Lebanon Counts The Cost Of Conflict

More than a million Syrian refugees have spilled into Lebanon, fleeing the civil war that has wreaked havoc in their country over the past four years.

The United Nations High Commissioner for Refugees (UNHCR) forecasts that, on current flows, there will be about 1.5 million registered refugees in Lebanon by year-end, increasing the country’s population of 4.4 million by a third.

Lebanon has accommodated the largest number of refugees among all the neighbouring countries of war torn Syria.

But while Lebanon’s humanitarian effort and generosity towards its neighbour should be commended, it has come at a heavy price. The World Bank estimates that the Syrian refugee crisis will cost Lebanon around $7.5 billion in lost economic activity between 2012 and 2014.

“For illustrative purposes, the influx is comparable to the United States experiencing a refugee influx the size of the Canadian population, or Germany absorbing the combined Austrian and Swiss populations,” the IMF says.

The Syrian conflict has taken its toll on the Lebanese economy, with GDP growth rates languishing at 2.5 per cent in 2012 and 1.5 per cent in 2013, compared to blistering annual growth rates of nine per cent between 2007 and 2010. The International Monetary Fund expects Lebanon’s GDP to grow a paltry 1.8 per cent this year.

“The Syrian crisis, with its implication on the political context, has exposed Lebanon’s structural weaknesses,” according to the United Nations.

The Syrian refugee crisis has also impacted the labour market, with Lebanon’s unemployment rate having soared to 20 per cent, compared to 11 per cent in 2011. Syrians entering the workforce have also placed downward pressure on wages, pushing more than 1.17 million people below the poverty line.

Aggregate investment and consumption spending has also fallen, although well- heeled Syrians have contributed to a bump in spending.

“While private investment is still sluggish to a large extent within the context of a wait-and-see attitude characterising investors and delaying major decisions, private consumption is benefiting from the resilient behaviour of domestic consumers, a good incoming of Lebanese expatriates to the home land and the spending of Syrian refugees,” says Bank Audi analyst Marwan Barakat in a third-quarter report.

Still, ARA Research and Consultancy’s latest Consumer Confidence Index (CCI) fell eight points in August, amid clashes between the Lebanese security forces and militant groups.

The Security Situation Index, managed by a local consultancy, also fell 51 points, while the Purchase of Durable Goods Index plummeted 74 points during the month.

Other indicators offer grim reading. Lebanon scored 46.3 over 100 on Business Monitor International’s latest International Risk Ratings, emerging as the 14th least risky among 19 Middle Eastern countries.

“The political instability in the future is forecasted to stay due to the security situation in Syria, which does not seem to add confidence for Lebanon’s stability over the medium-term,” BMI says.

“Moreover, sectarian tensions will remain fickle, which will probably result in further legislative deadlock amid a presently fractious parliament.”

Even the normally intrepid Gulf investors are staying on the sideline as the regional conflict continues to fester and expand with new threats such as the Islamic State of Iraq and Syria (ISIS) knocking on Lebanon’s door.

“The economy in Lebanon is so slow and you know investors are hesitant,” Emaar CEO Mohamed Alabbar said during a recent visit to the country.

The company is proceeding with a single residential project in Lebanon, but it is clear that further investment is not on its radar screen. “Emaar prefers to operate in expanding markets,” Alabbar said.

KeY SeCtorS hIt

Among the sectors most impacted by the crisis are tourism and real estate, which have traditionally been key drivers of economic growth.

The number of international tourists rose 0.7 per cent in the first eight months of the year, after a 9.6 per cent drop during the same period last year.

Gulf Arab tourists have largely stayed away from the country due to travel advisories from their governments, though the summer saw wealthy Gulf Arabs slowly return. Europeans and Asians, who comprise a large portion of inbound tourism traffic to Lebanon, largely stayed away.

The real estate sector has seen an increase in rents due to the large influx of Syrians, with assets rising 9.7 per cent in the first seven months of the year – but most analysts believe the trend is not sustainable. The first few months of the year saw a dramatic decline in prices, which was only arrested after the formation of a new government.

Apart from Syrians, demand is driven by the local population, which has a genuine desire to live in the property they purchase.

However, real estate’s traditional strength lies in demand from the expatriate population and foreigners who buy Lebanese property for investment or commercial purposes. Those segments of the market are largely absent.

Sales transactions grew 2.2 per cent in the first seven months of the year, compared to a 7.2 per cent decline in 2013 and an even more dramatic 10.1 per cent contraction in 2012.

The lack of business confidence has also impacted commercial real estate, especially as businesses look to downsize or seek lower rates from landlords to cut costs.

The country’s exports to its main markets of Syria and Iraq have also been disrupted due to route closures leading to a widening trade balance over the past three years.

Goods exports have declined as land- ports used to export goods to the MENA region (most notably fresh fruit and vegetables) have seen substantial drops in activity, notes the IMF.

“Meanwhile, imports of goods have seen limited growth over the same period, as import demand associated with the increase in Syrian refugees has likely more than offset a shift of import composition towards items with lower values.”

The fiscal situation, already fragile before the crisis, was further strained due to the additional burden on fiscal spending and the impact of the economic slowdown on fiscal revenues.

Analysts believe that the Lebanese government will have to prepare a long-term strategy to combat the Syrian refugee situation, as the refugees are unlikely to return to their home soon given the heavy infrastructure devastation that has taken place.

“It is of utmost importance for the Lebanese authorities to devise a salvation policy anchored in a broad based national consensus in order to shield Lebanon from the potential risk tied to the inflow of Syrian refugees and secure sufficient financial and other resources to cope with the crisis and contain its critical repercussions,” says Bank Audi’s Barakat.

LEBANESE RESILENCE

Even as the regional conflict rages on, Lebanon is in the midst of a domestic political stalemate, too. The country has been without a president since May of this year, with the two main political groups disagreeing over candidates.

“The presidential vacuum has disrupted efforts to pass legislation, including the passage of the electoral law needed to schedule parliamentary elections, which were previously envisaged for November of this year,” the Institute of International Finance says in its latest report.

The political and economic crisis has not eroded the country’s economic fundamentals, however.

Despite very high indebtedness, Lebanon has been able to continue to finance itself based on a highly liquid domestic investor base and its solid credit record, notes the IIF.

“Despite frequent political turmoil, the country has never defaulted on its debt or missed a coupon payment.”

Lebanon’s five year sovereign CDS spread has declined from 450 bps at end-2012 to 340 bps by mid-November, the Lebanese pound remains stable, and official foreign exchange reserves have continued to increase.

In addition, the financial services sector remains strong and well-capitalised thanks to stable remittances from the Lebanese diaspora spread across the world.

A game changer for the Lebanese economy could be monetisation of its natural gas reserves, according to Citibank.

Last February saw the launch of the much-anticipated tendering process of Lebanon’s first offshore exploration blocks to tap into 25 trillion cubic feet of natural gas. The reserves could turn Lebanon from a chronic energy-starved country to an exporter of natural gas.

“A cheap domestic source of gas could, therefore, spur a major transformation in the country’s economic fortunes,” the Wall Street bank says, but with a note of caution.

“This appears, however, unlikely to progress in the current political climate, and has been three-times delayed, most recently in January to August.”

Lebanon must also move quickly on other fronts, including creating a framework law for public private partnerships (PPP) to spur foreign investment in the transportation, water and telecom sectors.

The launch of the Capital Markets Authority also needs to be reinforced with stronger business reforms, and engaging the private sector. The World Bank’s latest Doing Business survey, which tracks the world’s most competitive economies saw Lebanon drop two places to emerge as the 104th most business- friendly jurisdiction out of 189 countries.

However, the return of region stability, or at least less volatility, may also spur growth.

“The potential for a strong recovery in tourism and investment is enormous given the country’s strategic location, good climate, excellent entertainment services, and a highly educated workforce,” the IIF notes.

“A stable political environment, structural reform, and the recent discovery of large recoverable gas reserves could move the economy to a sustainable higher growth path over the medium term and help to bring government debt down to more sustainable levels.”