Population 4.01 million
GDP 41.766 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
7 |
1.5 |
1.2 |
1.5 |
|
Inflation (yearly average) (%)
|
4.5 |
5.1 |
6.5 |
5.5 |
|
Budget balance (% GDP) *
|
-7.5 |
-8.5 |
-7.5 |
-7 |
|
Current account balance (% GDP)
|
-20 |
-23 |
-21 |
-20 |
|
Public debt (% GDP)
|
140 |
136 |
138 |
136 |
| (e) Estimate (f) Forecast * Grants excluded |
||||
STRENGTHS
- Financial support from the diaspora and from the international community, and strong potential for a recovery
- Robust banking system
- Discovery of offshore natural gas reserves
WEAKNESSES
- Political division along faith lines maintaining latent risk of civil war
- Exposure to regional geopolitical tensions
- Political divergences hindering reforms needed to consolidate the public accounts
- Very high public debt
Risk assessment
Economic situation still dependent on the local and regional political environment
The coalition government led by the Sunni Najib Mikati, but dominated by the Shiite pro-Syrian Hezbollah, remains weak – in the run up to legislative elections planned for June 2013 – due to strong internal political tensions aggravated by the civil war in neighbouring Syria.
Growth is expected to remain modest in 2013, both because of the negative impact of internal political instability on private consumption and investment and also because of growing troubles in Syria. Moreover, activity could contract, if the region’s geopolitical tensions increase because the Lebanese economy – in which services play a predominant role – is very sensitive to them. Traditionally, the nationals of the Arab states in the region and, more particularly, those of the Gulf States, are the main users of the country’s services, especially through tourism, and the main investors in real estate.
Continuing high twin deficits, excessive public debt and huge external debt
The size and persistence of fiscal deficits – especially due to interest representing about 50% of tax revenues – will make it necessary to implement the planned reforms to consolidate public finances, particularly increasing VAT, broadening the tax base, modernising the administration and restructuring the state-owned energy company Electricité du Liban. However, the competing interests within a precarious governing coalition are inhibiting the drawing up of economic policies. Moreover, with 2013 marked by legislative elections, progress seems unlikely. Furthermore, the structural public accounts deficits and the chronic problems of a bloated and heavily subsidised public sector, compounded by the cost of post-civil war reconstruction, explain the very high level of public debt, which although hard to sustain, is, nevertheless, mitigated by the preponderance of the domestic debt in local currency.
Externally, the economy suffers from a narrow export base, as shown by a structural trade deficit, attributable to imports of oil, raw material and agricultural products. However, the services and transfers surplus should again help to partially contain the huge current account deficit in 2013 and the permanent capital flows from the diaspora and the Gulf countries are expected to cover that deficit. Nevertheless, the burden of external debt will remain very heavy (about 85% of GDP), especially since it is mostly short term (about 83% of total debt). Moreover, in the event of serious political disturbances, capital flight cannot be ruled out but, in such a situation, Lebanon could draw on its substantial foreign exchange reserves – representing about one and a half year’s imports – and would probably receive financial support from “friendly” countries.
Sound banking system but over-exposed to sovereign risk
The Lebanese banks remain strongly capitalised, very liquid and profitable, with steadily falling non-performing loans. Deposits are expected to continue to rise, given attractive rates of return and the confidence that the strength of the banking system and the pegging of the Lebanese pound to the dollar inspire in depositors (local residents, diaspora and non-residents from the Gulf). However, the banks still prefer to cover a significant portion of the state’s financing needs rather than lend to the private sector. They thus remain over-exposed to sovereign risk and are also vulnerable, due to the highly dollarised deposits, the evolution of the real estate market and regional instability.
Moreover, Lebanese companies are traditionally very resilient to major political shocks and have hitherto always striven to pay, even in critical situations, given, moreover, that the business environment is relatively favourable compared with most of the other countries in the region.
