Lebanon’s troubled economy now under spotlight

IN THE AFTERMATH of former prime minister Rafik Hariri’s assassination two weeks ago, the focus has fallen firmly back onto the country’s economy. This follows the publication of two damning reports on the state of Lebanon’s finances by respected economic bodies.

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By  Rhys Jones Published  February 27, 2005

IN THE AFTERMATH of former prime minister Rafik Hariri’s assassination two weeks ago, the focus has fallen firmly back onto the country’s economy. This follows the publication of two damning reports on the state of Lebanon’s finances by respected economic bodies. International rating agency Moody’s maintained its negative outlook for Lebanon this year. A report released last week by the credit rating service said the country lacks the characteristics of a desirable investment environment. The report, which follows an equally unflattering country risk analysis study on Lebanon by the Economist Intelligence Unit (EIU), said that the negative rating outlook for the country reflects the absence of substantial reform since the Paris II conference of November 2002, due to the competitive and unstable nature of domestic politics. Moody’s ratings are an indicator of the potential for credit loss due to a failure to make payment, delay in payment, or partial payment to the investor. The agency’s ratings measure total credit loss and are initially determined or subsequently changed through committee. Rating agencies and international financial organisations are concerned about the government’s inability to adopt drastic measures to reduce the public debt and stimulate the economy. “The highly speculative B2 ratings for Lebanon’s country ceiling for foreign currency debt and deposits and the B3 domestic debt rating reflect the country’s significant public sector debt — forecasted to be 177.9% of the GDP at the end of 2004,” Moody's report said. It added that lack of success in establishing long-lasting reforms is a concern as it could make foreign and domestic confidence revert and the level of reserves decrease quickly, but the country is still running deficit of about 9%-10% of GDP. In recent years, Lebanon has secured US$2.5 billion in soft loans from France, Saudi Arabia, Kuwait, UAE among other countries in order to reduce debt servicing. This assistance was attached to a clear condition that Lebanon implements an economic plan and proceeds with a privatisation programme. “We [EIU] have been looking for some progress with the reforms that were promised at the same time as Paris II from Lebanon,” Simon Williams, senior economist, EIU told Arabian Business. “However, a lot of the structural measures promised; privatisation being the most obvious one, simply haven’t transpired. Couple that with a very uncomfortable political outlook and frankly it’s not at all surprising that Lebanon’s on negative outlook,” he added. The cash injection from the donor states replenished the Central Bank’s foreign currency reserves, which reached US$12.5 billion at one point. Nevertheless, these reserves fell below US$12 billion last year due to increasing pressure on the Lebanese pound. Moody’s said that a continuous and sustainable decrease in debt servicing costs linked to reforms and privatisation could bring the rating up. “Regional or domestic instability could result in a return of rate pressure ... this means rating could further come down,” the agency’s report stated. Lebanon did manage to achieve 5% growth in 2004, benefiting from a rebound of tourism and exports. “Nevertheless, the Lebanese economy is characterised by a lack of diversity. Industrial activities are still weak, with important service sectors, especially tourism, and banking, contributing almost 70% to GDP,” the report stated. Apart from the financial problems, Moody’s and the EIU expressed concern about the political situation in Lebanon and the region. Both agencies believe political squabbles between President Emile Lahoud and recently deceased former prime minister Rafik Hariri dealt a severe blow to any possible economic and financial reforms. “[Laoud and Hariri] actually cooperated at Paris II. They put on a united front for it and were actually working together and signing the same tune,” explained the EIU’s Willaims. “In spite of this, very quickly after Paris II it became very clear that Lahoud wasn’t going to allow Hariri to push on with the measures that he saw as being essential to economic and fiscal reform; mostly for political reasons. At the moment I would say Lebanon’s political environment is not conducive, as we stand, for economic reform,” he added. Lebanon did well out of Paris II because it gave the country access to some low-cost concessional foreign debt and it opened up the chance for negotiations with other creditors, in particular commercial banks, which provided around US$3.5 billion zero-cost financing for the country’s debt restructuring. The Central Bank was also generous and it was hoped that the funds would be used to reduce the cost of debt seriously and would be coupled with structural reform, fiscally in terms of cutting expenditure but also structurally in terms of privatisation and other measures. This simply didn’t happen. “Once the post-Paris II deals were executed the fiscal pressure came off, then the reform process slowed markedly and I think a lot of that comes down to political differences. I think that had Hariri been left to follow his head post-Paris II we would be in a different position to where we are now,” suggested Williams. Finance minister Elias Saba has now submitted 18 proposals to a parliamentary committee to stimulate the economy and cut red tape. But analysts believe the government may not have enough time to implement any of its reforms because the cabinet will resign after the parliamentary elections in May. “Until political issues in the country are resolved and until we get past the general election and a stable and effective government is appointed, I think Lebanon is in no position to take real steps to address its economic issues,” said Willaims. “The new government will have to start off by cutting non-debt spending, which is absolutely key. But until political issues are resolved, its difficult to see how the country can move forward,” he concluded. For full story, buy Arabian Business, on sale from February 27.

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