Lebanon Pulse

Lebanon’s economic outlook for 2015

Article Summary
The economic situation in Lebanon does not bode well for the coming year, but hope remains if governing political forces move away from the region's conflicts.

On an economic level, 2014 was not the best year for Lebanon. All indicators of growth and production declined, as the World Bank recorded a 1.5% growth rate for 2014. The treasury deficit is expected to reach 10.2% of the gross domestic product compared to 9.4% in 2013. The situation does not bode well for the coming year, although these challenges are to be expected in a country that is affected by the repercussions of the Syrian war, especially on the security level.

Perhaps the best indicator showing a strong correlation between security and the economy is the Consumer Confidence Index, which is issued in partnership between the Byblos Bank and the American University in Beirut. The Consumer Confidence Index recorded a recovery in the first half of 2014, as a result of the formation of the government in February and a relative improvement in the security situation, after a halt in the series of bombings, which rocked Beirut and Tripoli from March 2013 to January 2014. Thus, the indicator stood at 29 in the second half of 2013 and reached 33.5 in the first half of 2014.

This recovery in the first half of 2014 boosted the construction sector, which is traditionally a key driver of consumption. According to the World Bank’s Lebanon Economic Monitor report that was released in the fall of 2014, there has been a slight increase in consumption reflected in an increase in loans in the private sector, which rose by 7.4%, compared to 4.1% for the same period in 2013.

However, this improvement faded with the outbreak of the fighting between the Lebanese army and Syrian militants in the summer of 2014, which caused the security situation to further deteriorate. The Consumer Confidence Index reached "a record level in decline in the second half of 2014," Nassib Ghobril, head of the economic studies at Byblos Bank, told Al-Monitor. This has caused consumer loans to decline, as shown in the statistics carried out by the financial company Kafalat.

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Regarding his predictions for the future, Ghobril said, "This depends on the political situation. If things remain the same in terms of anxiety and uncertainty, the recession will persist. If a breakthrough is to happen at the political level, and a president is elected with a government seeking to implement reforms, this would be directly reflected on the confidence index and we could see a 4% growth rate."

Another key driver of growth is tourism, which did not significantly improve. There has been a slight increase in the number of tourist arrivals by 5% compared to 2013, which was met with a decline of 5% in the profitability of hotels, according to a Byblos Bank Report. This is because in the second half of the year, hotels were forced to cut their prices to attract tourists, as they had been adversely affected by the security events.

The sit-ins and the closure of roads by the families of the kidnapped Lebanese soldiers — who have been abducted by jihadist groups in August 2014 after their raid on the Arsal village in the Bekaa Valley — in an attempt to draw attention to the eligibility of their cause, made things worse and did not benefit their cause, although it was highly publicized.

Exports, which reflect the competitiveness of the Lebanese economy, saw a decline of 18%, while the trade deficit widened by 0.4% to reach $16 billion at the end of November 2014. There is no doubt that the recession in Europe and the slowdown in economic activity for the Gulf states, as a result of falling oil prices, were a reason behind the overall drop of Lebanese exports, especially to Europe and the Gulf states, which are leading importing markets for Lebanese products and services.

However, there is a silver lining in all this. It is true that falling oil prices had a negative impact on some Lebanese exports; however, they served as good news for the Lebanese economy. The productive sector will see a decline in the cost of production, which would enhance its competitiveness. This could also be positively reflected on exports, especially if producers redirected their exports toward the markets that have also benefited from falling oil prices. Producers could invest what has been saved in the oil sector into other consumption fields.

In the same framework, Ghobril said that the decline of the euro rates against the US dollar — which has been positively influenced by the recent fall in oil prices — will help reduce the trade deficit, especially since a high proportion of imports come from Europe. This is not to mention that falling oil prices will save the Lebanese treasury around $800 million because the Lebanese government has been paying a high bill for oil consumption used for electrical power, which in 2014, constituted 50% of the treasury deficit.

The bottom line is that an opportunity arises on the horizon, which would allow Lebanon to get out of this tunnel. However, it might be lost as many other opportunities in the past, because the Lebanese, and specifically the governing political forces, are not aware of the need to move away from the region's conflicts and to distance themselves from the warring parties.

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Found in: trade, tourism, security, oil prices, lebanon, exports, economy, construction

Sami Nader is a columnist for Al-Monitor's Lebanon Pulse, an economist, Middle Eastern affairs analyst and communications expert with extensive expertise in corporate strategy and risk management. He currently directs the Levant Institute for Strategic Affairs, focusing on the economics and geopolitics of the Levant, and is a professor for USJ University in Beirut. On Twitter: @saminader

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