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October 2009

Tue, Oct 6 2009, 09:52 GMT
by Credit Libanais Research Unit

Credit Libanais

OVERVIEW

The Lebanese economy continues to prosper in 2009, notwithstanding the rippling effects of the global financial crisis and propagating World economic recession. Main indicators remain solid, thanks to a regained level of confidence in the economy, a strong banking sector, a prudent Central Bank and an unprecedented rebound in tourism activity. More particularly, Lebanon presented a unique example amid the global financial crisis managing to achieve a consensus real GDP growth rate in excess of 8% in 2008, when paradoxically, regional and international economies lowered their respective growth expectations in 2008 to negative and near zero levels. The year 2009 was no exception for the Lebanese economy, with latest estimates projecting real GDP growth at 7%, despite the intensification of the global crisis and the prevalence of a World recessionary environment in the first tier of the year, thus eclipsing the negative 1.3% anticipated growth of the global economy. The resilience of the Lebanese banking sector, unarguably the backbone of the Lebanese economy, to domestic and international shocks coupled with the vibrant 2008 and 2009 tourism seasons in the aftermath of the Doha accord and smooth 2009 parliamentary elections, were the major drivers enabling Lebanon to weather, and oddly enough to benefit, from the mammoth financial storm. The unparalleled resiliency of the banking sector to the global crisis was the fruitful result of the Lebanese Central Bank’s astute policies and stringent regulations. The credit also goes to Lebanese banks which succeeded at maintaining solid profitability levels, healthy liquidity ratios and a strong capital adequacy without tampering asset quality, with total consolidated banking sector assets attaining $105.38 billion through July 2009 up from $90.10 billion just one year earlier. A major impediment to a sustainable economic growth, however, pivots around the piling debt burden and the ensuing high debt to GDP ratio, which is considered to be one of the highest in the World, standing at 162.5% in 2008. Lebanon remains captive, though, of a vicious circle of a recurrent budget deficit, owing mainly to the burdensome debt service, and a mushrooming debt. The government, however, is striving to tackle this issue by organizing international aid conferences, which extended a lifeline to the Lebanese economy during periods of crisis, with the latest aid convention, the Paris III conference, amassing some $7.532 billion in pledged soft loans and grants.

Finally, the increasing confidence in the Lebanese economy allied with the remarkable improvement in Lebanon’s major economic indicators may entitle the Lebanese government to refinance at cheaper rates, and eventually reduce debt servicing, as a first step towards tackling the lingering debt overhang.

STRENGTHS OF THE LEBANESE ECONOMY

The Lebanese economy enjoys a set of attributes which play a major role in accentuating growth and luring prospective investors. Said attributes include, among other things, the “laissez-faire” nature of the economy, the soundness of the Lebanese banking system, the country’s clean record on debt servicing, the high level of international confidence materializing in international aid conferences, positive balance of payment figures and ample foreign reserves.

Complementing the aforementioned attributes is an array of investment incentives which serve to increase the appeal of investing in Lebanon in terms of lack of barriers on foreign investments, apart from some restrictions on real estate investments, free mobility and repatriation of capital in addition to a series of tax cuts and exemptions applicable to investments in certain businesses.

Said factors undoubtedly prepare for a better investment climate which, in its turn, will act as a catalyst for spurring economic growth.

FUTURE PROSPECTS

The vigorous performance of the Lebanese economy in 2008 and first half of 2009 demonstrated an unprecedented resiliency to regional and international tensions. In this background, and in light of the consecutive upward GDP revisions which raised Lebanon’s 2009 real GDP growth estimate from 3% to 7%, we can expect the Lebanese economy to post a stellar performance in 2009 and the near future, backed by the stunning level of capital inflows, a vivid tourism season and a pick up in investment activity. Said performance, however, should be complemented with major reforms on the economic, political and bureaucratic fronts in an endeavor to further stimulate economic activity.

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Published on  Tue, Oct 6 2009, 09:57 GMT