Lebanon’s Fragile Strength

The economic agenda must be a priority if the government is going to tap the country

As we keep hammering in many articles, the end game for a country like Lebanon is to attract and keep foreign investors. The thinking goes that foreign investment in the private sector will serve to offset the debt-laden public sector and help fuel economic growth. As eloquently put by our economics minister, economic growth needs an increase in job creation. This is a national interest issue. What is puzzling, when one watches the political landscape, besides the ineptitude of most politicians and their thirst for individual enrichment, is how little they are focusing on the need to get this economy going.

Back in the Hariri days, despite all what has been said and done, there was a clear emphasis on getting the economic engine running. The best testimonial to the good work done by Hariri is in fact the current behavior of all asset markets in Lebanon. Many pundits and critics often speculated that Hariri held the country together, and while this is being revealed from a political perspective now, from an economic point of view, it is now clear that he had developed a deep conviction among investors that this country is for real.

The risk now, is that the resilience we spoke of in the December issue, ie the continuing flow of capital, will be jeopardized by political wrangling. What is astounding, is that part of the body politic is fiercely opposing the internationalization of the Lebanese question, while what the Lebanese economy needs, is exactly that.

After 30 years of total Syrian tutelage – and I use the word generously – Lebanon is now in a position to bid for its sovereignty. This, from an economic perspective has profoundly positive implications. It has placed Lebanon on the map in terms of the global money game. Sound simplistic? Not really.

Internationalization

The missing link that is stopping Lebanon’s economic acceleration is its adherence to an international agenda. If one looks at Turkey for instance, it is clear that once there is a genuine sponsorship of economic and fiscal steps by the international community, there are certain rules and guidelines that must be respected. Turkey could not have achieved the economic growth and embarked on the path of development economic integration, without the backing of the World Bank and the IMF.

Lebanon is no different in many respects. How do we expect the international economic and financial entities to back us, without delivering on the most basic framework that governs international relations? Many political talking heads reject in a vociferous manner for instance, privatization. How can any fiscal balance be restored if privatization is not backed and implemented? More pressing yet, is how Lebanon can reap the benefits of strong Sovereign debt ratings by Moodys and Standard & Poors, without achieving full sovereignty. All these hot issues reveal what a critical crossroads Lebanon is at. On one hand, we have seen a fairly stable, albeit anemic economy, with strong advances in major shares thanks to regional interest, and hot real estate transactions, and on the other a deep division inside the political panorama as to how much “internationalization” there should be.

In essence, there is a clear disconnect between what is occurring on the economic (and financial) front, and the political mood. Take for instance the mega deal announced by Audi Saradar Group to raise its capital by $600 million coupled with a large Egyptian group’s 20% stake in the bank. On that same day, the political news was horrendous. This dichotomy shows that most politicians are not aware of the economic opportunity that lies ahead for Lebanon, and that as the political bickering continues, players with fundamental belief in Lebanon are pouring money into the country’s private sector. It is the epitome of Lebanon’s contradictions, that an Egyptian investment bank is showing more faith in the country than many of its politicians. What needs to happen politically is clear to all. Lebanon is on the doorstep of normality with the international community, it needs to address its internal incongruence with one thing in mind: prosperity. This cannot be achieved by challenging the world, upon which it is entirely reliant to get its fiscal and economic house in order. This is also clear evidence that outside money is chasing Lebanese assets. Bank shares are soaring; finally joining their regional brethrens. Solidere, the epitome of Hariri’s reformist thrust, is witnessing unprecedented flows from all sorts of investors. This represents a positive factor going forward, but it also, perversely, is a source of vulnerability. These moves in asset markets are a clear vote of confidence, but if the political scene is not calmed, it may all go to waste. Simply put, once investors have put their money in a country they believe in, the onus is on the politicians to encourage them to continue, creating a virtuous circle. It is a fair bet that that most of the investors in Lebanon feel that the internal issues will be resolved, and more importantly that true reform is on the way. The money that has come in will now be in a “show me” mode, requiring immediate action from the policy makers. If the political gridlock results in excessive delays in reform, and by that we mean privatization, then investors will be as quick to bail out as they were to hand their money over to the Lebanese private sector.

Lebanon is a country operating well below its economic potential. Its pluralistic fabric is a source of strength, in a fairly dogmatic and monolithic regional environment and it has magnificent kinetic forces: high literacy, high profile and wealthy Diaspora willing to invest, and a stellar role in helping reshape the whole Arab world. These attributes should be protected and harnessed in order to reach potential.

In many ways, Lebanon can be a standard bearer for change in the region. Prosperity is the best glue to keep together often diverging views of national identity and foreign allegiances. It is clear that change is inevitable both in Lebanon and in Syria, and we are clearly on a path which will better the economic performance of both, but in order to lubricate the process and defend the gains achieved, we must focus on the economic agenda, and let it drive the political one, not the other way around. However, one worries that the drive to privatize for instance will be portrayed as“internationalization” and stall, because without privatizations and reform of the public sector, the flare up in Lebanese assets and the relative stability of the economy will go down the drain. Lebanon is now in a position with a lot to lose, and therefore those who claim to protect it must bear that in mind.
 

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