The downward revision to negative from stable of Lebanon’s rating by Fitch is not surprising as it comes on the heels of Standard and Poor’s revision to B-minus status a few weeks ago. Rating agencies act in tandem as they use the same criteria in their modeling exercise.
When one modifies a rating, chances are high that the others will follow suit. The direct impact of such a move is typically an increase in risk perceptions thus making it more expensive for Lebanon to finance its deficits by driving interest rates higher. This, in turn, will affect private borrowing costs which, ultimately, will influence growth. Furthermore, since Lebanon has shifted much of its public debt to foreign currencies and as external debt stands now at over $36.4 billion, the consequences of this move cannot be dismissed lightly.
True, Lebanon today offers a grim picture for the undiscerning observer as the relative institutional vacuum, the intervention of Lebanese factions of various obedience on both sides of the Syrian conflict, the influx of refugees, the increasing budget deficit and the weakness in several macroeconomic parameters, all seem to constitute a highly uncertain political and economic outlook.
But it is important to note that the fundamentals that have kept the country afloat through meaner crises are still there. Fitch itself underlines them as it concedes growth will be positive albeit weak in 2014 as it estimates to stand at 1.5 percent. In effect, industrial output has increased in real terms as have industrial exports, and so has commercial activity but at a slower pace. The same goes for agricultural production, which is benefitting from the absence from the market of its traditional competition: cheaper Syrian produce.
Banks report robust results; their capital adequacy has never been as high, being over three times that of major international banks, and they are awash with liquidity. Their capacity to finance additional budget needs is intact and they have plenty of dry powder to sustain private credit without risk of “crowding out” Lebanese businesses.
Many initiatives to support small and medium size enterprises and start-ups are being put in place with the help of the Central Bank which has just published its fortnightly balance sheet that shows, among other strong features, a level of reserves that can finance over a year of imports.
Tourism is the one sector that has seriously been afflicted by the political situation and, more specifically, by the Arab boycott. Regrettably, tourism professionals are partially to blame because they have geared their entire business model to Arab tourists and “expats” visits. Prospecting other markets and exploring creative avenues may not have entirely compensated the defection of the traditional flow but it would have most certainly had a mitigating effect. It is when confronted with such cases that the lack of adequate planning and direction from public authorities is painfully felt. Diversification and support for the sector by way of a number of tourism agreements signed with various countries would have most certainly helped. Alas, years of government neglect – although the latest, now “caretaker,” Cabinet has tried to act in that direction – are taking a heavy toll on major sources of foreign money flows.
It is a fact that the origin of all ills is the inability of local politicians to address the everyday-life issues by agreeing to tone down the political posturing and giving more time to effectively managing and legislating in order to correct economic distortions. Unfortunately, the exact opposite was done and the track record of both the successive governments and legislatures since the turn of the century can hardly be qualified as shining when it comes to reforms and forward-looking policymaking.
Paradoxically, it is this very ineffectiveness that may contain the seeds of the solution because the slightest improvement in the political panorama will be met, as has been systematically the case in the past, with a huge improvement in economic morale and, henceforth, in performance.
Maybe the gurus at Fitch Ratings should consider giving some positive weight to the absence of a (damaging) government ... Surely, that ought to give us a few notches up.
Shadi A. Karam is adviser to the president of the republic for economic and financial affairs.