Lebanon's Economy to Face a Turbulent 2019

Published December 20th, 2018 - 09:16 GMT
When a new government is formed, it will need to follow through on reform promises made at CEDRE in April 2018 to attract inflows of capital in order to reboot Lebanon’s economy. (Shutterstock)
When a new government is formed, it will need to follow through on reform promises made at CEDRE in April 2018 to attract inflows of capital in order to reboot Lebanon’s economy. (Shutterstock)

Since 2011, Lebanon’s economy has been exhibiting recessionary symptoms. Economic growth slowed from 8 percent in 2010 to 0.6 percent in 2017, as measured by the country’s public bean counter, the Central Administration of Statistics. For 2018, the International Monetary Fund (IMF) projected GDP growth at just 1 percent.

At the time of this writing, Lebanon has not yet formed a government in the seven months since parliamentary elections in May 2018, but there is room for speculation that it may be formed before the end of 2018, or hopefully in early Q1 of 2019. Cabinet formation could unblock decision making that would lead to a reassurance of confidence in the country. Confidence has not dramatically fallen on the financial and banking side of things, but expatriate confidence in particular could use strengthening. There has been a lot of energy channeled toward fear that could be eliminated, so formation of a new cabinet could calm unjustified or excessive fears triggered by uncertainties over the future.

When a new government is formed, it will need to follow through on reform promises made at CEDRE in April 2018 to attract inflows of capital in order to reboot Lebanon’s economy.

Currency concerns

The current economic model is unsustainable and has been understood to be for years now, but was allowed to keep operating, even though it was known that the currency peg was not designed or engineered for the long term. Despite this unsustainability, Freddie Baz, chief strategist and board member at Bank Audi, says Lebanon is not at risk of a devaluation because of the level of foreign currency reserves held by Banque du Liban (BDL), Lebanon’s central bank: “The last several years have seen BDL’s foreign assets as percentage of local currency money supply in ranges above 70 and 80 percent—81.9 percent today. This [percentage ratio] is where you have evidence for the risk of a collapse in the local currency. I am talking about 18 years where the central bank’s foreign assets represent 80 percent of your money supply in local currency; this is a technical buffer.”

Even with such a technical buffer protecting the lira, external factors could spell trouble for Lebanon’s economy and others in the region, the IMF noted in its November 2018 Middle East and North Africa Regional Economic Outlook. The Middle East, the report reads, faces many risks that “cloud the outlook.” These risks include the global interest rate environment that mainly reflects the rise in interest by the US Federal Reserve in a little over two years from 0 to 2 percent, and the IMF also mentions the tariff wars sparked by the US against its major trading partners, the European Union and China, as the rise of trade barriers would certainly reflect on the ability of small economies, like Lebanon’s, to compete in global markets. Another risk mentioned by the IMF as a damper to the region’s economic fortune is geopolitical strains and regional conflicts, or the possibility of economic or financial sanctions on non-state or state actors, or the forced closure of financial institutions, as Executive reported in its November 2018 report on US foreign policy in the region vis-a-vis Iran and Hezbollah.

As countermeasures to protect themselves, the IMF suggests countries in the region should use “flexible exchange rates” to “serve as buffers in the event of external pressures,” but for Lebanon the IMF recommends maintaining the peg for the foreseeable future.

Spending gone rogue

The IMF’s other protective measure from the November 2018 report is that public spending should be adjusted to be “equitable” and “more supportive of growth.” At CEDRE, Lebanon promised to reduce its deficit by 5 percentage points of GDP over five years, and the 2018 state budget featured a 0.06 percent decrease in total spending compared against the 2017 state budget.

But over the first six months of 2018, the fiscal deficit rose sharply by 234 percent in a year-on-year comparison to 2017. State expenditures totally overshot the 2018 budget spending forecast, says Jean Tawile, economic advisor to MP Samy Gemayel. He attributes this rise to the public sector wage increase legislated in late 2017 and hiring in the public sector over the course of 2018.

Tawile’s assertions were confirmed in an early December 2018 public statement issued by the Ministry of Finance that also noted an additional fiscal burden—Lebanon’s current account balance, described by the IMF as the “flows of goods, services, primary income, and secondary income between residents and nonresidents.” From 2000 to 2014, the average annual deficit of the current account stood at $5.1 billion each year. By 2015, $9.1 billion more flowed out of Lebanon than in, and that figure has risen sharply since 2015. For 2018, the IMF projects a deficit of $14.5 billion, and $15.2 billion in 2019.

Unsustainable economic model

Lebanon’s official reserves—foreign currencies, other assets denominated in foreign currencies, and gold reserve—stood at $36.4 billion, according to the IMF. The IMF projects official reserves to dwindle to $31.1 billion next year. In 2015, the figure stood at $36.7 billion and rose to $40.2 billion and $40.6 billion in 2016 and 2017, respectively. This is happening because the country’s traditional economic model relies on internal USD circulation. Lebanon’s model depends on the financial and services sectors, tourism, foreign direct investment mainly in the form of real estate, and remittances and in recent years, not enough dollars have been entering the economy to offset dollars exiting at an increasing rate. Annual tourist arrivals by total number have largely recovered from 2010, a golden year for tourism in Lebanon, but tourism spending has not. In 2010, nearly 2.2 billion tourists came to Lebanon and spent roughly $8 billion. By 2016, according to the latest available figures from the World Bank, arrivals were at 1.7 billion and spending was at $7.2 billion. Stakeholders tell Executive that in 2017 and 2018 those who have been coming to Lebanon have been spending less overall. Big spenders from the Gulf are not traveling to the country in the same numbers as before, and this is reflected in tourist arrivals by nationality. Instead, budget travelers are coming to Lebanon at higher rates, and this is partly reflected in the occupancy of high-end hotel rooms.

Read More

Lebanon's Five Star Hotels Focus on New Markets to Recover From Losses
Lebanon Should Lay off Redundant Government Employees, Experts Say 

The real estate sector is also not as robust as it was in 2010 and prior. This is in part because Gulf nationals are no longer purchasing property in Lebanon as they once were and instead, according to stakeholders, have been selling off assets. Likewise, Lebanese expats working in oil-producing countries have not been purchasing property back home, amid job security concerns on account of lower oil prices (while oil prices recovered  in 2017, they began falling again toward the end of 2018) and job security concerns, as Executive reported in its October 2018 real estate special report.

While the real estate sector may see positive developments in 2019 through increased investor confidence, the sector, alongside tourism and hospitality, may not return as the drivers of Lebanon’s economy that they once were.

An abbreviated history of the real estate, tourism, and commercial sectors as traditional components of the Lebanese economy shows that, at certain points in time following the establishment of the Lebanese republic, these were important drivers of the economy, but not concurrently or linearly.

Real estate as a traditional cache of wealth was always a component of the Lebanese economy, while tourism was not, except for a very narrow period in the 1960s when Lebanon, in terms of transnational infrastructure and aerial linkages, was superior to all other Arab countries. Beirut’s airport was then the gateway to Arab countries—a transit place with appeal for specific types of tourism, mostly casino gambling and other fun-related activities. This was a short-lived period ending with the outbreak of the civil war, when Beirut lost any prospect to position itself as a layover hub in competition with neighboring countries.

When Rafik Hariri first became prime minister in the early 1990s, there were three dream scenarios that Lebanon wanted to revive. The dream was that Lebanon would serve as a tourist hub for Arabs, and as a bridge between the Arab world and the West.  This was fulfilled, but not to the large economic scale Hariri sought—perhaps due to the failure of the Oslo Accords. The added double dream of being a financial and commercial hub are interrelated. Lebanon experienced this to a certain extent in the 1950s and 1960s, even though high human capital was mismatched with relatively poor wealth in the country. In terms of real estate, Hariri had dreamed of building Beirut into a showcase on the Mediterranean. Beirut Central District, the emergence of Solidere as a government-controlled investment scheme, and the rollout of infrastructure was part of the dream to make Lebanon a commercial hub. The traditional business of shipping and trading in the region reflected today as the CMA-CGA global shipper—with special mention of the development of their Marseille hub and Chinese links—has not left much to be done locally. Thinking of Lebanon in 2019 and beyond as a center of trade is not feasible because it has become so multicentric.

Rebooting the economy

There is consensus at the political level in Lebanon that the economic model is not sustainable, and that Lebanon is at a point where restructuring the economy is necessary. But there is a difference in opinion on how the state should go about doing so—either by burning the house to the ground and rebuilding from scratch, or through a measured approach over several years. Both routes are politically difficult, and reforms will cause pain especially to beneficiaries of public sector employment —but if Lebanon is able to follow through on the promises made at CEDRE and receives the capital inflows pledged by donors, then a transition can be more smooth. If no compromises are made by the political elite, and the cabinet void persists, this will drive confidence further down, and perhaps precipitate a collapse of the currency or of the economy at large.

There are big ifs all around—if a government is formed sooner rather than later, if it implements a strategy for reform, and if external factors do not get in the way first. But assuming the best case scenario—that Lebanon has a new cabinet before the end of 2018 or just after—the metaphorical house that is on fire can be extinguished and rebuilding and remodeling works can begin.

But what should be the architecture and interior design of Lebanon’s economy in the future?

Lebanon has always been a net adopter of technology and worked as a lab for dissemination of tech into areas that have larger market potential. For auto parts or retail brands, the theory is if it can be done in Lebanon, it can be done in Riyadh or Cairo. So as a test market for the MENA region, Lebanon has been functioning since the second half of the 20th century at varying levels of performance. There is also a history of Lebanese entrepreneurship that has gone to other places to extract resource wealth and then acted as transmitters of that wealth—for example, the Audi’s established business with the Kuwaitis and the Frem’s transferred Western knowhow into Gulf environments. The particular strength and success formula of Lebanese companies has been to take what has been successful in Western markets and translate it to work in the Arab market contexts, re-exporting technologies and managerial skills to where they are needed.

Lebanon has cultural and technological adaptivity and, relatively speaking, a good human capital position, and these could be leveraged into a national function in the digital economy in a context where Lebanon has potential to compete with peers, but not with France, Sweden, China, or the US, in digital capacities. But Lebanon could capitalize on in digital economy relations with countries at a similar level of digital readiness.

However, reports that measure digital readiness and digital competitiveness have not yet shown how digitally ready Lebanon is, but assessing urban development and productivity contexts could create competitive advantages. If Lebanon manages to be an early adopter of digital business structures among other global communities of similar size and capacity, it could become a potent supplier and competitor of high native human capital and high native marketing potential, and the trade heritage of Lebanon could be translated into an economic force for the country.

How can Lebanon make optimal use of these qualities to create a digital turning point and compete in the future global digital economy?

Given the challenges Lebanon faces, it will be up to the next cabinet, once it is formed, to take steps to adopt an all-encompassing digital strategy—including cybersecurity measures and the rollout of e-government to digitize public service provision—that the government said it had prepared in 2018. Should implementation of that strategy begin in 2019, Lebanon will be positioning the economy for the coming decade and beyond.

By Olga Habre


© 2019 All rights reserved Newsmedia SAL

You may also like