BEIRUT: Sustained political and security instability would further widen the fiscal deficit and cap Lebanon’s GDP growth near 1 percent in 2014, the International Institute of Finance said in a revised assessment of the country’s economic situation.
Alternatively, the IIF’s upbeat scenario, which assumes an improvement in the domestic situation in correlation with a de-escalation of the civil war in Syria, forecasts growth to accelerate to as much as 5 percent.
“The IIF estimates the probability of each of the A and B scenarios at 50 percent and as a result we expect an average weighted growth of around 3 percent,” Garbis Iradian, deputy director of the Middle East and Africa Department at the IIF, said Thursday.
Iradian, who arrived in Lebanon two days ago, released the IIF’s revised report during a round-table discussion at the Phoenicia hotel in Beirut with the participation of economists from leading Lebanese banks who belong to the IIF association.
Confidence in Lebanon’s banking sector remains strong as it enjoys high liquidity buffers and capital above the regulatory minimum, according to Iradian. The IIF projects growth in bank deposits to range between 7 percent and 9 percent in 2014 based on the two projected scenarios.
Deposits need to grow by at least 5 percent a year to ensure the financing of the budget without additional exposure by banks, which currently hold about 23 percent of their assets in government securities, the IIF report noted.
“Egypt, which has a fiscal deficit-to-GDP ratio similar to that of Lebanon, saw its government debt as a percent of local banks assets reach 42 percent in 2013, whereas in Lebanon it remained stable at 23 percent, same as of the end of 2011,” Iradian explained.
Thanks to the growth in deposits, Lebanon has maintained a relatively stable government debt-to-broad money supply (M3) ratio, he added.
However, the government debt-to-GDP ratio would increase further to 150.2 percent by 2014 and 156.9 percent by 2015, according to scenario A, while the fiscal deficit would widen further to about 11.9 percent of GDP by 2014 and 12 percent by 2015, the IIF report said.
Under the same scenario, private investment as a percent of GDP is expected to drop from an estimated 21.3 percent in 2013 to 20.9 percent in 2014 while tourist arrivals are expected to drop a further 3 percent compared to 2013, having decreased around 40 percent on a cumulative basis since 2010.
Under scenario B, which assumes the formation of a new government in Lebanon and a halt to the civil war in Syria, government revenues are projected to recover, leading to a fiscal deficit of 9.1 percent in 2014 and a shift in the primary balance from a deficit of 2.5 percent in 2013 to a surplus of 3 percent by 2015.
“While the frequency of violent incidents in Lebanon has increased, we are not of the view that fighting in Lebanon itself will spread. A unity government could be formed soon ... nudging the economy toward a slightly brighter outlook than implied by the pessimistic scenario A,” the IIF report noted.
However, not all participants shared Iradian’s view of an improving economic outlook.
Nassib Ghobril, head of economic research at Bank Byblos said the correlation between consumer confidence and private consumption, a main driver of GDP growth in Lebanon, limits the upside potential growth to around 3-4 percent.
The Byblos Bank/AUB Consumer Confidence Index dropped to a record low in the first half of 2013 since its inception in 2007, mainly lowering private consumption, which accounts for 87 percent of GDP expenditures.
Head of Economic Research at BLOMINVEST Bank Marwan Mikhael, who also participated at the round-table conference, said 2014 would be as challenging as 2013.
“Other main challenges that will weigh on the economic performance include the presidential election during the year, the formation of a new government, and the evolution of the security incidents,” Mikhael said.
In addition to recovery in economic activity, Iradian said bolstering the fiscal position required a strong political will and, above all, the formation of a strong government based on a broad national consensus.
However, sustaining such a recovery would require the government to undertake structural reforms to address issues such as the electricity sector, Iradian said.
According to the IIF report, the subsidized electricity sector cost the government an estimated $2 billion in 2013, or 5 percent of GDP, while regular power outages continue.