Sucked in

Hezbollah declaration means Lebanon finally overtly embroiled in Syria crisis

Despite the government’s official policy, Lebanon has never been truly dissociated from the Syria conflict. However, until late the involvement of Lebanon’s divergent factions across the border has been covert, opaque and from afar. In this past month, that has changed — bringing the conflict ever closer to home.

The deteriorating security situation is perhaps not surprising but it is disturbing. On a trip in early May to the Hezbollah stronghold of Hermel, north Lebanon, Executive stood with local residents as they inspected the red hot tail of a rocket that had just crashed into a hillside overlooking a family fairground. “This is not the first and it won’t be the last,” one of them said. Correct, he was.

As he spoke Hezbollah was escalating its involvement in the bloody battle for the town of Qusayr, eight kilometers into Syria. A rise in the number of their fighters coming home in body bags has followed.

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Perhaps inevitably, as violence in the socially and economically dislocated Beka’a grew, the conflict enflamed again in Tripoli — the scene of on-off battles between groups in support of and opposed to Syrian president Bashar al-Assad for years. The body count from more than a week of fighting reached 29, including two Lebanese soldiers.

Then on Saturday, Hezbollah leader Sayyed Hassan Nasrallah delivered a speech that defiantly nailed the party’s colors to Assad’s mast. Describing the government in Damascus as the “backbone” of the resistance to Israel, Nasrallah declared, “We entered a new phase a few weeks ago: the phase of fortifying the resistance and protecting its backbone.”

Only hours after Nasrallah had proudly declared his party’s involvement in Syria, the violence within Lebanon completed its advance to the capital Beirut with two 107mm rockets slamming into the Shia and Hezbollah dominated Shiyeh southern suburbs. Five people were injured — and another unsettling line was traversed.

A battle for confidence

All of this is catastrophic for confidence, which is paramount for the Lebanese economy. One need just look at Banque du Liban’s — Lebanon’s central bank — coincident indicator (which gauges the country’s economic activity) to see how responsive the economy is to political and security developments. “In Lebanon confidence is the most important thing. Politics is 95 percent of it. You can feel it from the restaurant to the stock market,” observed Mazen Soueid, chief economist BankMed.

Foreign direct investment and consumer confidence have nosedived and growth in the economy plateaued at 1.2 percent over 2011 and 2012. A reflection of this debilitated situation came with the Moody’s downgrade in mid-May from stable to negative for the outlook on government bonds and for the deposits ratings of the country’s three biggest banks.

The security crisis is both related to and compounded by the almost complete paralysis of the political establishment, and this in turn is further stripping whatever confidence remains that Lebanon can shelter its economy from the Syrian tragedy. “We really need a government that can neutralize the economy from the political environment; this is especially true with everything that we see today,” said BankMed’s Soueid.

However, the resignation of Prime Minister Najib Mikati in late March has stripped the executive branch of its ability to pass any new decrees — reducing it to little more than the guardian of day-to-day business. Furthermore, despite the media circus of negotiations, it is now highly likely that the lack of consensus on a new electoral law will mean parliament’s term will be extended — a move that is constitutionally dubious to say the least.

Perhaps the biggest indicator of the lack of faith in politicians and the government to help shore up the flagging economy is the increasingly vocal reticence of Lebanon’s powerful banking sector to keep on unconditionally financing the national debt. “The banks have reduced their exposure to Lebanese pound-denominated treasury bills and while we continue to exchange Eurobonds I don’t think we will continue to indefinitely subscribe if there are no concrete reforms,” warned Nassib Gobril, head of research at Bank Byblos.

The central bank has stepped in to fill the void and buy up government papers in what is ultimately a short-term fix to an unstable and unsustainable situation. For now this intervention will keep the government afloat and stop interest rates from spiraling skyward, which would further hobble the economy.

Restoring some vestiges of confidence in the economy is first and foremost predicated on security. Although this month’s events don’t bode well, a good first step would be if all the involved parties, and they are plenty, were to step back from the affray, tone down the vitriol and show some commitment to the welfare of Lebanon.  

If at least a veneer of stability can be maintained then perhaps the nation and its economy can be saved from being washed up on the rocks. This of course requires concerted political will. As the seeds of sedition are strewn around us, it is a tough ask to expect anyone to fix that conundrum.

 

In next month’s magazine, out on Saturday, Executive will dig deep into the country’s banking sector and whether it is the last hope for a faltering economy. To subscribe click here.

Zak Brophy was Executive's Economics and Policy Editor from 2011 until 2013.

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