The Lebanese economy is not only wearing black, it is also awash with red and white, and will be for a while yet and it remains unclear just how long – weeks, months or longer – the disruption of Lebanon’s economic heartbeat will last. This cannot presently be assessed authoritatively in terms of economic impact and the potential loss reaches from hundreds of millions of dollar to possibly billions – but it could also create, if the momentum for change is sustained, an unprecedented momentum of long-term economic growth.
In the immediate aftermath, attention has focused on the monetary situation, the exchange rate, potential pressure on the banking system, and short-term fluctuations in the Solidere share price as well as the cost for repairing damages to the hotels and businesses affected directly by the explosion and the disruption of tourism. In tourism, on top of the large losses that had to be borne by the hotels which were hit physically in the blast (and which by now have scheduled their reopening dates between mid March and beginning of April), the fears over a massive contraction for the first quarter were confirmed by industry leaders and corroborated by reports in Arab media speaking of a two third cancellation rate for airline bookings to Lebanon.
And although the currency scare could be cooled very effectively before the end of last month and the – economically anyhow only of marginal importance – Beirut Stock Exchange quickly appeared to regain its balance, the damaging impact of the Hariri assassination and the associated developments on the Lebanese economy manifested itself in many further ways, including in areas that were not in the first instance considered vulnerable. The most optimistic assessments by government economists thus conceded a 0.5 to 1 percent downward correction in GDP growth expectation for 2005, whereas according to analyst views on the severest end of impact anticipations, most or even all of the year’s projected 5.5 to 6% GDP gain would be eliminated, meaning a damage of well over $1 billion. The estimate that the damage might range below 1% of GDP and thus be limited to less than $200 million would seem overly optimistic in light of the losses already sustained in the first week after the assassination, when business was simply not taking place, and in the second week, when lesser but still significant disruptions occurred.
In the first week, big malls closed for at least three days, and so did most of the retail sector. In the $400 million-a-year supermarket retail trade, hyper- and supermarkets that had not been closed for a single entire day in over six years of operations, shut down for two days, plus the shutdown on February 28. According to the manager of a major supermarket in Achrafieh, the store sustained a 6% contraction of turnover over the same month a year ago.
Of restaurants and flower retailers, who had counted on brisk Valentine’s Day business, the former stood empty and the latter sat on perished or stale merchandise, causing many an average flower shop to incur thousands of dollar in losses in what normally is one of this trade’s most profitable selling periods. Various restaurant owners told Executive that they saw their revenue drop by at least 15% in comparison to February 2004. Managers of small businesses that had to attend to urgent matters did so only with the blinds drawn, to avoid stiff fines for violating the three-day official mourning period.
All this added up and in total, the second half of February saw so many days of no or severely reduced economic activity that its commercial losses alone could shave more than 1% from the annual gross domestic production of goods and services. Many business establishments in the Lebanese economy operate on tight conditions and recurrence of similar disturbances in following months could threaten their existence.
The detriment to doing business was nowhere more visible than in the downtown. In addition to suffering storefront damages like shattered windows on February 14, the area was void of economic activity for four of the following seven days. And just when some restaurants had reported normal occupancy for lunch on February 25, authorities totally blocked streets around parliament for at least until the end of the month. On the last Sunday of February, the entire Beirut Central District, instead of bristling with its normal crowds, was commercially inactive. All public attention was concentrated on Martyrs’ Square where people converged in large numbers at the tomb of Rafik Hariri and at the independence demonstrations by the Martyrs’ statue.
Despite the economic vagaries and the emotional upheaval of the moment, strategizing for the next business is important at this time, indicating that life will and must go on, and as such could be considered quasi therapeutic in the country’s process of regaining its internal footing and finding new direction.
The fact that tourist arrivals were hit substantially hurt the short-term outlook for a wide range of businesses beyond the hotel sector, including establishments in agro-industry. “I deliver to hotels and restaurants who all felt the effects and reduced their orders.” said Mazen Kassem, manager of the company that produces the K-Sun fruit juices. He estimated that the loss of tourism in February reverberated to K-Sun as at least 10% reduction in revenue and while he assessed the company’s outlook for the coming months as mostly contingent on political developments, he saw the coming months as not overly positive for business. “The problem we will face is that in Lebanon, we got used to be dependent on tourism,” he said.
Next to tourism, the real estate sector was eyed with considerable concern in direct consequence of the assassination, as real estate development had provided another boost to last year’s upbeat economic outlook and most buyers had come from the Arabian Gulf. Most pundits in the real estate sector voiced the assessment that investors would take a step back and wait for the situation to stabilize before making new decisions.
A more optimistic view came from Nabil Gebrael, the chairman of real estate brokers Coldwell Banker Lebanon. “My personal belief is that there may be some delays in decisions but not any real impact,” he told Executive. The fundamental selling points in favor of investments in Lebanese real estate had not changed, Gebrael maintained. “You cannot take away why people invest in Lebanon,” he said. “Clients we are dealing with have not slowed down one bit.”
The possibilities of uninterrupted continuation of the real estate trend not withstanding, construction-related enterprises are a sector of Lebanese industry, where manufacturers had to re-calculate business plans. In light of the assassination, leading tile maker Uniceramic made contingency plans for a reduction of 40 % or more in domestic demand over the short to mid-term. “We see a threat to manufacturing and are shifting our attention strongly to exports, due to the impact of the situation,” Uniceramic general manager, Nabil Ghorra, told EXECUTIVE.
Also for his firm, there had been no business for one week after the assassination, Ghorra said and anticipated a double impact on sales of construction supplies from more reticent building activity in the coming months and from possible work outages. Although Uniceramic employees are all Lebanese, the vast majority of construction workers in Lebanon are Syrian, many of whom returned to Syria for at least a while in the aftermath of the Hariri assassination. “They are not working,” Ghorra said, “and if they are not working, I can’t deliver.”
In the long run, however, the Uniceramic manager would not expect a negative business environment and the company is presently going ahead with taking delivery of new machinery, which will increase production capacity at its Chtaura factory by 50% from the end of May.
While the impact of the Hariri assassination on specific sectors of Lebanese industry appears more varied and more significant than would meet the eye, the effect on industry in general “does not differ from the impact on the economic situation in the country as a whole”, said Fadi Abboud, the president of the Association of Lebanese Industrialists. He emphasized the importance to retain the high foreign deposits in the Lebanese banking system, citing the correlation between the Balance of Trade and the Balance of Payments.
Abboud saw many investors as holding off decisions to see further developments of the situation and acknowledged that there is “a lot of pessimism” in the sector, but called for creation of balance. “The role of all economic sectors ought now to be to calm markets down and make sure that Lebanon is still a destination for investments and that the banking sector continues to attract deposits,” he said.
There are aspects to the effects of the assassination of Mr. Hariri on Lebanese industrial sectors that are unrelated to the current politico-economic fallout but nonetheless severe. To the agro-industry as a whole, the death of Rafik Hariri was highly detrimental as far as national and even regional growth prospects for the coming years, said Atef Idriss, director of consulting firm MENA Food Safety Associates and past president of the syndicate of Lebanese food producers.
Idriss pointed to efforts for invigorating intra-regional trade in agricultural and agro-industrial products where Rafik Hariri acted as powerful advocate and region-wide lobbyist. With harmonization of policies, agro-industrialists had hoped to increase intra-Arab trade in this sector from 7% to 20 % over the coming years, but in absence of Hariri’s top-level facilitation this would not be achieved, Idriss opined.
“The area does not have an agro-economic vision that could be translated into more economic activity,” he said. “The late prime minister was aware of the necessity to achieve regional harmonization of different policies regulating agro-industry. I don’t know if we will ever have another politician who is able to help the food industry across the region to meet the requirements of this age.”
This serves well to recall that the impact of the assassination of Rafik Hariri is multi-dimensional and entails the detrimental result of his absence as a leading personality with international connections and the short-term effects of the turbulence and shock over his assassination on the Lebanese productivity as well as the, by all indications even far more consequential, implications for fundamental changes in the political and economic reality in country and region.
The advertising sector faced a dilemma, as many clients considered the ethical wisdom of continuing their campaigns. Events were postponed, said Omar Nasreddine, general manager with advertising agency Grey Worldwide Middle East Network, but the halt was temporary.
Although the events of February 14 were “very unfortunate”, Nasreddine took the view that the long-term implications for the country are highly positive, by taking people to a point where they strengthened their resolve to never return to the bad old times of division and internal warfare. The assassination rekindled the desire to find a mechanism that allows the Lebanese to get fully back on their feet. “In my generation, we are all war children. What the Lebanese people should do today is stick together,” he said, “The same principle applies in business terms. All have an obligation to stand together and then the economy will surge again and advertising will surge with it.”
This view prevails widely across the spectrum of business sectors and communal identities. The current process triggered by the assassination of Lebanon’s former prime minister will result in a cleaner country and cleaner politics, said also Michel Ferneini, owner of the La Posta restaurant in the by economic disruption most affected downtown. His restaurant suffered a very substantial reduction in revenue last month and the cost of the current situation could reach high levels for the entire economy, he said, “but I consider this a very small price to be paid for a better future. Sooner or later, Lebanon will be much better. A free Lebanon with less corruption would give a chance for quick economic growth. I want to do personally all that is in my little power to have a better country.”