Lebanon still exposed to regional turmoil

An Article Analysis Submitted in Partial Fulfillment of the Requirements of

the Course monetary economics (ECO 220)

Presented to Mr. Garabed Boghossian

Prepared By:

Garen Afarian

Spring 14/15
 Table of content
I. Introduction

II. Summary

III. Analysis

IV. Opinion and Recommendation

V. Conclusion

VI. Article
Introduction:

One of the best ways to measure the economic situation of a country is via
GDP. The pattern of GDP growth is held to indicate the success or failure of
economic policy and to determine whether an economy is 'in recession or
expansion. The concept of GDP was first developed by Simon Kuznets for a US
Congress report in 1934. In reality there are many factors that affect the GDP of a
country. In this article the author is talking about the economic situation in
Lebanon. So what are the current factors affecting the GDP of Lebanon? Some of
these factors are the oil prices, Syrian refugees, political uncertainties and the
domestic interest rates. In this paper we are going demonstrate that how these
factors affect the GDP of Lebanon and we are going to state opinions and
recommendations about this situation.

Summary:

The World Bank projected the GDP growth in Lebanon at 2.5 percent in
2015 compared to 2 percent in 2014, noting that the country is still vulnerable to
developments in war-torn Syria. The World Bank said in its MENA Economic
Monitor that Lebanon is still highly exposed to regional turmoil. The World Bank
added that the regional tension came at a time when the country is reeling under
the inability of rival political groups to elect a president. On the positive side, the
report said that security conditions within Lebanon's border have improved so far
in 2015 and a dialogue has been launched between opposing political parties. On
the negative side, the report said it would be difficult to predict how the regional
situation will develop this year.

Analysis
The author starts the article by saying that the GDP growth in Lebanon is expected
to reach 2.5 percent in 2015 compared to 2 percent in 2014.
The projected growth in Lebanon would be due to the expected rebound in oil
production among oil exporters. The primary benefit of the oil price drop comes
from a lower fuel bill for the national electricity company, Electricit du Liban.
This is significant given that in the past four years exceptionally high oil prices
have cost the Lebanese government, on average, an astounding 4.7 percent of GDP
to maintain electricity prices constant, by covering any price difference above $23
per barrel. Another positive impact is the fall of 20 liters of gasoline from
LL39,000 to LL22,000, benefiting consumers. If low prices are sustained, the
effects can eventually create an economic boost by increasing the spending power
of cash-strapped consumers.
On the negative side, the flow of remittances from Lebanese emigrants could be at
risk due to lower oil prices. In 2014, Lebanese expatriates sent a significant $7.7
billion to support families back home which constitutes more than 16 percent of
Lebanons GDP. As 60 percent of these financial flows come from Gulf countries,
they could be at risk due to lower oil price leading to project delays, budget cuts
and may ultimately impact the employment and income of Lebanese working in
the Gulf Cooperation Council states.

Also, the World Bank said that the Syrian war could still spill over into other
neighboring countries and Lebanon was one of them. The presence of more than
1.18 million Syrian refugees has further exacerbated the economic slowdown in
Lebanon, with unemployment reaching a record high. Donor states have pledged
billions of dollars to Lebanon to help the government cope with the huge influx of
Syrian refugees.
However, the government claimed that the financial assistance pledged to Lebanon
had failed to reduce the negative effects of the presence of the Syrian refugees.

Plus, the ongoing domestic and regional political uncertainties and security
breaches have kept consumer confidence and investors sentiment at low levels,
which has limited economic activity. Therefore the economy requires a positive
political shock for consumer confidence and investors sentiment to rebound to the
levels seen in 2009 and 2010. The drop in oil prices in the international markets
have given Lebanon a breathing space. It has provided Lebanon with a window of
opportunity to undertake fiscal policy reforms, but authorities have yet to
formulate a concrete strategy to adjust to the new era of low hydrocarbon prices.
Economists fear that the public debt could increase to around 143 percent of GDP
in 2015 in the absence of fiscal reforms, which would leave Lebanon vulnerable to
shifts in the availability of finance, the primary surplus needs to be raised to at
least 2.7 percent of GDP to ensure a decline in the public debt ratio.

At the end of the article the author mentions a raise in the domestic interest rates to
maintain the margin on USD and LBP deposits in Lebanon. The expected increase
in Lebanese interest rates is more related to the evolution of global interest rates
than to the borrowing need of the finance Ministry. According to economists, the
Interest rates on Lebanese currency could increase slightly in 2015 at most by half
a percentage point, due to the expected 0.25 percentage point increase in U.S.
interest rates by mid-2015. Which will further discourage investors in Lebanon.
Lebanon will expect fiscal deficit of 10.8 percent of GDP in 2015.

Opinion and Recommendations

The drop in oil prices in the international markets have given Lebanon a breathing
space because production costs have decreased and disposable income has risen.
However, the country's real GDP growth forecast of 2.2 percent for 2015 continues
to be below the required growth level to change the dynamics of the Lebanese
economy.

Consumer confidence and investor sentiment in Lebanon continue to be severely

affected by domestic political instability and regional turmoil, so it is not surprising
that growth will remain at low levels in 2015. The Lebanese economy has suffered
a major slowdown since the outbreak of the conflict in Syria in 2011. Lebanons
GDP growth decreased to 1.2 percent in 2013 from 3 percent in 2011 when the
Syrian conflict broke out, bringing to an end three years of nearly double-digit
growth for the Lebanese economy. The stimulus targets the real estate sector with
over 50 percent of loans reserved for housing with a ceiling of 800 million LL. per
loan. The real estate sector has suffered the most as a result of political and
security instability that has scared off both local and foreign investors.

Lebanons Central Bank should maintain the current interest rates throughout 2015
even if the U.S. rates rise slightly in the second half of this year because the
country's inflation rate is going down, mainly owing to lower global commodity
prices and the significant appreciation of the Lebanese pound via the countrys
main trading partners, particularly the eurozone. The Lebanese pound, which is
pegged to the U.S. dollar, has gained significantly against the euro since the
European Central Bank announced its quantitative easing program last month,
sending the euro to an 11-year low of $1.1115.
According to the IIF, Lebanon's inflation rate will decrease from 1.6 percent in
2014 ot 0.5 percent in 2015; and lower oil prices and a stronger Lebanese currency
will reduce the cost of Lebanons imported goods from an estimated $19.2 billion
in 2014 to $17.2 billion in 2015, which should improve the country's current
account balance.

Lebanon should also improve its fiscal situation. The fall in global oil prices has
provided Lebanon with a window of opportunity to undertake fiscal policy
reforms. Without these reforms, the county's public debt could increase, which
would leave Lebanon vulnerable to shifts in the availability of financing. The
country can improve its fiscal situation by strengthening tax revenue
administration, combating pervasive tax evasion and gradually raising the average
electricity tariffs, which have remained unchanged since 1996 when the global
price of oil was $23 per barrel.

According to the IIF, with all these measures taken, the primary surplus would rise
to 5 percent of GDP, the fiscal deficit would narrow to 3.3 percent of GDP by
2018, and the public debt-to-GDP ratio would decline from 140 percent of GDP in
2014 to 117 percent by 2018.

Conclusion:

In conclusion we can say that decrease of oil prices have a significant impact
on the GDP of Lebanon. On the other hand the Syrian refugees, political
uncertainties and the increase domestic interest rates also affected the economic
situation of the country. As we can see the GDP of Lebanon is growing from year
to year therefore, the country is on an expansion. However, Lebanon should
improve its fiscal situation via tax revenue administration, combating pervasive tax
evasion and gradually raising the average electricity tariffs to avoid recession and
to increase more the GDP growth of the country.

Article
World Bank: Lebanon still exposed to regional turmoil.
BEIRUT: The World Bank projected the GDP growth in Lebanon at 2.5 percent in
2015 compared to 2 percent in 2014, noting that the country is still vulnerable to
developments in war-torn Syria.
The World Bank said in its MENA Economic Monitor that Lebanon is still highly
exposed to regional turmoil.
The border with Syria remains menacing as coordinated attacks by ISIS and Al
Nusra are frequently launched from bases in Syria. While the influx of Syrian
refugees decelerated significantly in 2014 after the Lebanese government imposed
entry restrictions, Lebanon continues to host around 1.18 million UNHCR-
registered refugees from Syria amounting to 26 percent of the population, the
report said.
The World Bank added that the regional tension came at a time when the country is
reeling under the inability of rival political groups to elect a president.
It also said the Lebanese economy performed relatively well in 2014 compared to
2013, although not as well as in 2008 and 2009.
Stronger economic performance and lower oil prices pushed real GDP growth to
an estimated 2 percent in 2014, compared to 0.9 percent in 2013. The fiscal deficit
declined to an estimated 7 percent of GDP with the primary balance reverting to a
surplus after two years in deficit. Declining imports led to an improvement in the
current account balance though the overall level is still high at 22.2 percent of
GDP, the World Bank said.
On the positive side, the report said that security conditions within Lebanons
border have improved so far in 2015 and a dialogue has been launched between
opposing political parties. This is likely to have a positive impact on consumer
and investor confidence. In addition, oil prices are expected to stay low and this
will help improve the countys current account balance. Overall, we expect real
GDP to grow by 2.5 percent in 2015, up slightly from 2014, it added.
We also expect the current account deficit to narrow further to 16.7 percent of
GDP. We expect the fiscal deficit to stay roughly constant at 7.2 percent of GDP as
reduced transfers to Electricite du Liban from falling oil prices are likely to be
offset by higher debt servicing due to rising interest rates, the World Bank said.
But on the negative side, the report said it would be difficult to predict how the
regional situation will develop this year.
And, on the economic side, with reasonable prospects for Fed tightening this year,
Lebanon is likely to follow suit and raise domestic interest rates to maintain the
margin on USD and LBP deposits in Lebanon. This will negatively impact lending
to the private sector and raise Lebanons debt service costs, as new debt will need
to be contracted at higher interest rates given the short average debt maturity of the
current portfolio and the ongoing large gross finance needs, it argued.

http://www.dailystar.com.lb/Business/Local/2015/Apr-16/294589-world-bank-
lebanon-still-exposed-to-regional-turmoil.ashx