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Lebanon: Promising outlook with 8% economic growth

Monday, 09 August 2010 12:30

By almost any measure, the Lebanese economy looks set for a strong end to 2010, with foreign investments on the rise, the property market flourishing and the tourism sector enjoying a banner season. Although as always, there are provisos to such forecasts, the main one is a continuation of political stability.

The IMF recently upgraded its forecast for the Lebanese economy, raising its projection of 6% GDP growth to 8%, ranking the country second regionally after Qatar and fourth globally.

Significantly, the private sector has been the foundation on which Lebanon’s resurgence has been built, a situation that is expected to continue in the medium to long term. Another IMF report, this one issued in mid-July, showed that in the decade ending in 2008, real GDP had grown by a cumulative 41%, with the private sector serving as the main engine of growth. Service industries make up the backbone of the private sector, accounting for an average of 64.7% of GDP across the 10 years covered in the study.

Private consumption increased by 28.5% in the 1998-2008 period, compared to just 5.1% for public consumption, while private investment grew by 14.8%, a sharp contrast to the 3% fall in state investment, the international lender said.

Another driving force for the economy was the increase in foreign direct investment (FDI), reversing a regional trend that saw a tide of net outflows in 2009. According to the “World Investment Report” for 2010, issued by the UN Conference on Trade and Development on July 22, Lebanon’s FDI rose 11% last year, with $5bn entering the economy, compared to an overall decline of 24% in the Middle East region, with only Qatar and Lebanon posting an increase in capital inflow.

In part, this inflow was a result of the continued strong interest in the Lebanese real estate sector, with 22,000 real estate transactions conducted in the first quarter of 2010, carrying a value of $2.1bn. This represents growth in sales of 41% compared to the same three months of 2009, according to the Directorate of Real Estate. However, while in some countries such a surge would probably raise concerns of a property bubble, again it seems as if Lebanon is in a league of its own.

The strong sales levels are being fuelled to a large extent by private capital, both domestic and foreign, rather than by funding from the country’s banks, with less than 20% of all property acquisitions being financed by banks, according to the central bank. Instead, much of the banks’ credit lines have gone to the corporate sector, which is helping to underpin the growth predicted by the IMF.

One of the reasons that the Lebanese economy was less affected by the global financial crisis than some of its neighbours was the excellent performance of its banking sector, with solid growth in profits and deposit levels over the past 18 months. However, unlike financial sectors elsewhere, Lebanon’s banks have not focused solely on consolidating their positions by building up deposits at the expense of lending.

While Lebanese banks have further strengthened their balance sheets, they have not turned off the credit taps, with an additional $3bn worth of loans made in the first five months of 2010. As of the end of May, Lebanese banks had $31.4bn worth of loans on their books, more than 10% up on the December figure, with the five-month total representing some 80% of the aggregate growth for all of 2009.

There are some potential downsides lurking in the background, with the very willingness of local banks to inject funds into the economy raising concerns that well-fed domestic demand could in turn see inflation heat up.

According to Raed Charafeddine, the first vice-governor of the central bank, though this is a possibility, it is maintaining a tight rein.

“Clearly the excess liquidity can push up inflation,” he said in an interview with the Gulf News on July 19. “Thus we have been mopping up liquidity through certificates of deposit on one hand and have been encouraging lending only to productive sectors.”

The fragile political stability of Lebanon is a perpetual concern. Recent rumblings over the possibility that members of the Hizbullah movement could be implicated in the UN’s investigation of the 2005 assassination of former Prime Minister Rafik Hariri – the father of current premier Saad Hariri – along with a ramping up of tension between the pro-Islamist party and Israel, could serve to make investors think twice about buying into the Lebanese economy.

That said, there have been similar rumblings for most of the past decade, a decade that has seen strong growth despite political instability and even war. As such, there is little to suggest that growth cannot be maintained or even improved going forward.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Monday, 09 August 2010 12:47

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