28 March 2011
BEIRUT: Barclays Capital has projected Lebanon’s real GDP growth at 5.5 percent for 2011 compared to 7.5 percent last year.
The inability of political factions to agree on the formation of a new government is starting to weigh on the country’s economic outlook, the bank has said, according to a report in Lebanon This Week, the economic publication of the Byblos Bank Group. Economic challenges are increasing and risks are likely to rise, according to the bank.
Barclays indicated that domestic political uncertainty, along with the rise in geopolitical risks in the MENA region, the absence of a government, and the constant political wrangling have led to a policy void, institutional paralysis, and a lack of direction or timeline for much-needed fiscal and economic reforms.
It noted the current political stalemate is weighing on economic activity, as the Central Bank’s coincident indicator slowed in the last quarter of 2010, reflecting receding activity in real estate, tourism, and a slowdown in consumption as indicated by softer growth in VAT receipts and customs revenues.
Barclays considered that increased political uncertainty in nearby Arab countries and its negative effect on growth prospects are adding to the complicated domestic picture.
It noted that the destination of more than 50 percent of Lebanese exports is towards nearby Arab countries, especially to Egypt, Saudi Arabia and the UAE, also the main sources of foreign direct investment and tourism to Lebanon. It considered that weakening economic growth in Egypt and rising risks in the GCC, as well as an increasing tendency to employ nationals and rely on local companies across the region, could negatively affect Lebanese expatriates and companies dependent on these economies.
In parallel, it said rising global food and oil prices pose significant inflationary and fiscal risks. It stated that rising global prices will negatively impact Lebanon’s import bill and current account deficit, as well as the government’s budget. It noted that higher oil prices will raise the value of the transfers to Electricite du Liban, which will be compounded by the effect of the government’s recent decision to lower the import tax on gasoline by 57 percent, at a cost of around 1.5 percent of GDP.
Barclays Capital expressed concerns about the possible reversal in debt-sustainability trends despite improved fiscal indicators. It said the total primary surplus increased by 11.6 percent and was equivalent to 3.3 percent of GDP in 2010. It noted, however, that capital spending remains relatively constrained and far below the levels required to upgrade and modernize Lebanon’s infrastructure in the energy and transport sectors, where bottlenecks affecting growth are most acute.
Barclays said its base-case scenario is that a new government will be unable to ratify a budget without agreeing on the financing of the Special Tribunal for Lebanon. Accordingly, investment spending looks likely to remain at existing levels, with current spending rising further, bringing the deficit to around 8.2 percent of GDP this year up from 7.5 percent of GDP in 2010. It pointed out that the risks to the favorable debt dynamics are a slowdown in economic growth and a declining primary surplus, as a new government could increase current spending. – The Daily Star
Copyright The Daily Star 2011.
