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Lebanon 2013 | ECONOMY | REVIEW: ECONOMY

While regional instability has had an impact on Lebanon's economy, the country has shown its investors its true flexibility.

Although the Arab Spring had at first seemed to pass Lebanon's economy by, the local business community has battled to overcome the effects of strife in neighboring Syria of late, through which the majority of Lebanese exports traditionally travel. The result has been a slack investment environment and sluggish growth, impacted mainly by a drop in domestic spending as consumers hunker down. Following 1.4% growth in 2012, the Banque du Liban (BDL) growth target of 2.3%, set earlier in 2013, looks increasingly more difficult to achieve, according to a World Bank report released in June. The country's trade volume grew 0.4% in 1H2013, with imports posting a contraction of 0.8%, due to a drop in mineral imports, and exports rising 6.5%, with ports posting an increase in activity—the Port of Beirut alone posted a 70.6% year-on-year increase in activity—as exporters seek alternative ways to get their goods to market in the face of a Syrian border on near shutdown. On a positive note, the general deceleration across the economy resulted in inflation abating mid year, with the Consultation and Research Institute reporting a rate of 3.7% between June 2012 and June 2013. While the real economy has been a mixed bag, with some sectors, such as construction and tourism, posting a decline over 1H2013, the banking sector, often the bulwark of the Lebanese economy at large, reported a 4% increase in activity in 1H2013, with lending to the private sector increasing by 3.2%, according to Bank Audi. While investor confidence looked unshaken in 2012—FDI reached $3.78 billion for the year, up 8.5% on 2011—the Investment Development Authority of Lebanon (IDAL) has warned that FDI could fall by 21% by end-2013 as a decisive conclusion to strife across the border fails to emerge. While Lebanon looks unlikely to slip into recession, regional instability will continue to keep wallets in pockets and the government, which desperately needs to put its own house in order, in a state of suspended animation.

THE DEVIL'S IN THE INDICATORS

Lebanon's GDP grew 1.4% in 2012 and reached a value of $42.95 billion. The slowdown continued over 1H2013, likely impacted by a drop in private spending and the resulting drop in imports. Spending has been supported somewhat by the presence of Syrian refugees, who now officially number upward of 700,000, but this has been insufficient to encourage the continued commitment of investors to the domestic market.

Inflation, recorded at 3.7% between June 2012 and June 2013, abated slightly due to the economic slowdown in 1H2013. The consumer price index (CPI) points to price increases in food and beverages, healthcare, and education, while the consumption of luxury goods, often associated with the Lebanese tourism industry, is in decline, with a Bank Audi report suggesting a 19% decrease in luxury imports and growth of 1% in mass consumption imports over 1H2013 due to a fall in visitor numbers and the swelling refugee count.

Remittances, a crucial part of the economy thanks to Lebanon's large diaspora, have not dropped off according to a World Bank projection, coming in at around $7.6 billion in 2013, up 4.4% on 2012. This is following a slight contraction in 2011 and could be good news for the real estate sector if the trend continues, in light of sales to foreigners dropping 8.6% year on year in 1H2013.

Pinning down the unemployment rate remains a challenge, however, with a September World Bank forecast suggesting it will double to 20% in 2014. Lebanon-based economists, on the other hand, claim the current rate is a much higher 15%, above the 10% in published statistics. The influx of refugees will increase the labor supply and, most likely, encourage an increase in informal work as a part of total employment.

WHAT'S IN THE KITTY?

Economic woe has resulted in a blow to the public debt to GDP level, which had been improving in recent years. The figure stood at 137.5% in June 2012 and rose to 140.9% in June 2013, with the end-2013 figure to come in at 141.3%, according to the IMF, up from 139.5% at end-2012. Lebanon's fiscal deficit is set to account for 9.7% of GDP by end-2013, according to IMF estimates, the highest it has been since 2008. The public deficit stood at $782.6 million in 1Q2013, 17% higher than the same period in 2012. Revenues dropped 4.8% year on year in 1Q2013, and stood at $2.2 billion. This was a result of a drop in tax and non-tax revenues, according to Bank Audi. There was an 8.1% decrease in VAT revenues, coupled with a 6.7% decrease in miscellaneous tax revenues, resulting in an overall decrease of 5.6% year on year. The decline in non-tax revenues can be explained by an 11.5% year on year drop in income from public institutions and properties, as well as a 10.9% drop in administrative fees and charges. As long as external security issues continue, the Lebanese government is unlikely to hear positive news on the fiscal account side.

LET'S GO OUTSIDE

Lebanon's trade volume practically stagnated in 1H2013, expanding by a mere 0.4% to $13.1 billion due to a slight contraction in imports and an impressive increase in exports considering the circumstances. Imports contracted 0.8% in 1H2013 compared to the same period in 2012. There was a drop in mineral exports, which represented 30% of total imports in 1H2012 and 25% in 1H2013, of 17.3%, while non-mineral imports grew by 6.4%.

Exports are where the story is, however, with many of Lebanon's outbound goods finding new routes into foreign markets. Exports grew 6.5% in 1H2013 compared to 1H2012, totaling $2.3 billion. The Port of Beirut posted a 70.6% increase in exports in 1H2013, while ports in Tripoli and Sidan also announced increased activity. This is compared to exports through Rafic Hariri International Airport, which were down 27.2% year on year in 1H2013, as the sea became the preferred export route in order to bypass the Syrian border. That being said, Syria is still Lebanon's biggest export market, with sectors such as agriculture moving more products into Syria due to domestic production shortfalls—agricultural exports to Syria registered a monthly average increase of 16.1% in 1H2013. In 1H2012, $126 million worth of products were exported to Syria, a figure that grew to $391 million in 1H2013. Exports to Syria accounted for 17% of the total over the first half of the year, while exports to Switzerland, Iraq, the UAE, and Saudi Arabia, which accounted for 27% of total exports, dropped by 14%. Exports to Lebanon's remaining trade partners also fell 1.5% over the period. Lebanon's current account deficit stands at $8.5 billion as of 1H2013, down slightly by 2.7% year on year, which can be considered something of a consolation.

KEEPING IT REAL

The banking sector remained solid over 1H2013, albeit with only moderate growth. The same cannot be said for the real sector, however, which struggled in several areas. For the banks. there was a 4% increase in activity, reaching $157.9 billion, when measured by the total domestic assets of banks operating in Lebanon. Private sector lending grew by 3.2%, slower than the previous year by 59% as the appetite for risk drops due to uncertainty. The equity markets continue to suffer, however, with the Eurobond market displaying price declines and the equity market also registering price contractions, according to data from Bank Audi.

In terms of the real sector in 1H2013, there was a 16.2% drop in construction permits, an 8.2% decline in property sales, a 4.9% decrease in electricity generation, and a 12.6% fall in the number of tourists. On the plus side, agricultural exports grew by 34.4%, while industrial exports also grew by 5.4%, with the industrial trade deficit falling to $7.5 billion in 1H2013 compared to $7.9 billion in 1H2012. One-fifth of industrial exports were destined for Syria, with demand falling mainly into the chemical products, plastics, machinery, and electrical equipment categories. These positives are helping to alleviate stress on the economy, resulting in slowed growth rather than contraction. While the BDL set a target of 2.3% growth for the year, the result could be difficult to achieve before the fog of uncertainty begins to lift and the government can start to plan for the future. Until that time, investors will watch from afar, tourists will seek alternative destinations, and exporters will continue to adapt to the complex environment as only the Lebanese know how.