While other regional economies tottered in the wake of the global financial crisis, Lebanon was quietly racking up some record years of growth. Lebanon has long been celebrated for its laissez-faire approach to business, a tradition that has made it a rarity in a region known for more interventionist state policy. In addition to the strictly enforced nature of banking secrecy, the lack of restrictions on capital movement and foreign exchange make it a growing world financial services hub. Lebanon’s population of over 4 million is boosted in terms of its economic profile and global impact by the 12 million or more Lebanese in the diaspora around the world, who form the bulk of FDI and deposits flowing into the country, whether in the form of investments or deposits. Understanding the relationship between the two is key to appreciating the strength of the local economy in the face of challenges that would flummox the average nation.
In the worst years of the global financial crisis, 2008 and 2009, Lebanon posted GDP growth of 9.3% and 8.5%, respectively. Although growth slowed to 7.5% in 2010, political uncertainty in the first half of 2011 saw GDP growth stall to a forecasted 1.5%, according to IMF estimates. Citigroup, however, projected real GDP growth for 2011 at a slightly higher 2.8% in August, though converged on a consensus figure of 3.5% for 2012, mimicking the projections of the IMF and close to those of Barclay’s Capital (3.6%). The World Bank estimated the size of national GDP at $39.2 billion for 2010. Lebanon’s growth slowed in 2011 as a
result of local political stalemate over the first half of the year and spillover issues related to the Arab spring, although the second half of the year is looking to make up for some of the ground lost.
Inflation has been kept in check, with some estimating that up to 70% arrives directly from imports, due to the heavy import dependence of the country. CPI was measured at 4.8% in 3Q2011 in y-o-y terms, marginally up on the 4.8% recorded for FY2010 and 3.4% over 2009 by Lebanon’s Central Administration of Statistics. The Lebanese pound (LBP) has maintained a close peg to the US dollar since 1999, roughly at the LBP1,500:USD1 level.
MIND THE DEBT
Lebanon’s gross public debt came in at $52.5 billion at end-1H2011, signifying a debt to GDP ratio of some 130%. The domestic portion of the gross public debt was $31.8 billion, while external debt came in at $20.7 billion. Although such high figures would raise flags for most economists, Lebanon has the luxury of high deposit levels in the local banking sector, estimated at some $165 billion by the Banque du Liban (BDL) mid-2011, well outstripping both national debt and GDP combined. It is this ratio that serves to keep the Lebanese economy stable even in the most trying of times. Lebanon has managed to maintain solid foreign currency ratings from the main agencies, with S&P giving B+, Moody’s B1, and Fitch B stable.
State spending remains a hot issue in Lebanon, and the new Mikati government has stated its intent to rein in fiscal policy. Overall government expenditures in June 2011 were up 7.3% in year-on-year terms, according to Ministry of Finance figures. The fiscal deficit for the period was measured at $865.3 million in the first half of the year, and was equivalent to 15.4% of the total budget. The figures as stated assumed the inclusion of $704 million in telecoms revenues, though the transfer of these funds is dependent on their release by the relevant ministry. In line with Lebanon’s heavy debt burden, debt servicing accounted for 33.8% of all government expenditures over the period, and made up 36% of budgetary spending. The primary balance managed to post a surplus of $1.13 billion for 1H2011. Revenue collections have improved over the past few years following the introduction of a VAT tax. One of the larger drains on the government’s books is Électricité du Liban (EDL), which is projected to account for $2 billion of the state budget. This figure is likely to rise following cabinet approval of a $1.2 billion investment in the electricity sector, which will be phased in over the coming three years, to boost generating capacity.
Lebanon’s economy is dominated by its services sector, which makes up for near 80% of GDP, with the banking sector alone estimated to represent nearly half of that figure. Tourism is the next largest player in the service economy mix, depending on the year, making up for up to 10% of GDP, while industry sits on roughly 15%, and agriculture makes up some 5% of GDP. The cyclical nature of the tourism industry and its heavy dependence on regional stability make it vulnerable to external shocks, though recent history demonstrates that it has strong rebound potential.
The economy remains heavily import dependent, with the current account running a deficit of $9.42 billion in 2010 according to 1H2011 BDL estimates. The main imports include oil and mineral products, manufactured goods, and foodstuffs. The top five sources of imports over 2010 were, by order of magnitude, the US, China, Italy, Germany, and France, while its top five export destinations included Switzerland, the UAE, South Africa, Iraq, and Saudi Arabia, with the precious or semi-precious stones and metals category topping the list at $1.11 billion over 2010, according to the BDL.
In the first half of 2011, industrial exports were up 3% in year-on-year terms to $1.7 billion, with precious or semi-precious stones and metals accounting for 22.1%, base metals at 18.1%, and machinery and mechanical appliances making up for 16% of the figure, with just over one-third of all exports going to countries in the MENA region.
THE FDI COMPONENT
The World Bank estimated that FDI inflows worth $4.95 billion arrived in 2010, up marginally on the $4.8 billion recorded over 2009. Such flows contributed some 12.6% to national GDP in 2010, and remain relatively immune to external shocks as they are largely made up of remittances or remittance-type investments, such as in the local real estate sector. However, as a result of overspills from the Arab spring, the Arab Investment, Export and Guarantee Corporation (AIEGC) estimated that FDI would fall to $3 billion over 2011. Early indications are that while FDI levels are weaker over 2011, the core remittances segment that underpins FDI numbers is still showing signs of steady growth, and thus a figure closer to $4 billion is more likely.
A key recipient of remittance income, Lebanon’s real estate sector has seen strong growth as a result of the adjustment of reserve requirements of the banks to encourage the extension of mortgages denominated in Lebanese pounds. Interest in the real estate sector has been primarily sourced from expatriates, local residents, and GCC investors, with many seeing Lebanon as an ideal location for summer vacations. Over the first half of 2011, construction permits have risen by 5% to 8.8 million sqm in year-on-year terms, with cement deliveries also up 2.7% over the same period to 2.7 million tons, indicating the robustness of the construction component of the economy.
The economy has been built very much on public confidence in key institutions, especially the BDL, as well as the international connectivity that Lebanon’s diaspora population provides to the home economy. While such core strengths remain, Lebanon’s economic development over the medium to long term will see an increasing emphasis on the services sectors, and recent moves to improve the internet and telecommunications network may reveal even more hidden gems within the economy.
© The Business Year