Global: Lebanon economic and strategic outlook macroeconomic profile
Lebanon is a competitive and free market regime with a strong proactive commercial tradition. The Lebanese economy is service-oriented - main growth sectors include banking and tourism. There are no restrictions on foreign exchange or capital movement or on foreign investment, and bank secrecy is strictly enforced. Lebanon benefits from its large, cohesive, and entrepreneurial Diaspora.
Lebanon has witnessed a sluggish growth in its GDP during the past six years with nominal GDP growing at a CAGR of 5.1%. The slowdown of the GDP growth however has been linked with political tensions, inflation, trade deficit, decreased tourism which slowed down domestic demand. Political unrest throughout the past few years have contributed to the destruction of economic infrastructure, thus putting on hold all capital market transaction and the inflow of money into Lebanon. However things are changing for better with the nominal GDP in 2008 expected to reach US$24.6bn and a forecast of 5% increase expected in 2009.
Looking forward, the Lebanese economy is estimated to have grown slightly by 1.5% in real terms by the end of 2007 to a record GDP of LBP29.0trillion (US$19.3bn), which is still below the 2005 record level. Similarly, nominal GDP is estimated to have grown by 5.4% at the end of 2007 to reach a new record of LBP34.7trillion (US$23.0bn). The anticipated weak growth is mainly due to the political unrest that is not resolved yet. Thus, long term investment decisions seem likely to be postponed and only little direct investment - especially from the gulf - is anticipated. Investments are estimated at hundreds of millions of dollars rather than the billions of dollars that had been anticipated early 2006 before the political unrest. Moreover, the anticipated growth for 2007 is mainly from donor-financed infrastructure investment.
Currently, Lebanon’s total budget deficit has witnessed a declining trend over the period 2001-05 from LBP4.2trillion to a minimum of LBP2.8trillion. The decline was mainly linked to the reform programs aiming to increase revenues as well as reducing expenses, especially debt service. Apart from an increase in revenue from taxes, the main reason for the decrease in budget deficit has been reduced interest burden due to refinancing of debt by zero interest US$4bn Paris III loan. However, political tensions during 2006 had a negative impact where the deficit increased by 39.1% to LBP3.9trillion by the end of 2006. Entering 2007, budget deficit declined slightly by 1.4% and stood at LBP3.8trillion.
During the first nine months of 2008, government revenues have reached LBP7.6trillion, increasing by 16% from the same period in 2007. Of the total revenues, LBP579bn are treasury receipts. Expenses amounted to LBP10.6trillion, increasing by 14.5% over the same period in 2007. Revenues are growing at a faster rate than the expenditures, hinting for a brighter economy if thing are held on the constant pace. The budget deficit stood at LBP3.0trillion at the end of September 2008.
A important component of revenues to Lebanon is the Capital and Financial account. It had been in surplus and it had seen a big surge in 2003 to US$4.9bn on the back of increased FDI and portfolio investment which reached US$8.9bn in 2007.
Also contributing to the surplus in financial accounts is the increased inflow of investments into Lebanon, where direct investments reached US$3,077.5mn in 2007, increasing from US$2,669.4mn in 2006. In the same context more money is going out of Lebanon reaching US$991mn but foreign investments in portfolio are increasing and reached US$1,730.4nm in 2007, an increase of 32% from 2006. Portfolio investments increase a CAGR of 71% from the period of 2003-2007 while FDI increased 1.1% during the same period.
However, with all government efforts to increase FDI, comes the risk of inflation. Lebanon faced 100% inflation for a period of years due to the civil war, the political unrest and increased debt. After experiencing more than 100% inflation in the early nineties, Lebanon’s economy has experienced low inflation 2000 onward. It decreased to below 10% during the new millennium era and onwards.
2007 was a relatively not so good year for the Lebanese consumer; it was the only year that the important sector of the economy had double digit inflation rates. Services, food and utility posted the highest rates. This is reason for a depreciated Lebanese pound, which is pegged to the decreasing dollar, as a result imported inflation increased and secondly, is the start of the oil prices bubble where in October 2007 oil prices reached a level of US$91.10.
In 2008, inflation increased 7.2% until June 2008, where major increases in prices occurred. Transportation prices jumped 20%, foods by 10%, housing 4.8%, and utility by 15.6%.
We expect inflation rate to decrease because of the global slowdown that helped decrease oil prices and food prices which can be a major factor. Also, the Lebanese Pound is pegged to the US dollar and as the American economy slowly recovers so will its currency gain more purchasing power, thus decreasing the cost of imports which in return will decrease the imported inflation.
The expectations for 2008 are a bit brighter with real GDP estimated to record 3.5% of growth to reach a new high of LBP30.1trillion (US$19.9bn). This scenario is mainly based on the assumption of easing political tensions - internally as well as externally. In addition this assumes a better performance from the services sector especially financial services and tourism which in turn is supported by the positive outcome of the reform agenda adopted by the government in different fields covering - debt management, controlling fiscal deficit & tax reform, privatization program, facing unemployment and controlling inflation. These are the risk factors facing the Lebanese economy in the next phase. Despite the fact that the government is taking good steps in the right direction regarding the reform agenda, the ability to control political risk and internal tensions will have a major role to play whether the economy will be able to support such reforms and consequently to the overall economic performance.