The full impact of the civil war in Syria is starting to be felt in Lebanon. While President Michel Suleiman had hoped the country could remain neutral even as the Syrian conflict escalated, it was only a matter of time when Beirut was dragged into the conflict.
"Lebanese political factions, including those allied with Damascus, will resist any attempt by the Assad regime to 'export' the conflict to Lebanon," noted Oxford Analytica. "However, their political compact is coming under increasing strain, and the risk of a new civil conflict in Lebanon will increase as the Syrian government collapses."
Last week, Saudi, Qatari and Emirati governments issued travel warnings and advised their nationals to leave the country, citing fears of kidnappings in response to hostage-taking of Lebanese and Iranian nationals by Syrian rebels.
"The alert was issued after the UAE Embassy in Beirut had received information about the UAE nationals being targeted and because of the difficult and sensitive circumstances in Lebanon," Undersecretary of the Foreign Ministry Juma Mubarak Al Jenaibi told WAM, the Emirates state news agency. "Travelling to Lebanon currently may be dangerous for UAE nationals."
Lebanon, which remains divided between supporters of the Syrian regime and those of the various Syrian opposition groups, has found it difficult to remain neutral in the conflict and some fear it could be the next playground for warring Syrian factions.
Media reports suggest many regional states are covertly using Lebanese bases to support Syrian opposition groups, which could lead to retaliation from Syrian President Bashar Al Assad's regime.
This is what analysts had feared. In July, Fitch ratings agency had affirmed Lebanon's B rating on substantial and rising foreign exchange reserves, lower debt levels, and reduced interest costs, relative to the previous decade, mitigate the downside risks to political stability, growth and public finances in 2012, but had warned of instability which could lead to downgrade pressures.
"The already low rating embodies a degree of tolerance for political volatility," noted Fitch. "However, a major and sustained outbreak of conflict resulting from either internal sectarian strife or a spill over of tensions from neighbouring Syria could put the rating under negative pressure."
The risk of sustained deposit flight prompted by political instability is the primary risk to Lebanon's rating. "Currently, there are no signs of this, and when deposits have fallen in the past, the fall has proved temporary," the ratings agency had said hopefully just a month ago.
Even though the country has brought down its debt to GDP ratio from 180% six years ago, they still remain high at 135%, making the country especially vulnerable at a time when investors are steering clear of highly-indebted countries.
CMA Datavision, which tracks sovereign indebtedness, believes after Egypt, Lebanon is the second most likely Middle East country to default.
But the politicians have moved, passing the 2012 budget after months of bickering.
"It is worth noting that the government ratification of Lebanon's 2012 budget proposal comes with the current global atypical environment where public debt and deficit woes rise on the top of the radar screens of global investors, which makes the issues of avoiding public finance drifts among the top priorities, knowing that Lebanon's indebtedness ratio remains in the top decline of countries around the world," said BankAudi in a note to clients.
The debt crisis comes at a time of great political disorder around Lebanon. Even though the Hizbollah-led government is closely aligned to the Assad regime, the banking sector and the Lebanese government has been careful to respect sanctions on Syria, for fear that western countries may impose sanctions on the country itself.
Figures from the banking sector confirm the view. The top three Lebanese banks have withstood local political instability, regional issues and global economic lethargy - at least for now.
"This can be observed through their unaudited results reporting an aggregate of $475.67-million during the first half of 2012," said BlomInvest Bank in a note to clients.
"Results during the first six months of 2012 demonstrate the ability of Lebanon's three largest banks to properly manage challenging operating conditions, building on their rich experience in the local market which endures an unstable political and economic environment."
Central bank assets rose to reach nearly USD75-billion by the end of July compared to USD68.5-billion during the same period last year. "BdL (Banque du Liban or The Central Bank of Lebanon) foreign assets (excluding gold) slid by a monthly 0.4% to stand at $35.21 billion, while the value of gold reserves increased by 3.4% to $14.98 billion, as the international price of gold rose to $1614 per ounce," estimates BlomInvest Bank.
Other sectors of the economy are showing signs of strain - expect growth to falter. Tourism has already declined 8% year to date and with Gulf citizens probably staying away after the travel advisories, that figure could fall further.
Figures show that arrivals at the Rafic Hariri International Airport were up nearly 12% in the first half compared to the same period last year, but that number masks the rapid growth in the first quarter and the downward trend which dominated the second quarter. Arab visitors rose 7% during the first half of the year, but failed well short of the double-digit growth recorded in previous years.
Defiant Lebanese expatriates aside, the tourism season may be a victim of the rising conflict. Media reports says seven people were killed on August 21 in Tripoli, apart from more than 100 wounded as Lebanese gunmen clash with supporters of the Syrian regime.
Construction, a cornerstone of the Lebanese economy is also showing signs of strain. Construction permits fell to their lowest level in three years, down 14.7% over the past year in terms of square metres, according to Order of Engineers in Beirut and the North. The number of permits also fell 7.5% in the first half, compared to the same period last year. Key areas such as Mount Lebanon were down 35%, Beirut 14% and Nabtiyeh 52%.
However, property sales have remained resilient, at least for now, although it may catch up with a slowdown in construction permits. Nearly USD4.15-billion worth of property sales transactions were conducted in the first five months of 2012, compared to USD3.85-billion, according to the General Directorate of Land Registry and Cadastre. Although transactions rose in value, volumes declined 8% year-on-year.
Meanwhile, Lebanon's trade deficit is widening at an alarming rate. Bank Audi research shows the deficit rose 22.6% year-on-year to reach USD8.7-billion in the first six months of the year, following a 10% increase a year before.
"During the first half of 2012, the combination of a higher import cost bill, a challenging global business and the intensification of the crisis in neighbouring countries largely contributed to further widen the trade deficit to new highs, thus putting additional pressure on Lebanon's external accounts," says Marwan S. Barakat, one of the co-authors of the BankAudi report on the Lebanese economy.
Imports grew by 17.9% over the period, moving from USD9.2-billion in the first half of 2011 to USD10.9-billion in the same period of 2012. Meanwhile, exports grew by a paltry 2.4% over the period to reach USD2.20-billion in the first half of 2012 compared to USD2.1-billion in the same period last years.
Despite these negative figures, the overall economy has managed to keep its head above water. GDP grew 3% last year, according to World Bank estimates, compared to the robust 7% growth in 2010. The bank expects forecast to grow 3.6% in 2013 and 4.5% in 2014.
"The economic impact of increased political tensions has so far mainly been felt in lower growth, whilst key financial variables - FX reserves and banking system deposits - continue to rise and the public debt ratio declined again in 2011 to 135% of GDP," notes Fitch.
SYRIAN REFUGEES & THREATS
Lebanon also has to contend with at least 30,000 Syrian refugees that have fled the civil war in their country.
More important than the figures, the war of words within Lebanon has escalated.
"When our country is attacked, we will not wait for permission from anyone," said Hezbollah Chief Sayyed Hasan Nasrallah, responding to an Israeli threat to Hezbollah if it takes control of Syrian chemical weapons.
"We know of certain targets that can be hit by a small number of precision-guided missiles that would turn the lives of hundreds of thousands of Zionists into hell," noted Mr. Nasrallah, according to Daily Star report.
U.S. President Barack Obama has also waded into the conflict, warning Syria not to cross the 'red line' of attempting to deploy or use chemical weapons.
"We cannot have a situation where chemical or biological weapons are falling into the hands of the wrong people," Mr. Obama told reporters.
CONCLUSION
With Lebanon being engulfed in the Syrian conflict, the economy is likely to suffer. It seems that every time the country looks to pick up the pieces, it gets embroiled in another war.
But BankAudi believes in order to set the country back on the right footing, the government will need to employ 'drastic structural reforms' to bring the debt down and ensure a soft-landing for the country.
For now, the country, like its bigger, more volatile neighbour, looks to be heading towards a much harder landing.
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