Lebanon’s growth engines losing steam
Headed into their worst showing since 2006, Lebanon’s real GDP growth numbers have plenty of company on the journey south. Fresh Central Bank data showed commercial bank deposits inched up only 0.56 percent to $113.8 billion in July, the slowest rate in six months. Total deposits grew by $629 million during the month, the smallest amount since the fall of the national unity government brought about deposit outflows in excess of $1 billion in January. Even the dollarization rate remained elevated at 66.7 percent in July compared to 62.9 percent at the end of July 2010.
Economists attribute the weak growth in economic and financial variables so far this year to domestic political disputes as well as regional uncertainty emanating from Arab uprisings. “Growth prospects started to deteriorate in September 2010, long before the Arab Spring, but the deterioration accelerated during the regional events early this year and following the collapse of the national unity government,” Dr. Mazen Soueid, chief economist at BankMed told The Daily Star.
Weak deposit growth dispelled arguments of the resilience of the banking sector in the face of a triple whammy, including heated domestic politics, Syrian turbulence and international market upheaval.
“Political instability in Lebanon has a direct impact on confidence and the country has one of the weakest records of political stability among peers,” said Purvi Harlalka, Fitch Rating’s credit analyst covering Lebanon in an interview with The Daily Star. At current growth levels, deposits are poised to register their slowest increase since 2006, while the sector had grown its deposits by 12 percent, 23 percent, 16 percent and 10 percent in 2010, 2009, 2008, and 2007 respectively.
The measure is especially critical to the fiscal and economic stability of the country as the government relies heavily on commercial bank purchases of sovereign bonds to refinance maturing debt and fund its budget deficit. Harlalka warned that “Lebanon does depend on confidence and capital inflows, and these can change.” But unlike the region’s governments which are rushing to increase spending to cover the shortfall in indicators, Lebanon’s Cabinet is staring helplessly at the eye of the storm. “There isn’t much the current government can do to stimulate growth because the 2011 budget can’t be adjusted,” said Soueid.
Nevertheless, in the regional kingdom of the blind, a one-eyed Lebanon is king. Although the country has not been immune to foreign shocks, even meager economic growth rates of 2-3 percent place Lebanon in line with growth rates at major regional oil economies. In particular, the UAE and Kuwait are projected to grow at 2.8 percent and 3.1 percent respectively in 2011 according to a recent BofA-Merrill Lynch report, while Bahrain’s economy is seen shrinking by 2.2 percent. Furthermore, what economists described as a missed opportunity for Lebanon to attract more deposits during the Arab Spring has not been as much of a blessing for UAE as observers predicted. The Gulf country’s annualized deposit growth rate reached 14 percent in May, the latest monthly data available, compared to an annualized rate of 8.2 percent in Lebanon according to Economena Analytics calculations.
Therefore, deposit growth, albeit slower, is still viewed as a support factor by credit agencies, and as evidence of Lebanon’s ability to close the year with acceptable levels of economic and financial damage. “We affirmed Lebanon’s sovereign rating at B in July which was during the Syrian unrest. Unless events in Syria spill over into political instability or deposit flight in Lebanon, the rating is stable,” Harlalka said. But deposits can only go so far in supporting growth and stability, and indeed fall short of returning the country to it normal growth, which according to Soueid, is 7 percent in real GDP growth terms, “if you have the appropriate policies and given low regulation and a dynamic private sector.”