When Lebanese Prime Minister Saad Hariri took to Saudi television in November to resign and accused certain groups of planning his assassination, some amount of capital vacated Lebanon. But the market reaction was muted, with private-sector deposits at commercial banks falling just 1.5 percent month-on-month.
Recovery was swift, especially when Hariri rescinded his resignation in December after an appeal from President Michel Aoun.
With its sect-based political parties linked to regional powers and interests, Lebanon has been vulnerable to tensions between Iran and Saudi Arabia, which have worsened in recent years due to the wars in Syria and Yemen. It has been a long time since Riyadh, Damascus and Tehran together brokered the 1989 Taif Accord, a political settlement which established a new order in Lebanon to end a 15-year civil war.
The broad picture can obscure important details. The country’s politicians like to blame regional turmoil for domestic disasters, such as a garbage crisis that had at least 150 illegal dumps burning trash, or an electricity sector that has a generator in every apartment block belching out diesel fumes to fill the gaps left by the loss-making, state-owned Electricite du Liban.
“Regional turmoil is taken as an excuse by our politicians,” Nassib Ghobril, chief economist at Byblos Bank, tells TRENDS.
“What does regional conflict have to do with improving the road network, electricity and water supplies, or reducing the fees of telecoms services and improving their quality? You can still implement reforms; it requires political will.”
The Lebanese government has long run a fiscal deficit, allowing the public debt to grow to $78.15 billion by September, up by 4.6 percent year-on-year and estimated by rating agency Fitch to represent 149 percent of the GDP, the fourth-highest such ratio of any Fitch-rated sovereigns.
Back in the 1990s, under Prime Minister Rafik Hariri, late father of Saad, borrowed money was used in part for post-war reconstruction, but it has mainly financed a bloated public sector and rampant nepotism: between 2000 and 2016, according to the IMF, 34.7 percent of public spending has gone towards salaries.
Private-sector manufacturers, meanwhile, have struggled with high interest rates and a weak regulatory environment. Given low exports, the country’s growing trade deficit reached $20.3 billion in 2017, or 38 percent of the GDP.
Banks on solid footing
Lebanon’s banks keep the show on the road. The success of the regulatory framework imposed by the Central Bank — led since 1993 by Riad Salameh — was never better illustrated than during the 2008 world financial crisis, which barely rattled Lebanon’s banks.
At the end of 2017, the banks’ assets in the Lebanese market were $220 billion, with the six banks listed on the Beirut Stock Exchange alone having assets —including foreign operations — of $125 billion. The overall assets represent nearly four times the GDP.
“Lebanon, as an economy, needs to find the foreign currency to cover its imports and the current account deficit as well,” says Ghobril. “That’s what keeps pressure on the banks to keep attracting deposits.”
Bank deposits from abroad are an important part of a services sector that goes a long way to making up the trade deficit — along with FDI, tourism receipts and expatriate remittances. The Balance of Payments in 2017 showed a manageable deficit of $156 million, albeit a marked deterioration on a $1.2 billion surplus in 2016.