for sovereign ratings from stable to positive in December and last month upgraded Lebanon from B3 to B2 – the first market upgrade in Emerging Europe, Middle East and Africa since September 2008 – citing the substantial improvement in external liquidity and the “proven resistance of the public finances to shocks.” The report emphasized how much Lebanon – comprising just four million people and a GDP of $29 billion, comparable to Yemen or Uruguay – punches above its weight in banking and services in particular, making the economy almost as internationally well-regarded as its food, wine and cultural output, which have together boosted Lebanon’s national identity.

That identity has also been a boon to tourism, which is expected to be a big growth industry in 2009 as Europeans and North Americans join visitors from the Gulf lured to the Roman ruins at Beirut. Arrivals in the first three months of this year were already 50% up on the same period last year. However, serious concerns remain. With the budget deficit expected to remain high, few expect any significant reduction in Lebanon’s external debt, estimated at 162% of GDP, particularly if one of the key inflows of capital – remittances from Lebanese working abroad – falls off. Some suggest it will as the boom in places like Dubai turns to bust, which could mean at least 30,000 young professionals returning to Lebanon, where youth unemployment is already high.

On the bright side, however, this represents just 10% of the 300,000 expatriate Lebanese working abroad. Chatham House’s Mr. Shehadi counters that the return of part of that work force could further energize the local economy.“These are highly qualified and well-connected people, accustomed to being successful,” he says. The government recognizes that if Lebanon is to tackle the budget deficit and reduce foreign debt, asset sales will be key.

Eventually it hopes to privatize under-resourced national electricity company EDL (which last year received subsidies equivalent to 6% of GDP) and transport infrastructure, which would also benefit from private-sector funding. In the more immediate future, when conditions improve, it hopes to sell two GSM networks, which analysts suggest could net as much as $17 billion. Beirut-based A.T.G. Holding, which along with Information Technology Group (ITG) is part of the Holcom Group, an affiliated portfolio of companies

largely dedicated to the provision of ITC products, office equipment and related professional services, is taking mobile communication one step further. “We are going to launch a WiMAX service soon,” says Antoine Fadel, A.T.G.’s President. The group already operates the country’s dominant internet service provider (IDM) and data operator (GDS).“We will be the first country in the whole

Middle East to have WiMAX,” he says. “We also have a license to operate a private data network all over the territory of Lebanon,” adds Claude Bahsali, Chairman and CEO of ITG. “I don’t want to give a specific date for when it’s going to happen, but what I can say is that the Lebanese government is fully committed to privatization, and to the role that can be played by the private sector,” the Prime Minister says. The government must also move forward in other key areas, such as reducing the bloated public sector and reinvigorating public infrastructure, battered by years of war and underinvestment.

As ever with Lebanon, sustaining confidence will be critical – and investors will be watching. Market cap on the Beirut Stock Exchange has already dropped 20% this year, reflecting latent uncertainty about whether any government can get a proper grip on the country’s endemic challenges. “You need political will and consensus to implement structural reforms, ”says Nassib Ghobril, Chief Economist at the Byblos Bank Group.“The priority for the political class is to put financial and economic issues as their top priority. The challenging regional economic and financial conditions may push them to do that.”

Mr.Ghobril points out that the crises that beset Lebanon between 2005 and 2008 meant it missed “golden opportunities to attract capital, tourists and multinationals and implement structural reforms to reduce the debt and fiscal deficit and raise the economy’s competitiveness” when global conditions would have made this relatively easy. This, he says,makes doing the right things now all the more important. At the very least, once the election dust settles, investors will be expecting a clear business vision

from Lebanon’s new government. “Political and monetary stability are absolutely key to enabling Lebanon’s private sector to get on with doing what it does best,” says Chatham House’s Mr. Shehadi, “creating prosperity.”


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