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Syria effect

07 December 2011
If Syria sneezes you can be certain that Lebanon will catch a cold and it is no different this time around. Right now Damascus has caught the chills, which has infected Beirut which is suffering from a bout of economic malaise. The International Monetary Fund notes that the Lebanese economy will only eke out a 1-2% growth this year, compared to the 8% annual growth between 2007-10. "After four years of strong growth, Lebanon's economy has lost momentum reflecting domestic political uncertainty and regional unrest," says the IMF in a note on Lebanon. "Growth could increase to 3-4% in 2012. But risks are high and to the downside, reflecting among others an uncertain global and regional environment, particularly in Syria. Thus, strong domestic policies are needed to instil confidence." As a small, open economy Lebanon thrives on the well-being of the region. It relies heavily on remittances from the Lebanese diaspora especially from the Gulf and tourists from the wider MENA region, but with the Arab Spring serving as a great distraction there has been little time to partake off Beirut's nightlife for regional tourists.

"The government collapse in early 2011 and the inability of the designated Prime Minister Najib Mikati to form a new government until June, drove the country into a new episode of stagnation over the first half of the year," notes Blominvest Bank analyst Gaelle Khoury, in a report.

"The economic sluggishness was more intensified following regional developments, particularly from Syria, that clouded further the domestic economic environment through a sharp fall in consumers' and businesses' sentiment."

Bank Audi says that regional disturbances have negatively affected the tourism sector. "The worsening of the situation in Syria also contributed to have a negative impact on Lebanon's tourist activity," says the Beirut-based bank.

Total number of tourists declined 24.4% during the first ten months of 2011 to 1.4 million from 1.85 million during the same period last year. Arab tourists, which comprised 41.3% of all tourists last year, only made up 34% of the total this year.

With the big spenders staying away, tax-free purchases grew only by 8% in the first ten months of the year, compared to 21% during the same period in 2010.
Interestingly, spending by Syrian nationals rose 18%, potentially as a result many fleeing the troubled country.

The Consumer Confidence Index (CCI), published by ARA Marketing Research & Consultancy, fell by 9.24% in October 2011 compared to the same month a year earlier to settle at its lowest level since May 2011.

On a monthly basis, the CCI dropped 12.2% as the domestic and regional political uncertainties as well as the Shura Council's rejection of the Cabinet's wage increase draft weighed negatively on sentiments.
This was reflected by the 13.54% drop in the current security sub-index to 281 points, whereas the sub-index measuring personal income dropped 4.9% to 136 points. However, the economic sub-index increased 14.3% from 175 points to 200 points.

As for the expected economic index (6 months forward), it retreated by 28.73% to 67 points, its lowest level since May 2011, and the expected personal income index fell 15.48% to 71 points, while the expected durable goods consumption index jumped 30% to 130 points, says Blombank.

"On the private expenditure and private investments fronts, indicators point to a weak performance," says Blombank. "Claims on the private sector were down by 4.7% y-o-y over the first half of 2011 and consumption of durable goods, tracked by new vehicle sales, fell by a severe 6.1% to 16,299 vehicles up to June. The growth in the value of cleared checks remained almost flat at 0.2% y-o-y in H1 despite an 11.9% y-o-y rise in their numbers, mostly boosted by interest rates incentives."

REAL ESTATE DOWN
The Syrian effect is making its presence felt in real estate too, which has been traditionally a strong sector given the finite space available and the growing wealth of Lebanese expatriates.

The Directorate of Real Estate showed the number of property sales fell 14.5%% during the first ten months of the year, with purchases by foreigners falling 26.5% during the period.

"The fall in demand for property in Lebanon during the first ten months of this year was coupled with a decline in the value of property sales during the said period," says Bank Audi . "Indeed, the value of property reached USD6,843 million in the first ten months of 2011, down by 10.8% relative to corresponding period of 2010. The average value per property sales in the first ten months of 2011 went up by 4.3% relative to the same period of 2010 to reach USD103,500."

Other economic indicators also pointed to a downward trend. Lebanon's trade deficit widened to US$13.3-billion during the first ten months of the year - up 18.8% compared to last period.

"The key policy challenges are to maintain macroeconomic stability and lay the foundation for a more dynamic economy that leads to inclusive growth, while reducing the country's debt-to-GDP ratio, which is among the highest in the world," says the IMF.



BANKING BLUES
Regional problems are impacting the Lebanese banking sector negatively, says ratings agency Moody's.

"The key drivers of credit risk within this system are slower economic growth, following a sharp GDP deceleration in H1 2011; (ii) downside economic risks due to regional political uncertainty, particularly in Syria; and (iii) the banks' asset and loan exposures to other regional countries experiencing political unrest and/or economic slowdown, such as Egypt and Jordan," says Moody's.

Bank profitability could come under pressure as credit growth and fee-generating income deteriorates. Combined with historically low interest rates and potential upward pressure on funding costs, Moody's expects the slowdown to exert pressure on banks' pre-provision income. At the same time, provisioning charges are likely to rise at least into the first half of 2012, further suppressing net income.

"The Lebanese banking system is highly exposed to Lebanon's sovereign debt (rated B1, stable). Government debt on banks' balance sheets stood at a very high 3.4x the system's aggregate Tier 1 capital at year-end 2010, whilst the wider exposure to the Lebanese government is estimated to have been even higher, at over 6.1x Tier 1 capital. Moody's does not expect a material shift in the composition of the banking sector's balance sheet over the outlook horizon; therefore, the banks' credit risk profile will continue to be closely linked to that of the Lebanese government."

WHAT TO DO
Lebanon needs structural reforms to address infrastructure and business regulations. The country came 82^nd in the Legatum Prosperity Index of 110 countries, and ninth regionally suggesting how far it has to go to become competitive.

The country also came 134^th regionally and 14^th regionally in Transparency International's Corruption Perception Index 2011.

"Addressing high unemployment calls for a more efficient labour market, including by attuning the education system to the needs of the labour market and reforming the social security system. Wage increases should be in line with productivity growth so as to not risk undermining competitiveness," says the IMF.

The Lebanese Businessmen Association recently rejected a proposed wage increases, citing weak economic conditions and the danger of price hikes.

"Lebanon's medium-term strategy should focus on generating sustained inclusive growth while reducing vulnerabilities. Structural reforms are key to tackle the infrastructure deficit and improve the business environment. This would strengthen competitiveness and ultimately have a tangible impact against unemployment and poverty," says the IMF.

But there are some positive developments. The third quarter saw a number of developments such as the allocation of USD1.2 to build a 700 megawatt plant to
rid the country of its chronic blackouts.

"Also, positive advance touched upon the communications sector, with the approval of a bill to initiate faster internet connection speeds and reduce costs. The parliament has also passed the capital market law after five years of wait, which ensures a regulatory framework for the markets, paving way to a potential expansion of activities on the Beirut Stock Exchange," says BlomInvest's says Khoury.

These developments are expected to boost up consumer and business sentiments and drive up the economic performance of Lebanon in spite of ongoing regional disturbance.

SYRIAN CONNECTION
Paradoxically, the Lebanese economy could benefit if Syrian businesses use Lebanon as an 'economic corridor' and bypass the crippling sanctions imposed on the community by the Western community.

The Lebanese government is publicly looking to distance itself economically, with Lebanese Central Bank noting that there were no Syrian assets in the Lebanese banking sector.

Still, the Syrian government has a powerful ally in Hezbollah chief Hasan Nasrullah, which could facilitate Damascus economically.

Blominvest Bank notes that the rise in exports and the heavy orientation of the economy towards the Gulf which is benefiting from relatively higher oil prices and great government stimulus, should help keep remittances and banking sector deposits inflows high, guaranteeing strong external capital inflows for the economy. In any case, the robust capital inflows over the previous years and Central Bank's ample foreign reserves are at adequate levels to serve as a strong cushion against internal and external shocks.

CONCLUSION
Lebanon's economy is in for some headwinds ahead of them. The Central Bank of Lebanon has done well in the previous crisis and the re-election of Riad Salameh as the Governor, which will instil confidence in the country's financial sector.

To be fair, the country has suffered far worse crisis and lived to the tale and there is no reason to believe that the resilient Lebanese businesses will not outlast this crisis. But it's hardly the environment to start building for the long term.

© alifarabia.com 2011