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Country Report Lebanon

Country Report


Flag Lebanon

Lebanon’s economy continues to show weak growth in 2014 (3%), being adversely effected by the conflict in Syria. Furthermore, Syrian refugees have put pressure on public finances and may further increase unemployment. But the banking sector remains healthy and Lebanon still has ample foreign reserves, which mitigates Lebanon’s otherwise high country risk.

Strengths (+) and weaknesses (-)

(+) Structurally strong remittance inflows

Lebanon’s vast diaspora has sent home remittances worth 20% of GDP each year for over a decade, making this a strong pillar of the economy.

(+) Strong banking sector

Lebanon’s banking sector is sophisticated, well regulated and enjoys a solid depositor base, as the country is seen as a safe haven in the Middle East.

(-) Weak fiscal position

Lebanon’s weak fiscal position is characterized by a high level of public debt and continuous budget deficits.

(-) Unstable domestic politics

Coalitions fall frequently in Lebanon and their short-lived nature has led to an absence of significant structural reforms in years.

Key developments

1. Economic growth remains sluggish amidst Syrian conflict

Due to the prolonged conflict in its neighbour Syria, Lebanon’s GDP continues to suffer. GDP growth eased to 2% in 2014, compare to 3% in 2013. On a positive note, private consumption has increased (Figure 1), partially due to lower oil prices since oil accounts for almost a quarter of Lebanon’s total imports. However, the effect of lower oil prices has been offset by the decline in external demand, which again partially relates to Syria since it is Lebanon’s fifth largest export market and has suffered a severe economic contraction since the start of the civil war in 2011. Syrian GDP for example declined by 22% and 25% in 2012 and 2013 respectively. From another perspective, exports also declined since prices of precious metals (16% of exports in 2014) have gone down. Gold and platinum for example have declined by 6% and 24% in the past year.

Importantly, tourism also continues to suffer, while this is and traditionally has been an important sector for the economy. Namely, the tourism sector accounts for about a quarter of Lebanese GDP, and also accounts for about a quarter of employment. Tourism is suffering because of an increased perception of risk in Lebanon. Hotel occupancy rates for example are currently hovering around 50%, while they were around 70% in 2009 and tourist arrivals have decreased 7% in 2013, after already having decreased 12% in 2012.

2. Adverse effects of Syrian refugees

The number of Syrian refugees in Lebanon has reached about 1.5m, and now constitutes about a third of Lebanon’s population. This influx of refugees has three adverse effects. First, it puts strain on the government’s public finances, which are already quite weak (Figure 2) with a budget deficit of 6% of GDP and public debt steadily increasing from 130% of GDP to 135% of GDP in 2014. The World Bank recently estimated that the overall fiscal impact of the Syria crisis over the period 2012-2014 was a cumulative USD 2.6bn, which represents about 5% of 2014 GDP. Going forward, refugees will likely continue to put pressure on government finances, for example because the huge increase in population strains public infrastructure.

Second, it increases the population of low skilled workers in Lebanon, in an already weak labour market. Around 60% of the Syrian refugees work can be classified as low-skilled and according to the IMF, the influx of Syrian refugees has increased labour supply by about 50%, mostly effecting opportunities for unskilled workers, youth and women. This influx of labour could potentially increase unemployment to 20%, according to the IMF.

But even besides the added problem of Syrian workers, Lebanon needs to reform its labour market. Currently, there is a mismatch between the high quality of Lebanon’s (private) universities and high skill jobs. As a consequence, well-educated workers have historically emigrated to other countries (brain drain), which reduces potential economic output as human capital leaves the country.

Third, it has the potential to create social tensions between the Lebanese and Syrians. Syrian refugees for example are willing to accept much lower wages than Lebanese workers, which could create the perception that Syrians are “steeling jobs” from the Lebanese. For now, we think this effect will not likely lead to major problems, but the mix for civil unrest (high unemployment and influx of foreigners) is there.

Figure 1: GDP growth still weak
Figure 1: GDP growth still weakSource: EIU
Figure 2: Fiscal position still weak
Figure 2: Fiscal position still weakSource: EIU

3. Banking sector remains healthy and foreign reserves remain high

Despite all economic and political problems Lebanon is facing, it’s banking sector is remarkably healthy. Banks are well capitalised, with Tier 1 ratios around 12% and have moderate Non Performing Loan ratios of about 4%. Moreover, the banking sector has shown resilience in the past, for example during the war with Israel in 2006. This stable banking sector is driven by a steady growth (about 8% per year) of foreign deposits, which have over the years grown to a sizable reserve of foreign currency. Lebanon has foreign reserves worth USD 39bn and gold reserves of about USD 11bn, totalling USD50, or about 100% of its GDP. Thus, although Lebanon’s public debt is very high (135% of GDP), it is backed by ample foreign reserves. Financial markets currently do not view this high debt as a major risk, indicated for example by Lebanon’s continuing success in issuing foreign currency bonds to finance its deficit. However, the high debt makes government expenses inflexible, as interest payments account for about 30% of government expenses. This inflexibility is a risk going forward.

Factsheet of Lebanon
Factsheet of LebanonSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Lebanon’s nominal GDP per capita of USD 9,109 is moderate, but the country enjoys large remittances from Lebanese abroad. These remittances of the often highly educated émigrés de facto form the country’s main export category. In a regional perspective, educational levels are high. Lebanon’s universities are reputed for their quality and Beirut is the ‘hospital’ for the wealthy in the Middle East. The economy is led by the services sector with 73% of GDP (2014), of which banking is he most noticeable. Tourism, especially from the Gulf States and Europe, is another driving sector of the services-based economy. Lebanon has developed into a multi-religious country over the centuries. Since 1860, each of the leading (sub-) denominations of Muslims and Christians are guaranteed a representation in the executive, legislative and administrative powers. The civil war ended in 1990 after it was agreed that the seats in parliament are divided between Christian (seven groups; 40% of population) and Muslim (four groups with 60% of population) members, with each group occupying half of the seats in parliament. The president, the prime minister and the speaker of the parliament have since been a Maronite Christian, a Sunnite and a Shiite respectively. Power blocs are often temporary coalitions of clan leaders, more based on confessional and local interests or on personal/family relations than on political or ideological views. In this extraordinary political complexity, coalitions are rarely lasting, which causes slow - or deadlocked - decision making on critical issues.

Economic indicators of Lebanon
Economic indicators of LebanonSource: EIU
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO

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