28 December 2011
BEIRUT: The specter of the economic slowdown which loomed over Lebanon this year amid the tense political atmosphere in the country and the regional turmoil will probably persist in 2012 if the factors which contributed to this sharp fall in GDP growth remain unchanged.
Most economic indicators up to the first nine months of this year were extremely negative with the GDP sinking to less than 2 percent, the Lebanese economy’s worst performance for many decades.
Politics, according to most economists and experts interviewed by The Daily Star, was the number one reason behind the decline in tourism, capital inflows, investments, sales and customer bank deposits.
“GDP this year is less than 2 percent, banking growth less than 8 percent, tourism is down by more than 20 percent, capital inflows declined by 20 percent and investments fell by 15 percent. The only thing positive is the stability of the Lebanese pound,” economist Ghazi Wazneh told The Daily Star Tuesday.
Figures provided by the Central Bank show that the balance of payments in the first 10 months of 2011 recorded a deficit of $2.129 billion compared to a surplus of $2.755 billion over the same period last year.
Remittances and capital inflows in the first 10 months of this year fell to $11.2 billion compared to $14 billion in the same period of last year.
The trade deficit in the same reporting period reached $14 billion, although exports saw a small rise this year.
Lebanon managed by sheer coincidence and pure luck to reap great benefits from the global financial crisis and deteriorating situation in some regional countries from 2007 until the middle of 2010.
But the upbeat picture totally changed at the beginning of 2011 when the popular uprising that swept many Arab countries reached Syria, Lebanon’s strong neighbor.
Very few had imagined that Lebanon would end up paying a hefty price if Syria sank into chaos, as many observers had the impression that the regime in Damascus had everything under control.
A quick look at the geopolitical map of Lebanon shows that this small country would be adversely affected if its mighty neighbor Syria faces serious political, security and economic problems.
Against this backdrop, the great number of tourists who normally crossed from Syria to Lebanon shrunk considerably despite the efforts of the Tourism Ministry to encourage Arab visitors to come to the country by plane.
Industrialists and farmers also saw their businesses decline by more than 40 percent due to the political uncertainty in Syria.
To make matters even worse, the divisions among the main rival political groups in Lebanon grew wider and more dangerous amid signs that the government of Prime Minister Najib Mikati was unable to address the pressing needs of citizens.
“There is no sign that the economy will improve next year. As a matter of fact the economy will see its worse performance if the factors which contributed to this decline remain. I wouldn’t be surprised if the GDP fell to zero or achieved a negative growth,” Wazneh warned.
Bank Audi’s report on the performance of the Lebanese economy in the first nine months of this year illustrated the arguments made by Wazneh and other economists.
“Lebanon’s economy reported this year a net slowdown in activity amid growing domestic political tensions and emerging regional politico-security setbacks. On the basis of sluggish real sector performances, international growth forecasts for Lebanon were all adjusted downward. Notwithstanding the few discrepancies among such forecasts, all do point to a weak growth for 2011, after a four-year streak of strong growth when Lebanon figured among the outliers amid sluggish global economic conditions,” Audi reported.
It added that for the first time in almost a decade, Lebanon’s inflows, adversely impacted by domestic and regional political uncertainties, were not able to totally offset its trade deficit, leaving a balance of payments deficit of $1.5 billion over the first nine months.
“The 26 percent decline in financial inflows to Lebanon is tangible proof of the lost opportunity for Lebanon’s economy this year. Lebanon was not actually in a position to capture the capital outflows fleeing from some countries and which mostly took the direction of other regional markets or even the direction of some advanced countries,” Audi explained.
Marwan Barakat, the head of research at Bank Audi was not too upbeat about the prospects of growth in 2012.
“I believe Lebanon’s real economic performance in 2012 is likely to be close to the one prevailing over the second half of 2011, the period that followed government formation in Lebanon and the renewal of the BDL governor’s [term], i.e a moderate real growth in the 3 percent to 4 percent range. The regional turmoil is still likely to continue impacting private investment confidence, with major investment decisions expected to be delayed within an overall wait and see attitude on behalf of private investors, while household consumption is likely to maintain its positive growth despite overall political uncertainties, provided vital support to output,” Barakat argued.
Audi added that at the monetary level, the currency market which had started the year with some pressures, witnessed a relaxed mood over the third quarter of this year, with a net conversion demand from foreign currency holdings to local currency holdings.
“Such an LP demand driven environment enabled the Central bank to replenish part of the lost reserves, with foreign assets reaching a high of $32.1 billion at end-September.
“This year actually reported a noticeable return to debt monetization by Lebanon’s Central Bank, with BDL’s [Lebanese pound] T-bills portfolio reporting a record high of LL17.3 trillion. Such a portfolio is yet more than covered by the [Lebanese pound] CDs portfolio issued by BDL which amounts to LP 26.2 trillion, leaving room for further monetization if need arises,” Audi said.
Louis Hobeika, professor of economics and finance at NDU, told The Star that the economic outlook in 2012 will be much worse than 2011.
“Apart from the regional turmoil and daily political bickering, Lebanon’s economy will be impacted by the eurozone crisis since the country imports most of its goods from the European Union. Exports to these countries will also suffer as a result of the depreciation of the euro against the U.S. dollar,” Hobeika added.
Hobeika said that the current government proved to be incapable to of solving the country’s economic and social problems.
Economists have criticized successive governments for failing to pass a draft budget for six years in a row, warning that Lebanon’s credibility is at stake.
Barclays Capital called on the government to push ahead with an ambitious budget that would tackle the budget deficit.
“We believe that the 2012 draft budget as presented is likely to be revised in light of recent political developments and increasing downside risks to growth. On the revenue side, it anticipates an increase in revenues by 15 percent compared to 2011 anticipated revenues. For that, it suggests raising VAT rates from 10 percent to 12 percent, increasing taxes on interest earned from 5 percent to 8 percent, and imposing a 3 percent tax on revenues from the disposals of real estate assets, among other measures,” Barclays said.
“On the expenditure side, however, the suggested 9.5 percent increase in total spending, and notably the size in investment spending, equivalent to 5.8 percent of GDP, may not be commensurate with line ministries’ absorptive capacities, potentially resulting in inefficient and wasteful spending. Moreover, the draft does not include the anticipated effect of public sector wage adjustment that will follow the imminent increase in the minimum wage, which the government seems likely to endorse soon, estimated at about $800 million,” it said.
Barclays expected that the deficit forecast by the Finance Ministry needs to be adjusted upward.
“Our growth forecast for 2012 (3.6 percent) is also slightly less optimistic than the MoF’s draft (4 percent). Moreover, we remain skeptical about the likelihood of an agreement on the proposed tax measures. First, the VAT hike could face political opposition as it would erode the anticipated adjustment in the minimum wage, which is being negotiated with labor unions and businesses representatives,” Barclays said.
Barclays added that there was also opposition to the proposed tax on disposal of real estate assets and calls for replacing it with a proper capital gains tax, an issue of great controversy between various factions.
“Given these difficulties, and cognizant that pressures to increase spending are mounting amidst a low growth environment, we have increased our 2012 fiscal deficit forecast from 8.5 percent to 9 percent of GDP. This is likely to keep government debt-to-GDP ratio at 131 percent of GDP, as the primary surplus is expected to shrink from 2.5 percent of GDP in 2011 to 1.2 percent of GDP in 2012 on the back of expectations of rising wages and salaries,” the report said.
Wazneh said that the government must come up with new innovative ideas to replace the VAT taxes to generate more revenues. “The government can for example raise taxes on profits from 15 percent to 25 percent. This will not hurt the economy nor the banks and companies,” he said.
Wazneh and other economists called on the government to raise taxes on real estate sales despite the opposition of some groups, stressing that investors will not shun Lebanon if property taxes rise slightly.
Copyright The Daily Star 2011.
