Lebanon: cyclical strength, structural challenges

Two pieces of data released recently highlight Lebanon's current economic situation. Cyclical strength but structural challenges.
Domestic confidence is at the highest level for some time in Lebanon. The Central Bank release of foreign currency reserves supports this view. Gross FX reserves hit USD 12.6bn in February. Although the number overstates the strength of the central bank's position, it includes deposits of commercial banks, the rise from the USD 3bn
recorded in mid 2002 is telling. Recent tourist numbers also point to Lebanon's revival as a regional holiday destination. The most recent
official data for tourist arrivals showed a 30% y/y jump (November 2003). Overall we estimate that rebounding confidence, low interest
rates and higher tourist inflows meant that Lebanon grew by 3% in 2003, the best performance for five years.

However structural challenges remain. The Ministry of Finance revealed that Lebanon's budget deficit was 22% in January. This is an improvement from 35% recorded the year before but is still not sufficient to balance the current debt dynamics. Recurrent budget
deficits have driven public debt up to 190% of GDP, one of the highest in the world. Unless spending is brought under control this public debt
will continue to rise. The announcement yesterday from Alain Bifani, the Finance Ministry Director General, that the government will probably seek USD 1.9bn in fresh eurobond financing this year tells its own story. If the government can cut spending or realise privatisation revenues, the current level of confidence can be maintained. If not similar pressures that were last seen in 2002 will start to build.