29 December 2010

BEIRUT:  Burdened with a paralyzed government, political rivalries, $50 billion in public debt, budget dilemmas  a rickety infrastructure and the looming threat of an all-out conflict after the imminent indictment by the Special Tribunal of Hizbullah members, Lebanon’s prospects in 2011 still manage to  get the thumbs-up from most bankers and investors.

Bankers will immediately justify their stance by saying the country is resilient, flush with cash and has always managed to cope with wars and global financial crises.

Even rating agencies and international financial institutions, based on interviews conducted by The Daily Star, were cautiously optimistic about the economic prospects in 2011 although they felt the political standoff could affect growth if the government were to collapse. But this negative scenario, according to these agencies, is highly unlikely.

And the activity in the country supports that view.

Most malls and restaurants in Beirut and Mount Lebanon were flooded with thousands of customers before and after the Christmas season. Even hotels reported high room-occupancy ratios, which at certain points exceeded 90 percent.

Meanwhile, the number of tourists to Lebanon, according to the Tourism Ministry, surpassed 2 million visitors before the end of this year.

All of these indicators show that most Lebanese pay little attention to rumors that all hell will break loose of Hizbullah is implicated in the assassination of former Prime Minister Rafik Hariri.

BLC Finance chairman Shadi Karam is one of the bankers and investors who brush off talk of negative scenarios.

“Why do we talk about the panic in the market? Look at the restaurants that are filled with customers. This shows the Lebanese are not panicking,” Karam told The Daily Star.

He added that Lebanese have dismissed reports of an imminent crisis and this was clearly visible in many places.

Karam himself was not too concerned about the possibility of a paralysis in Cabinet. “The government is already paralyzed because the ministers have failed to agree on anything,” he said.

March 8 ministers have refused to discuss any item on the agenda unless the issue of the “false witnesses” is voted on, a demand totally rejected by both President Michel Sleiman and Prime Minister Saad Hariri.

“The quality of work the government is doing and the quality of some ministers we have, I would say that this paralysis is paradoxically a good thing for the Lebanese economy,” said Karam.

Citing an example, he said that if the government approved the 2011 draft budget, which was submitted by Finance Minister Raya Haffar Hassan, then the economic picture would have been even worse.

“We negotiated with her [Hassan] for three months to remove some of the items which called for taxes on properties and other types of taxes. If these taxes have passed then this would have negatively affected growth in the country,” he said.

He projected the economic growth in Lebanon in 2011 to range between 7 and 8 percent even if the situation did not change and provided no serious security setback takes place next year.

Karam argues that the drop in the dollarization in bank deposits will be a blessing for the economy.

“Every 2.5-3 percent drop in the dollarization of bank deposits will help the economy to grow by half or three-quarter percent,” he said.

Echoing similar views, Louis Hobeika, professor of economics and finance at the University of Notre Dame, projected growth to remain in the boundaries of 6-7 percent in 2011.

“I don’t foresee any serious problems next year but at the same time some of the economic problems we have may become worse if no action is taken,” Hobeika said.

He noticed that prices of properties in most parts of the country have frozen in the past few months due to the oversupply in the market.

“I believe that the real-estate market is heading for a correction [a drop]. There are many vacant apartments outside Beirut and sooner or later the developers will be obliged to sell at lower prices,” Hobeika said.

Several real-estate developers told The Daily Star that property prices will either remain stable or drop in the future as demand for housing will decline.

The developers and brokers admit that the demand for luxurious apartments have nearly stopped because the prices have become simply exorbitant 

Hobeika stressed the importance of revising the economic priorities in Lebanon to help sustain growth in the future. “Lebanon is probably one of the few countries in the world where industry and agriculture represent [just] 12.5 percent of GDP]. Even Switzerland, which boasts of relying heavily on banking and services sector, industry and agriculture represent more than 20 percent of the country’s GDP,” he added.

The vice president of BLOM Bank, one of the two largest banks in terms of total assets and size of profits, stressed that banks are able to counter all the challenges in 2011.

“I think the performance of the Lebanese banks in 2011 will be good,” Saad Azhari was quoted by news media as saying.

But Azhari warned that the real problem is the budget deficit, which accounts for 8-10 percent of the country’s GDP each year, or close to $3 billion.

“One way to solve this problem is to ration government spending and most notably the deficit in the electricity sector and to improve revenues through the adaptation of a fair and efficient tax system,” Azhari said.

He noticed that the total debt-to-GDP ratio in Lebanon has fallen and expected this ratio to reach 135 percent of GDP in 2011.

Copyright The Daily Star 2010.