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Emerging Markets

Safe haven

Lebanon’s economy has proved surprisingly resilient in the face of political gridlock and a global slump. But structural reform still beckons

Few countries could go months without a government, much less attract at the same time a record number of tourists and defy the regional and global economic downturn. Yet Lebanon, despite deep tensions between its two main political blocs, is experiencing economic growth far greater than expected, with the IMF expecting the country to top the 4% it earlier projected.

The summer saw tourists, especially Gulf Arabs, choking coastal and mountain resorts, as well as Beirut. By the end of July, the total number of visitors topped 1.08 million, a 57% increase on the first seven months of 2007, meaning Lebanon is set to break its previous best of 1.4 million visitors in 1974, the year before the 15-year civil war broke out.

Tourism has traditionally been a gateway towards investment in Lebanese real estate, and while prices have collapsed by as much as 50% in Dubai, they have held firm in Lebanon. “A number of overpriced developments have reduced by around 15%, but overall there has been no fall in residential prices,” says Karim Makarem, a director of Ramco, the leading real estate company. “Office rents in Beirut have gone up by 10–15% in the past year, and land prices have also increased as the city – like Manhattan or parts of London – has a limited supply that developers fight over.”

Alongside a buoyant property market, the banks have reported accelerated growth in assets, deposits and loans since the credit crunch tightened in 2008. “Investors see Lebanon as a safe haven,” explains Michael Karam, associate editor of the Beirut business monthly Executive. “The banks’ conservatism, born of harsh experience, seemed particularly reassuring after the collapse of Lehman Brothers.”

The banks’ caution evolved over many years in a risky and even wartime environment, but has been reinforced by tight regulations introduced by Riad Salameh, governor of the central bank, since 1993.

The total assets of banks operating in Lebanon were nearly $104 billion at the end of June, three times the size of the GDP and a jump of 17.2% in 12 months. However, total bank lending is under 70% of deposits, compared to levels of 120% in the UAE and elsewhere in the region. Even with conservative lending, Lebanese banks have enjoyed stronger profits at a time of widespread problems in the global banking sector.

The vastly increased deposits of the past year have been mainly in Lebanese pounds, up 51.3%, rather than dollar deposits, which rose by only 3%. Analysts say this reflects both higher rates offered on the Lebanon pound – around 7% compared to 3% on the dollar – and greater optimism about the political outlook. Nonetheless, around 63% of deposits are still in dollars.


One unfounded fear at the time of the credit crunch was that the slump in the Gulf would send home Lebanese workers and so slash the remittances that are so important to the Lebanese economy. “With annual remittances of close to $6 billion, Lebanon has the highest ratio for remittances per capita in the world,” says Marwan Barakat, head of research at Audi, one of Lebanon’s leading banks. “Such remittances, which have been sustainably growing year after year, aren’t likely to receive a significant hit as a result of the current crisis. We expect them to remain in the worst circumstances above 15% of GDP.”

The diaspora’s diversity, both in terms of work and location, mitigates against a drop in remittances, Mr Barakat adds.

The perennial fly in the Lebanese ointment is politics. With constant bickering before and since June’s parliamentary elections, Lebanon has made little progress on the reform programme agreed with international donors at the 2007 Paris conference – the so-called Paris 3 – which is monitored by the IMF through an Emergency Post-Conflict agreement (EPCA).

Debt woes

The programme was based on privatization, increasing revenue, and removing inefficiency in administration and state-owned enterprises. While the EPCA was ostensibly to monitor reconstruction after the Israeli onslaught of 2006, which devastated much of the infrastructure, it centred on tackling a public debt that was just under $50 billion at the end of July and could be near $52 billion by the end of 2009.

The debt is Lebanon’s real Achilles’ heel, and it continues to rise because the government runs a deficit, failing to tackle corruption, excessive state spending and the massive losses of Electricite du Liban (EDL). The deficit was $1.57 billion in the first six months of 2009, 26.9% of government spending and 9.7% of estimated GDP, figures that are only a slight improvement on 2008.

The state-owned EDL is expected by the Ministry of Finance to lose $1.23 billion this year, and the scheduled sale of the country’s two telecoms networks remains on hold because of political opposition and an uncertain international market.

While growth has helped reduce the debt as a percentage of GDP from 180% to 160% in the past two years, both Lebanon’s bankers and the IMF argue a new government must take urgent action to tackle the debt. “For the Lebanese resilience to crisis to last... drastic structural reforms are needed in an attempt to ensure a soft-landing scenario for Lebanon’s public finance conditions,” says Barakat. “Those reforms are becoming increasingly urgent in a period where Lebanon’s public sector can count relatively less on international assistance and foreign support because of the wealth contraction observed around the globe.”

The answers have to come from within Lebanon, stresses Barakat. “I don’t think the critical success factor revolves around pressure from international bodies, such as the IMF or others. There should be a widened political conviction domestically that if Lebanon has in the past survived crisis and weathered storms, its long-term stability is dependent on, among other factors, its ability to contain its vulnerabilities.”

Not all the figures are bad. A finance ministry report in August forecast a 7.4% rise in revenue from 2008 resulting from both growth and tax increases. But the ministry forecast that state spending would rise by 6.6% – with the biggest factors the losses of EDL and salary increases.

Prospects for radical reform of the state sector were not enhanced by a summer of tetchy arguments over ministerial portfolios as Saad Hariri, the US-and Saudi-backed prime minister designate, clashed with Michel Aoun, the self-styled leader of Lebanon’s Christians in coalition with Hizbollah, the militant Shia group allied to Iran.

The dispute came after regional and global powers – Saudi Arabia, Syria, France, Iran and the US – agreed in June a power-sharing formula for president Michel Suleiman to nominate five of 30 ministers, so holding the balance between 15 from the Hariri-led bloc and 10 from the Hizbollah-led bloc.

“This has been a turf war,” says one analyst in Beirut, “when what we need is action to secure the country’s future.”

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