Lebanon’s economy to pick up steam in late 2013

Jooste puts 2013 growth at 1.5-2 pct. (The Daily Star/Hasan Shaaban)

BEIRUT: The European sovereign debt crisis, regional unrest and domestic political uncertainty are among factors expected to weigh on Lebanon’s economy in the first half of 2013 before growth picks up in the second half of the year, a senior Merrill Lynch official told The Daily Star.

“The European situation will be a drag on the Lebanese economy in the first half of next year from a GDP point of view,” Johannes Jooste, head of Strategy for Europe, Middle East and Africa at Merrill Lynch Wealth Management said in an interview with The Daily Star.

“We can see it in some of the externally focused sectors in the Lebanese economy such as tourism and trade, which will be under pressure ... That sort of proximity to Europe and the exposure to political risk is unhelpful,” he added.

In the second half of 2013, Lebanon’s economy can be expected to improve as the European economy starts to gradually pull out of recession and growth picks up in emerging markets, Jooste explained.

In the United States, Jooste said he expected the Federal Reserve to pursue open-ended quantitative easing until the unemployment rate falls below 7 percent, with the fiscal cutback expected to weigh on GDP growth during the first half of 2013.

Jooste added that Merrill Lynch’s base case scenario projects a “just-in-time” solution to avoid the fiscal cliff. Provided that a political solution is reached, GDP growth is forecasted at 1.4 percent for the first half of 2013.

Despite improvements in the global economy, Jooste nevertheless highlighted that much volatility still reigns over GDP growth forecasts in Lebanon owing to local political uncertainty and developments in neighboring Syria.

Jooste was more conservative than the IMF in his forecast of Lebanon’s GDP growth for 2013, which he expected to be in line with 2012 at 1.5-2 percent. The IMF forecasts GDP growth at 2.5 percent.

Jooste added that a potential increase of 5-10 percent in global oil prices will have minimal impact on the Lebanese economy in 2013 as it remains in line with the country’s inflation rate.

While the negative impact of high increases in oil prices on Lebanon’s trade balance is usually offset by a boost in foreign direct investments originating from oil-producing Gulf countries, this wasn’t the case in 2012.

The deteriorating security situation in Lebanon and Syria has scared off Gulf investors and tourists whose governments have advised their citizens against traveling to Beirut.

Besides declining foreign investments, lower tourism revenues and increased deficit in the country’s trade balance, the Lebanese government also faces the challenge of finding sufficient resources to finance a much-debated large public sector wage hike that would cost the treasury more than $2 billion annually.

“It’s a little bit of a gamble in light of growth the following year,” Jooste said when asked about the implication of the government’s approval of the wage hike.

He argued that if the government enacts the hike today, it would have to wait for 2014 to increase taxes.

“As the spending goes into the economy at some point in 2014, you actually make it back through tax revenues, but tax revenues are also under pressure ... So it’s a dangerous game, and you should have a plan to stimulate growth in the second or third year to offset the hike,” Jooste said.

Otherwise, the increase in expenditures would eventually push bonds yields higher, Jooste added.

Despite a widening budget deficit, Lebanon’s borrowing costs tumbled more than its Middle East peers last month when the country extended maturities on $1.53 billion of bonds.

Bonds due in 2015 yielded 4.19 percent on Nov. 30, down 12 basis points for the month and 90 basis points, or 0.90 of a percentage point, since August, data compiled by Bloomberg show.

“If the revenues and the expenditures move too far apart, the market would start questioning the sustainability of the debt dynamic, and you’ll have a natural move upward in yields,” Jooste said.

He warned that diminishing growth rates would make Lebanon’s debt, which stood at 134 percent of GDP in 2011, unsustainable.

“Once you start getting over 100 percent of GDP, you don’t have much room for maneuver. Ask Greece, Argentina ... it could go out of control very quickly in the sense that you can only have one or two years of missing budget targets and you’ll find yourself in the position where the market rate of interest is such that you can’t add to your liabilities.”

“So, no it is not a sustainable strategy. Maybe an unavoidable strategy in the short term to try and foster growth,” Jooste said.

Some economists have insisted that the only way Lebanon can repay its debt in the long term is through oil and gas revenues originating from the recently discovered substantial reserves off the coast, in Lebanon’s Exclusive Economic Zone.

Asked whether the country could benefit from such wealth before actual production begins in no less than seven years, Joote noted that capacity creation and the building of infrastructure could have a positive impact on the labor market.

A version of this article appeared in the print edition of The Daily Star on December 07, 2012, on page 5.




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