Lebanon’s economy and industry suffer under coronavirus impact

The two-in-one catastrophe

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When seeking to fathom how Lebanon’s pre-existing economic woes correlate to the newly unfolding global coronavirus recession, a first obstacle is posed by the extreme speed with which this recession is  unfolding. In February, and even earlier in March, international agencies, leading economic powers, financial institutions, and noted economists assumed that the virus’s impact might be sharp or moderate but limited to the short term.

By the end of the second week in March, however, the tone of assessments had changed dramatically. Expectations of recessions in leading economies such as the United States now see a recovery starting in the fourth quarter of the year—in optimistic scenarios marked by a seasonal pattern with the first wave of coronavirus infections peaking this spring. Less hopeful scenarios see no resumption of GDP growth in corona-stricken G7 economies before the first quarter of next year, and some noted economists anticipate far worse, a deep recession of unpredictable length.

In a summary view, roughly three quarters of 41 Europe and US-based economists polled by Reuters in the third week of March said 2020 would see a global recession, and their sentiments reportedly grew still gloomier as the week progressed.  Where does this leave Lebanon, struggling already with an historic economic crisis of existential proportion?

Frontline sectors of the Lebanese economy with reliance on uninterrupted daily business—from the marginally self-employed and informal workers to general retail, luxury retail, hospitality ventures, and hotels—are unquestionably the immediate victims of the standstill of economic activity forced upon them by the necessary containment efforts to counter the threat of the COVID-19 epidemic in Lebanon.

Beyond this portion of the economy that is exposed to short-term impacts, however, the situation has turned so dire for the entire economy, and the Lebanese people as its stakeholders, that attempts to verbalize the disaster’s scope can only choose between metaphors in the superlative range. Is it more appropriate to compare the state of economy to being faced with a volcano eruption on top of an earthquake, or is it more fitting to liken it to a tsunami that follows just after the devastation of a monster hurricane?

Monster clouds over the country

Lebanese economists whom Executive reached by phone confirmed the impression, albeit in less dramatic words, that the country is undergoing a two-in-one crisis. While the implications are especially severe in terms of further increases of poverty and social destitution of the population, it also impairs the motors of hope that had existed (when taking into account that a resurgence of the hospitality industry and tourism has shifted considerably farther away, and that new complications in the financial markets also appear to push prospects of development there farther into the future).

“The coronavirus effect will be catastrophic on the world economy, and the Lebanese economic situation will be more and more catastrophic, amidst the halt of economic activity,” says economist Elie Yachoui, framing the picture in neutral words. But that phrasing makes his subsequent description of the economic outlook no less scary. “We can say that the middle class in Lebanon will be totally extinct. They will be the new poor,” he says.

In Yachoui’s perspective, the economic downturn will leave even the moderately well-off, those who have some savings in their accounts, in no advantaged state as they are not able to fully access those savings due to problems with banking and inability to obtain hard currency. He tells Executive that only the top ten percent of the population may find themselves to be better off, those who have deposits in accounts outside of Lebanon.

A similar assessment is voiced by economist Roy Badaro, who notes that a recent World Bank warning about the poverty level in Lebanon increasing from 30 to 50 percent of the population under the country’s prior economic crisis may no longer be adequate for describing the scope of the malaise. “I expect an 80 percent poverty level,” he says. “Only 5 percent of families will be able to keep the same level of consumption, and another five percent or so will be okay—all the rest will suffer a lot.” According to Badaro, the scale of economic suffering will vary but the relative poor of today will become very poor, and a serious threat of starvation could surface in about three months’ time.

Notably, the exacerbating effect of coronavirus health crisis and economic recession is also affecting the country’s manufacturing industry, a major driver of the economy. Fady Gemayel, the president of the Association of Lebanese Industrialists (ALI), tells Executive: “It is indeed a very dramatic situation. We [industrialists] are all primarily concerned about public health and of the health of workers in industry and the whole [manufacturing] chain.” 

According to Gemayel, the immediate challenges, in addition to their human impact, have operational and economic dimensions. “We see that things are unfolding very dramatically as industry has been requested to limit their operations to basic sectors of food, pharmaceutical, necessary consumer product industries, and what is needed in the production of these products,” he explains.

New operational challenges affect manufacturing enterprises that can continue to work, he adds, because they have to take extra safety measures not only for their personnel but for all stakeholders involved in distribution of their products. “At the same time, there is a challenge as far as going ahead into the future as most [enterprises] are not working,” he says. “This poses serious [economic] problems because it [compounds on] the previous problems that we had. As if we needed that.”

Nuanced in the details and unseen opportunities

Despite this overall burden that the recessionary environment of the coronavirus puts on all industrial sectors, the picture turns more nuanced when delving deeper into industrial activity and subsectors of manufacturing. Some subsectors—namely those with a stake in the digital realm and orientation toward exporting their goods and services—are saying they see those silver linings on their horizons, even as they are hit by the coronavirus crisis in conjunction with the preexisting Lebanese economic crisis.

Multilane, a company with wholly export-centric profile as supplier of infrastructure components for the global data center market, has been affected by the coronavirus on levels of work flow and its international supply chain but has been able to cope with these impacts, CEO Fadi Daou tells Executive. “We are doing okay,” he says. “Everybody is, of course, working from home, not just here (at the Lebanese manufacturing site) but also in our global offices in the US etc. The company is still on a steady path.”

A challenge that Daou had to deal with specifically relates to the company’s reliance on an international supply chain. Generally, disruptions of work at factories—first in China’s Hubei province, then in manufacturing plants in South Korea and finally in countries around the world—and disruptions of international shipping and cross-border transport. These disturbances notably represented an impediment that differentiated the downturn of the real economy triggered by the coronavirus pandemic from the financial upheavals that played the central role in earlier recessions, including the Great Recession of 2007-9.

“We are affected by global supply chain delays,” Daou says. “Much of our supply chain is sourced from southern China and some from Taiwan. That has been impacted.” What mitigated the disruption for Multilane, however, were two elements. The first such factor, according to Daou, was that the area of origin of supply for electronic components is centered in the southeast of China rather than the midwest, where the Hubei province, the most heavily affected by the virus, is located. Besides the better functioning of the supply chain on the Chinese end, the second factor aiding Multilane in its management of component supplies was its habit of maintaining some inventory because of the well-known vagaries of importing materials to Lebanon. “We do have one to two months delay in our supply chain,” he explains. “That could, of course, be increasing—and we would be impacted—but since we operate in Lebanon we typically don’t rely on [just-in-time] supply chain but keep two to three months buffer of material.” 

The deepest problems that Daou faced in terms of his international dealings actually occurred at the end of last year and were caused by the Lebanese economic crisis’ sudden restrictions on financial transfers via Lebanese banks. The problem was acute until the company could start to rely on inflows of fresh cash, meaning hard currency wired to its account after last October. “We did face some serious disadvantages when we were no longer able to pay our suppliers and our employees [in our offices abroad], so we lost quite a bit in the initial shock,” he says. “Banks did not give us three months to adjust and that was costly on our topline and our bottom line, which had a significant negative impact in the November/December time period of 2019. However, we recovered by January and we were able to shift some business outside the country.”

Another sector of industry to expect new opportunities are software companies that are currently anticipating a shift in corporate demand of local companies in favor of local suppliers, says Joe Hatem, CEO of Lebanese software house Profiles. The company has been in business for some four decades and is specialized in enterprise resource planning (ERP) software. “We are right now under the shock of the corona crisis but once the shock settles, the software industry has golden opportunities,” he says. “One because it is an industry that can export its services or its goods using very little imported material—mainly no imported materials at all.”

Secondly, in the domestic market, an effect of Lebanon’s economic crisis was that companies suddenly—due to the impossibility of making the requisite international transfers—ran into big problems with paying for software licenses from the international suppliers that dominate global markets. In this scenario, local beats global. “We suddenly become a better opportunity, because we are selling locally [and] cashing locally,” Hatem says. “Thus [software purchasers in Lebanon] can do better business with us than with imported software. I foresee that this will be a factor to give us a boost. What remains is for us to be aware of this and make good use of this opportunity. We are working on that.”

Hatem says it is a blessing for his company during the coronavirus-induced economic restrictions that “its work is digital” rather than dependent on physical production of goods and physical deliveries. Similarly to tech company Multilane, Profiles could quickly shift its engineers from coming to the office to working from home. The ability to service at least part of its client base remotely as well as being engaged in exports and receiving some payments in fresh money enabled Profiles to manage the coronavirus shock relatively well.

However, Hatem voices a grave concern that is of specific importance to his activity and industry. “The internet has become crucial more than ever,” he says.  “We can survive as far as dealing with banks even as things are slowing down. But if internet came to be in a situation of slow operation or no operation, everybody will be in trouble.”

This highlights how different industries with different specializations are exposed to singular bottlenecks and technical vulnerabilities, even if they are embedded in the digital economy. It furthermore illustrates how complex modern economic and social equations are, as a human or economic risk in one area of digital-era existence may have a less obvious tradeoff in another area.

According to Daou, online connectivity does not play as crucial a role for Multilane’s operations as it does for the software industry. Instead of focusing on short-term risks of higher internet consumption and resulting stresses on the existing infrastructure (some European countries saw a 10 percent increase in internet usage in just one week in March), he sees an opportunity in the fact that internet usage has been recently spiking. Providers of web conferencing, video streaming, and entertainment will, in the mid to long term, have to invest in their internet and data center infrastructure. “We don’t know how long this will take but we expect a very significant uptick in business activities,” Daou says.

Support or self-reliance?

One question where the industrialists interviewed by phone for this article were of one and the same mind was the issue of governmental support. Asked if they were looking for any fiscal assistance from the Lebanese state, something that would reflect even a small portion of the large fiscal and monetary relief packages that recently made news from governments in countries all over the world, they just laughed or sighed in exasperation. They all know too well how severe the financial limitations of the Lebanese state are, and how drained the coffers at the treasury and the central bank.  

Referring to what the Lebanese government should do, the Association of Industrialists’ president tells Executive that the government, at a minimum, needs to defer taxes to help mitigate the economic repercussions of the coronavirus pandemic, calling for a “lifeline for industry and for people.”

Gemayal continues, “I think the government should be very responsible in the sense of addressing the issues of dues to the public sector. What can they do with reference to this issue? [But also] there is a social issue that needs to be addressed, [and] a liquidity issue that needs to be addressed. How can the government [respond to these needs] and where can they bring funds from? I think it is necessary to solicit any specific aid from donor agencies that are not necessarily politically connoted.” 

He concedes that it will put Lebanese industry at a competitive disadvantage internationally if they cannot benefit from direct financial support measures from the public coffers, whereas enterprises in other countries receive sizeable fiscal support under very large rescue packages. This is not what is on his mind, however. “We are not here to complain that their situation is relatively better than that of Lebanese industries,” he says. “We are concerned with moving forward and meeting the challenges head on. We need to limit the damage and take advantage of available resources.”

One further point of concurrence among industrialists and economists interviewed in the early stage of the corona crisis in Lebanon was that the beginning of the solution to their dual conundrum and emerging existential recession lies in the realms of politics and changing attitudes. Now, more than ever, a rethink of economic strategy for the Lebanese economy is needed and this enormous task requires universal investments of mental effort by political and economic decision-makers without regard for partisan political concerns, exclusionary views, or special interests on national level or even beyond. The coronavirus crisis is global and thus prone to generate long-term changes that can be opportunities to rectify misaligned political and economic patterns. As Hatem puts it, “We need to reengineer our minds as well [as our strategy for finance and economy], and our relation with nature and with the Earth.”  

In this context of the overriding whole, the particular mood in the industrial camps of the Lebanese economy appears to be both defiant and desperate, but with an overall tendency of being determined to sustain industries against all odds in this two-in-one crisis of Lebanon’s mess and the global coronavirus recession. Even as he acknowledges that the pandemic is globally unique and that today’s obstacles to financing of raw materials similarly were never seen in Lebanon even in the days of the civil war, Gemayel says, “We do not want to give up. In Lebanon we have been through challenges in the past and lived up to them.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.