23 March 2011
BEIRUT: Standard Chartered Bank has forecast a real gross domestic product growth rate of 5.5 percent for Lebanon in 2011, indicating a decline relative to the 7.5 percent real GDP growth in 2010 and to the 8.5 percent average growth over the past three years, on the back of strong growth in aggregate demand, construction and financial services. The briefing was published by Bank Audi’s Lebanon Weekly Monitor.
Standard Chartered indicated that the last quarter of 2010 and the first indicators of 2011 point to a slowdown as a result of adverse political developments: Tourist arrivals were 4.5 percent lower year-on-year for the first two months of the year. Also, a paralysis in government is likely to lead to a slowdown in government capital spending, as compared with 2010.
Nevertheless, Standard Chartered emphasized the resilience of the Lebanese economy, supported by continued confidence in its banking system (ongoing deposit growth, albeit at a slower pace) and faith in the central bank’s ability to maintain the U.S. dollar peg and pursue an orthodox approach toward the substantial public debt-to-GDP ratio, which was reduced to 133 percent in January from 150 percent a year previously.
The briefing indicated that despite challenges, the dollar peg and the country’s debt dynamics should be safeguarded. Standard Chartered noted that with $41 billion in FX plus gold reserves in January 2011 – equivalent to 100 percent of GDP – the Central Bank has the means to defend the peg and that it allegedly did so after the January political crisis to keep the Lebanese pound within its trading band with the dollar.
In addition, commercial banks’ total deposits represent 275 percent of GDP, and almost all of these deposits are held by residents, non-resident Lebanese or other Arabs with vested interests in Lebanon, enabling the safe financing of public debt and the government deficit.
Fiscal policy will continue to be defined by a deteriorating fiscal balance, mainly owing to lower tax collection (because of lower growth), according to the briefing.
However, constraints on government spending – owing to political paralysis – will maintain a low deficit, which Standard Chartered estimates at 9.5 percent of GDP. The government would continue to support the currency peg, which means interest rates would tend to track U.S. rates, while the central bank would maintain the deposit-rate differential between the USD and the LBP in order to encourage de-dollarization.
Standard Chartered does not subscribe to the theory of a real estate market bubble, even if some market segments could be heading for a mild correction. The bank noted that the top end of the market could face higher vacancy rates, but developers’ profitability is sufficiently strong that there is no need to resort to fire sales, triggering a sudden price collapse, and the smaller and mid-range apartment segments are still undersupplied. Property demand has been strong thanks to pent-up domestic demand after years of political instability, ongoing purchases by wealthy non-residents, and growing demand from foreigners (mostly Arabs).
Finally, Standard Chartered does not expect a market-wide correction soon, based on fundamental geographical constraints, the limited availability of desirable plots and a regulatory limit of 60 percent bank financing. – The Daily Star
Copyright The Daily Star 2011.
