Judging an economy solely by the numbers rarely reflects the situation on the ground, especially in Lebanon. In 2009, the country experienced an economic rollercoaster with gross domestic product growth estimates ranging from a pessimistic low of 2.4 percent at the beginning of the year — due to the perceived effects of the international financial meltdown — to the optimistic high-end estimate of 7 percent growth some were proffering by year’s end.
While growth of some sort was almost certain, the Lebanese economy is still vulnerable, especially when it comes to managing or reducing its gargantuan debt.
The greatest success story has been in the banking sector, which has seen a 21 percent rise in deposits from September 2008 to September 2009, reaching $92.2 billion, with total assets rising 16.6 percent to $109.9 billion in the first three quarters of 2009, according to the Association of Banks in Lebanon (ABL). Compare that figure to Lebanon’s GDP projection of $32.7 billion — according to the International Monetary Fund — and, considering that banks and governments around the world were reeling from a lack of liquidity, Lebanon’s situation at the end of 2009 is enviable.
But a banking sector alone does not an economy make. The high energy prices in 2008 had a knock-on effect for many in the industrial and manufacturing sectors, who finally threw in the towel in 2009. The most remarkable closure was arguably Uniceramic, one of Lebanon’s flagship manufacturers, which produced 82 percent of the ceramic tile market share in March 2006. The company went bankrupt in September after high energy costs, cheaper imports and being stripped of safeguard measures saw its margins plummet. One of the few companies listed on the Beirut Stock Exchange in its early days after the Civil War, Uniceramic was finally delisted once and for all in November 2009.
Another sector that has seen better days is the agricultural sector, not least because of the scandal that erupted late in the year when lax regulation led to poisoned fruit appearing on local market shelves. The issue prompted many agriculturalists to lambast the government for its lack of focus on a sector that is the main source of labor for much of Lebanon’s rural population.
While reliable figures are not readily available, the sector is estimated to be worth some $1.5 billion by those in the industry, and the Economist Intelligence Unit’s (EIU) latest figures, from 2007, put its share of GDP at some 5.2 percent. According to Bank Audi, Lebanon’s agricultural exports amounted to a meager $69 million in the first six months of 2009.
“The share of GDP that agriculture and industry hold is around 15 percent,” says Kamal Hamdan, economist and managing director of the Consultation and Research Institute. “It’s not at the heart of the club,” he adds, referring to the Lebanese government’s focus on other economic sectors such as banking, real estate and services.
The amalgamation of these two faltering sectors, industry and agriculture, may prove to be their salvation. The agro-industry sector has seen double digit growth in the past few years, as well as in 2009, according to Nabil Itani, chairman and general manager of the Investment Development Authority of Lebanon (IDAL), the governmental institution that promotes investment in the agro-industry sector and other “productive sectors.” Again, exact statistics are unavailable.
“We don’t have industrial, tourist or sectoral censuses. We don’t count the production in each sector,” laments Jad Chaaban, acting president of the Lebanese Economics Association (LEA) and associate professor of economics at the American University of Beirut.
Even without sector specific data, indicators show that the tourism sector has done exceedingly well and real estate held relatively stable in 2009 riding, respectively, the 2 million tourists expected to have visited Lebanon by year’s end and a constant flow of real estate investment from inside and outside the country. According to Byblos Bank, by October 2009, a total of more than 1.4 million tourists had arrived in Lebanon, an increase of 46.3 percent over the same period in 2008.
Real estate sales transactions over the year declined by only 3 percent to total 55,482 in the first three quarters of the year, according to the General Directorate of Land Registry and Cadastre (GDRLC). The figures are a marked decline from the 24 percent yearly growth in transactions from 2007 to 2008. The total value of transactions during the first nine months of the year reached $4.3 billion indicating a 6.4 percent drop over the same period in 2008. Be that as it may, the accuracy of these figures has been questioned by some who deem their source, the GDLRC, as susceptible to false declarations from real estate firms and other obfuscating elements.
Karim Makarem, director at Ramco, a Lebanese real estate advisory company, says that one reason for this is because many sales are made off-plan and don’t get registered until buildings are completed.
“Transactions may be done a long time before [they are registered],” he says. “So you might have a situation where the real estate market is very stagnant and the figures being released are ever increasing.”
An elusive formula
When all the figures are tallied, Lebanon’s real economy is expected to have recorded bumper growth in 2009, albeit less than the IMF’s figure of 8.5 percent seen in 2008. The real amount of growth, however, is a contentious topic in the country’s economic community. The latest figures from the IMF predict a total growth of 7 percent for 2009. However, according to Bank Audi’s research department, the last GDP figures provided by the government are those from 2007.
“You have several problems with estimating GDP. Even the government accounts are not up to date because they run on arrears,” says Chaaban. He predicts that 5 percent GDP growth is a more accurate number considering that “too few companies report their accurate figures. Even when it comes to real estate registration, hardly anyone puts in the right figure. You end up with a system of estimation and not accurate measurement.”
Much of the debate over the country’s accurate GDP centers on methodology. According to Hamdan, the government is currently using the French National Institute for Statistics and Economic Studies’ (INSEE) methodology to calculate GDP. This method offers three different ways to calculate GDP (see box on next page) and uses several parameters that cannot be calculated if sectoral or income-based reporting does not exist or is indeed inaccurate.
“Unfortunately we have no surveys which confirm the situation at the level of the economic sector,” says Hamdan.
The difference in methodologies has prompted organizations such as the EIU to maintain an estimation of 5.1 percent real GDP growth in 2009 as of end-October.
Marwan Iskandar, economist and managing director of MI Associates, however, agrees with the 7 percent IMF estimate made in early October, saying that the figure is not just down to a bumper tourist season and real estate investments.
“The financial crisis had a beneficiary effect on the Lebanese economy because many Lebanese felt that their money abroad was not that safe, brought it back and are now looking at possibilities,” he says.
Iskandar’s point is substantiated by the fact that recent remittance figures have allayed fears of a decline in non-resident inflows to the country. According to the IMF’s most recent projections, Lebanon will attract a total of $7 billion worth of remittances in 2009, registering a contraction of only 2.5 percent on the previous year. According to Hamdan, some of this is a result of assets being liquidated by non-resident Lebanese, which could result in this phenomena being a one off.
The prognosis of many experts however, is that remittance levels will remain relatively stable in 2010, as the global economy is expected to see some kind of recovery and Lebanon has not seen the massive influx of expats from the Gulf that were expected due to the global downturn.
“There was a presumption that there was going to be massive unemployment in the Gulf and the reality was that while growth was stunted, massive unemployment was not created,” says Rabea Ataya, chief executive officer of Bayt.com, one of the largest recruitment firms in the Middle East.
The increased non-resident interest in Lebanon is also reflected in the growing amount of foreign direct investment in the country. In 2008, FDI reached $3.61 billion, according to a statement made by the United Nations Conference on Trade and Development, and is expected to hit $4 billion this year, says IDAL’s Itani.
Certain elements of Lebanon’s investment climate helped as well, such as the number of procedures needed to start a new business, which remain at five, lower than the Middle East and North Africa’s average of 7.9, according to the World Bank’s “Doing Business Report.” The report also stated that the time needed to complete these procedures had decreased from 11 to nine days in 2009 compared to a regional average of 20.7 days.
Despite the increasingly friendly investment environment, legal recourse in the country remains an obstacle for investors, because of Lebanon’s infamously tedious litigation process and inefficient judiciary.
“For the last 10 years, investors have depended on arbitration [instead of judicial process]. This is a solution because time is money,” says Itani.
As Executive went to press, the Court of Accounts — the judicial body responsible for Lebanon’s Financial Court — had not yet submitted its annual reports for the years 2006 to 2008.?Neither had it appointed a new president. The president’s post has been vacant since 2007.
Moreover, the special economic zone in Tripoli that was slated for construction at the end of 2008 was not created, although Itani expects it will be completed by the end of 2010.
Balance it out
One thing the Lebanese economy can also count on is a large and positive balance of payments (BOP) boosted by inflows of remittances, non-resident investment and a positive net increase in the foreign assets of the central bank.
According to the ABL, the first nine months of 2009 saw the BOP come in at a record $4.84 billion with the trade deficit narrowing to reach $952 million in September. Speaking at the Union of Arab Banks annual conference in November, Central Bank Governor Riad Salameh even stated that the balance of payments had reached $6 billion in October.
That bloody debt
As for public finances, there has been little progress. Lebanon’s gross public debt, which is held in most part by local commercial banks, continues to mount and is expected to reach $50.46 billion by the end of 2009, according to Byblos Bank projections. The cost of interest payments on the debt is the heaviest burden the government carries. According to Lebanon’s finance ministry, debt servicing amounted to $2.91 billion in the first nine months of 2009 alone, well on its way to the 2009 budget’s target of $4 billion for the year. That budget, released in August 2009, is just a proposal, however, and has no legal bearing since no budget has been ratified since 2005 by the Lebanese Parliament.
Iskandar predicts that the final amount of debt for the year will come to around $4.4 billion, but he insists the situation is not “destitute” except when it comes to political decisions.
“The government can do something about it [the debt] but they don’t because the political system is based on clientelism and nepotism, not achievement or performance,” he says. Still, Iskandar believes that the situation is better than the numbers suggest, because 83 percent of the debt is held by both Lebanese individuals and institutions that have an interest in continuing to hold this debt, because “it pays rates that you don’t get anywhere else in the world.”
According to Byblos Bank’s estimates, return on Eurobonds ranged between 7.25 percent and 7.35 percent in November 2009. “As long as they are getting their interest and the principal is being paid by issuing [more instruments]…they don’t want to unload because they are earning,” says Iskandar.
Some even suggest that the real burden of the gross public debt is much less than the expected 154.3 percent of GDP projected by Byblos Bank at year’s end. The IMF says that if the government continues to enact “unchanged policies” the ratio could decrease to 151 percent by the end of the year.
Shortage and spending
Even if the country is not on the verge of financial collapse, the real problem of the debt is that servicing it does not allow the government to close the “black holes” that absorb so much of its current spending. The public electricity company, Electricité du Liban (EDL), is a case in point, as it is expected to drain some $1.5 billion from government coffers, according to Mohamad Chatah when he was finance minister in 2009. In the first three quarters of 2009, the government had already spent $1.16 billion on EDL, according to the finance ministry. The budgeted amount to be spent on EDL in 2009 was $1.23 billion, which will likely be overshot by the end of the year.