Lebanese economy takes a hit from Syria's problem

Lebanese economy takes a hit from Syria's problem
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Published July 30th, 2012 - 10:50 GMT via SyndiGate.info

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The first half of 2012 saw the deficit climbing 22.5 percent, or around $1.6 billion, to reach $8.71 billion, compared to $7.11 billion in the same period of 2011
The first half of 2012 saw the deficit climbing 22.5 percent, or around $1.6 billion, to reach $8.71 billion, compared to $7.11 billion in the same period of 2011
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Economists and business leaders predict a bleak economic picture of Lebanon this year in light of falling foreign direct investments, plummeting tourism, a widening trade deficit and a war raging across Lebanon’s only accessible neighbor.

“Even in a best case scenario, I do not see growth at more than 1.5 or 2 percent – nearly the level achieved last year,” Nicolas Chammas, head of the Beirut Traders Association said in an interview with The Daily Star.

While the government has reported 5 percent growth in 2011, its figures were contested by the International Monetary Fund, the World Bank and most economists, who estimated it below 2.5 percent. “It seems that all the engines of growth have been turned off,” Chammas lamented.

On the FDIs front, Lebanon has been suffering. The latest data collected by the World Bank show foreign investments fell by more than $1 billion – or 21 percent – hitting $3.9 billion by the end of 2011.

Analysts fear the figure could regress even more this year on growing political uncertainty and fear that the conflict in Syria could spill over to Lebanon. Data on FDI levels in the first half of 2012 has not been made available yet.

“The figures reflect the Lebanese economy losing the relative attractiveness it enjoyed in 2009-10, when it was a safe haven for investments, when many countries faced severe financial crises,” Chammas added.

Tourism has also suffered, shedding 7.7 percent (in the number of visitors) in the first half of 2012. In comparison to 2010, the number of visitors plummeted by a striking 26 percent. But the more devastating loss to the economy is “qualitative, not quantitative,” Chammas said.

The impact of travel warnings issued by several Gulf Cooperation Council citizens has been shocking, scaring away the majority of Lebanon’s most cash-rich visitors.

“Over 95 percent of GCC tourists abided by the travel warnings issued by their respective countries. These tourists are alone responsible for some 45 to 50 percent of tourist spending,” he said.

In May, Bahrain, Kuwait, Qatar and the United Arab Emirates urged their citizens to avoid travel to Lebanon, dealing a blow to the country’s summer tourism season. Saudi Arabia, a major contributor of tourists to the country, followed the move by the end of June.

Although some economists argue that Lebanon’s 22-percent trade deficit increase is caused by a rise in smuggling to Syria, many disagree, pointing out that it signals stagnating exports and soaring costs of imports.

The first half of 2012 saw the deficit climbing 22.5 percent, or around $1.6 billion, to reach $8.71 billion, compared to $7.11 billion in the same period of 2011.

Chammas is also among those who dismiss smuggling as a significant factor in hiking the deficit. A rise in Lebanon’s consumption of oil products combined with higher international oil prices is one factor behind the soaring deficit, he said. The deficit also reflects a wage increase that became effective in early 2012, Chammas added.

“The wage increase instantly increased purchasing power and demand for goods. But Lebanon imports most of its consumption items and the manufacturing base is weak, hence the soaring trade deficit seen in 2012,” he said.

Had Lebanon been able to match production levels to the new demand, this would have probably translated instead into growth, Chammas said. Other economists and experts share Chammas’ negative economic outlook. “These indicators point to a recession. Personally I see little hope for a demand-side stimulus,” American University of Beirut economist Darius Martin told The Daily Star.

Given the tense geopolitical situation, it is very unlikely, even if the U.S. dollar depreciates, that Lebanese would significantly increase spending, encouraging a desperately needed economic revival, Martin added.

While dismissing further deterioration in FDIs, Nabil Itani, head of the Investment Development Authority of Lebanon, does not expect investments to rebound in 2012 given the turmoil in Syria and uncertainty in Lebanon. He said the rising trade deficit reflects increasing difficulties facing Lebanese exporters who now suffer from near closure of Lebanon’s land borders with Syria.

According to Itani, IDAL and the government are in the process of looking for alternative export routes. “But exporting via sea routes is not a readily available option,” he said.

Itani said he hoped in the upcoming weeks the government would conclude talks to find solutions that could include shipping trucks to Turkey, Jordan and Egypt via ferries and ships.

Nevertheless he expressed optimism that many Lebanese investors were more likely to withdraw investments from other countries and therefore help to compensate for the loss in FDIs.

“A return of some of these investments would at least partially compensate for the lack of investments from the Gulf Cooperation Council and foreign nationals. The nationalities [of investors] might change, but we are expecting the figures to remain around their 2011 levels,” he said. However, Jad Chaaban is among a few Lebanese economists who believe FDIs are not necessarily doing good for the Lebanese economy.

Chaaban said that a big percentage of FDIs are being channeled to the very speculative real estate market and contribute only marginally to economic development and job creation.

“In fact we used to see a crowding-out effect, harming productive sectors and the competitiveness of the economy,” he said, hoping investors would now turn to real economic sectors. “I’m cautiously optimistic that deep, protracted economic crisis is avoidable in the short term,” Martin said. “There’s no sign of a run on Lebanese banks, and it’s difficult for statistics to capture the country’s inherent resilience. Let’s hope for the best,” he added.

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