STAY STRONG

Lebanon 2015 | DIPLOMACY | YEAR IN REVIEW

While the economy remains well grounded due to the continued inflow of remittances and its solid financial system, the Lebanese public is increasingly showing its frustration at continued political deadlock.

For Lebanon, fate has often been a cruel mistress. Personified, the country wouldn't look out of place as the lead in a Greek tragedy; having gotten back on track following the 2006 Lebanon War between Israel and Hezbollah, crisis in Syria has stretched public services to breaking point as the country struggles to support the over 1 million refugees in the country. Summer then welcomed fresh strife, when frustrations over political stagnation came to a head as the authorities failed to tackle a refuse crisis, resulting in public protests that even the most disengaged observer could see was about more than just the mounting piles of rubbish on the streets.

A fundamental disagreement between the two main coalition parties—the March 8th Alliance, supported by Shia Iran, and the March 14th Alliance, with foreign endorsement from the West and Saudi Arabia—over which side to back in neighboring Syria's civil war means Lebanon has been sans President since April 2014, having failed on 15 occasions to elect a new head of state. Cast an eye over the economy, however, and it becomes clear that no amount of political foot dragging will slow things down for long.

According to the IMF, the Lebanese economy is set to grow 2.5% in 2015, up from the 2% growth seen in 2014 and 0.9% in 2013. Foreign reserves stand at $38 billion, while debt-to-GDP has exceeded 145%, in line with a widening of the fiscal deficit, predicted to reach 10.8% of GDP by end-2015 as the influx of refugees puts pressure on state finances and pushes Lebanese workers out of the informal sector.

The country also runs a current account deficit, which in 2014 stood at -24.9%, expected to narrow a tad to -22.2% this year. While appearing alarming at first, driven by Lebanon's high dependence on imports, the deficit is somewhat covered by capital inflows, propelled mainly by remittances made by the hefty Lebanese diaspora and the spoils of commercial banks operating abroad.

The import bill has made for more pleasant reading of late, however, thanks to the fall in oil prices; in 2012, oil imports ran up a price tag of $5.9 billion, or 27.6% of total imports. Just three years later, with prices nearly half of 2012's $111.67 average price for a barrel of Brent crude, the national bill for oil imports could fall by up to $2 billion in 2015. Ever untrusting, however, public observers in the country have suggested that cheaper oil imports will only benefit utility firms. Further into the future, however, Lebanon itself could become a significant exporter of hydrocarbons, following seismic data that suggests offshore energy reserves include more than 120 trillion cubic meters of natural gas, with a Global Risk Insights report suggesting extraction could yield $100 billion over the next two decades.

Back to the financial sector, and with the Lebanese pound pegged to the dollar, the banking industry remains well capitalized and the bedrock of the economy at large, mainly thanks to the central bank (BDL), which has maintained a prudent fiscal policy framework. As of early 2015, assets in the banking sector stood at $176.6 billion, up 0.9% from December 2014, while bank deposits climbed 6% to $151 billion at end-2014 with a dollarization ratio of 65.7% The BDL is also keen to maintain lending to the private sector, which is considered the engine of the economy in absence of an organized government. Thanks to incentive packages, loans made to private entities were up 7.5% YoY by end-January.

The business community's response to the Syria crisis has also been fascinating, with various industries finding new avenues of growth in a difficult environment. Most surprisingly, tourism picked up over 2014 as arrivals grew 6.3%, following a drop off of 6.7% in 2013, according to the World Bank. Then, in the first five months of 2015, the number of visitors came in at 524,334, up 18% from the same period in 2014. And in case you were wondering who is choosing to visit Lebanon in spite of security concerns in the wider region, the figures suggest the country still wields broad appeal, with the number of Arab tourists up by 19%, Europeans by 15.3%, Americans by 17.3%, Africans by 43.6%, and Australians by 29.4%.

Elsewhere, cement deliveries fell 5.4%, which can only suggest challenges in sourcing as, on the contrary, construction permits rose by almost 5%, having dropped by 12% in 2013.

Manufacturing has borne the brunt of trouble across the border, but if there's one maxim that the Lebanese live by, it's “when life gives you lemons, make lemonade.” In this respect, the lemons represent dwindling demand from Syria, and the lemonade Lebanon's attractiveness as an alternative base for manufacturing, as well a source of imports for countries previously reliant on the now shattered Syria.

Despite plenty of reasons to be gloomy, consumer confidence is anything but—the ARA index rose by 21% in 2014 over 2013, marking a turnaround following negative trends over the previous two years. In this area, too, the Syrian population is beginning to leave a lasting mark. Operating mainly in the informal sector, numerous micro and small businesses selling products at low prices have opened their doors to serve the Syrian community, much to the chagrin of some Lebanese business owners who are unable to compete on price.

Looking ahead, Lebanon desperately needs to end its political stalemate, a major step being the election of a President. And although the appointment would not quite be a panacea, it would go a long way to assuring investors that Lebanon is back on track and give the economy a much-needed shot in the arm.