The clearest sign of the overflow of the 19-month Syrian conflict into Lebanon has been the refugees fleeing the violence. The United Nations has registered an exodus of some 51,000 people, but NGOs place the figure at 100,000.
“It’s very difficult,” says Sheikh Zayd Zakaria, general secretary of the Coalition for Syrian Refugees Aid. “In some cases, we are putting three families in a garage with inadequate bedding. In the Bekaa, [east of Lebanon] there are refugees sleeping on the roads.”
But for Lebanon, the challenge is as much political as it is humanitarian.
The government fears the domestic consequences of fighting in Syria. This was highlighted by this summer’s sectarian clashes in Tripoli, Lebanon’s second-largest city, between Sunni Muslims and an Allawi minority that reflected the ethnic balance in Syria, where the regime of president Bashar al-Assad is mainly Allawi-led.
In Lebanon, anything to do with Syria is sensitive: the political coalition group known as ‘March 8’, dominating the government and led by the Shia group Hizbollah, is sympathetic to the Assad regime, while the opposition March 14 grouping, led by the Saudi-aligned Future Movement, leans towards the mainly Sunni rebels.
Fears that tensions from Syria could spill over escalated when at least 11 Lebanese Shia Muslims were kidnapped in Syria in May, prompting tit-for-tat kidnappings of Syrians in Lebanon this August.
Ironically, refugees have replaced other visitors, particularly tourists from the Arab countries in the Persian Gulf, whose governments in May warned their nationals not to travel to Lebanon, and in August called on them to leave the country immediately. The number of tourists fell 8% year-on-year in the first seven months of 2011, itself a poor year because of political instability, and this has had a major effect on many other sectors feeding off tourism.
That said, the overall number of passengers coming into Beirut airport grew by 8.8% in the first seven months, due to the Lebanese abroad visiting home. “This is a similar growth rate to earlier years; Lebanese expatriates are not affected by what is happening in Syria, they’re not afraid of the political or the security situation,” Marwan Barakat, head of research at Banque Audi, tells Emerging Markets.
But many investors have put their plans on hold, with investment down by 5.5% in 2011 and by 4% in the first seven months of 2012. “The ongoing uncertainties and the escalation of the conflict have resulted in businesses taking a wait-and-see approach,” says Nassib Ghobril, head of research at Byblos Bank.
“We have not seen any new major FDI project announced since the start of the conflict, and [bank] deposit growth has slowed down. Consumer confidence, as reflected by the Byblos Bank/AUB Consumer Confidence Index, is at record low levels.”
But this is only part of a more complex picture. “The decline in investment has been offset by consumption continuing at a relatively good pace,” says Barakat. “Transactions – at ATMs and POS [points of sale] – grew by 13% in 2011, and by 11% in the first seven months of 2012.”
Exports too are affected. With Syria providing the only overland route for Lebanese exports, businesses first faced higher transport and insurance coverage, and then security risks and closures of border crossings. But again, Lebanon businesses have shown typical initiative, expanding exports by sea and air. “Total exports are $2.5 billion in the first seven months of 2012,” said Barakat, “which is barely down on $4.3 billion in 2011.”
THE BANKING SECTOR
Faced with the general economic uncertainty, Lebanon’s banks have been increasingly cautious, moving the bulk of new deposits into reserves that at the end of the first quarter reached L£75.54 trillion (around $50.1 billion), up 19.2% over the same point in 2011.
Banking is the Lebanese economy’s largest sector, with total assets in April 2012 of $144.73 billion, over 320% of GDP – 9.2% higher than in April 2011, a trend strongly at variance with banks elsewhere in the Middle East.
Margins have been shrinking since Lebanon’s own governmental instability began in late 2010. Makram Sader, secretary-general of the Association of Banks in Lebanon, said in August he expected overall bank profits to fall by 4–5% in 2012.
However, the banks’ conservatism, led by the central bank, puts them in a good position to withstand political tensions. Under Riad Salameh, governor since 1993, the central bank has accumulated $35 billion in foreign currency assets as well as gold reserves worth $15 billion, making Lebanon the second-largest holder of gold in MENA. Salameh predicted this September that deposits would rise 8% in 2012 and that economic growth would match the IMF 2012 forecast of 3%.
Nor are the Lebanese banks preparing to leave Syria, where they have slowly expanded since the ‘Damascus spring’ – following the accession of president Bashar al-Assad in 2000. Syria, the banks feel, retains huge long-term potential.
“Obviously, the situation has affected the banks’ expansion and lending plans in Syria,” says Ghobril. “Their priority is now risk management, as the outlook for the Syrian conflict is uncertain: there is no telling when and how it will end.”