An international financial institute expressed cautious optimism Tuesday after the election of Michel Aoun as president, but warned that achieving sustainable growth would prove challenging.
The Institute of International Finance also underlined the importance of the quick formation of a national unity government as this would improve market sentiment.
The report added that there is room for optimism in Lebanon. “After 29 months of presidential vacuum, on Oct. 31 the Parliament elected Michel Aoun, 81 years old, as the new president. His election has been made possible by an endorsement from Saad Hariri, who heads the largest bloc in Parliament,” it said.
It added that one possible outcome of the formation of a Cabinet is better GDP growth in 2017.
“Provided that the political environment continues to improve (including the formation of a ‘unity’ government), investment should pick up. We expect real GDP growth to accelerate to 3.3 percent in 2017, from 1.4 percent in 2016, driven by a modest recovery in private investment and exports of goods and services. The latter could be supported by reopening the blocked trade routes with Syria and Iraq following the defeat of ISIS [Daesh] and de-escalation of fighting in Syria by end of this year or early 2017. We expect the peg to the dollar to be maintained supported by large official reserves of about $40 billion,” the report said.
One of the challenges facing the new government is the reduction of the fiscal deficit. “A new government will face tough challenges from persistently large external and fiscal imbalances. The fiscal deficit remains large at 8.6 percent of GDP in 2016, and the debt-to-GDP ratio continues to rise to 144 percent in 2016, up from 138 percent in 2015. An exit from the debt overhang will require strong fiscal effort and structural reforms to reduce the deficit and create conditions for higher and sustainable growth. The macroeconomic risks from the exceptionally high debt are somewhat alleviated by Lebanon’s considerable foreign assets and support from the highly liquid banking system, which continues to attract sizeable deposits from the Lebanese diaspora,” the report said.
Another important point IIF raised is the importance of increased capital spending in the future: “The government needs to have an adequate level of capital spending to improve infrastructure and prevent its further deterioration and to invest in much needed new investment projects. Capital expenditure ... accounted on average to only 1.7 percent of GDP in 2005-2015, the lowest in the region and among other emerging economies.”
IIF expressed hope that capital spending will be raised to around 3 percent of GDP in the coming years.
“The challenge that the government will face, however, is to find the right balance between substantial increase in capital expenditure and the need to further reduce debt,” IIF said.
The IIF report indicated that the decline in Lebanon’s potential growth in recent years reflects the lack of structural reforms and a decline in the economy’s competitiveness, and is not only attributed to political instability.
Nassib Ghobril, chief economist and head of the Economic Research and Analysis Department at the Byblos Bank Group, stated that “the election of a president and the formation of a consensus government would send a positive signal to foreign investors and could lead to acceleration in the growth of deposits.”
However, the IIF feared that risks to the outlook remain significant.
“Political bickering over the distribution of ministerial posts and disagreement over domestic and foreign issues, particularly the war in Syria could derail policy implementation. On the upside, better prospects for social peace and political consensus could restore investor and consumer confidence,” the report argued.
