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.
Industrial devolution
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.”
Differing estimates for Lebanon’s economic performance
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 $6 billion in October.
Foreign direct investment (FDI) overview, selected years
($millions)
Lebanon’s trade of goods
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.
Most of EDL’s expenditure continues to be allocated to fuel oil imports that are shipped instead of piped, causing them to be even more costly. In September 2009, after repeated delays over issues relating to pricing and quantity, Lebanon began to receive cheaper and more environmentally friendly natural gas piped from Egypt via Syria to run its power plants. The agreement spans 15 years and stipulates that Egypt will supply Syria with 250 million cubic meters (mcm) of gas every year. In turn, Syria will pass on an equivalent amount to Lebanon whose total should eventually increase to 600 mcm per year. In total, the gas is expected to save Lebanon around $240 million based on an oil price of $75 per barrel, according to the investment bank EFG-Hermes, which also owns a minority stake in Bank Audi.
“It’s good to take gas from the Egyptians because the Syrians cannot interfere with it. This is a multilateral agreement and that is the only reason why we received the gas,” says Iskandar.
The agreement is renewable by mutual consent with pricing renegotiated every three years, meaning that the gas is seen as more of a non-stick band aid than a stitch-up for Lebanon’s electricity finances.
“If the Egyptians suddenly don’t like us, they will shut off the gas,” says Chaaban.
In the short to medium term, the government looks set to implement former energy minister Alain Tabourian’s plan of buying smaller generators, which will cost around the same as the amount the government saves from using Egyptian gas. The agreement comes after months of political quarreling over the issue between the ex-minister and former Prime Minister Fouad Siniora. The generators are expected to produce 300 megawatts of electricity, slated to begin operations in the summer of 2010 during the months of the year when electricity consumption peaks.
Gas in hand, the Lebanese government will have some room to maneuver on the electricity issue. However, to make up much of the lost ground, the government will have to enact reforms, such as remote meter reading to replace the “1,900 people who come to measure your meter,” says Iskandar.
Another option is to increase costs of electricity to consumers, given that 38 percent of electricity in Lebanon is generated by private generators, according to Iskandar, and are much more expensive than state-provided electricity.
The proposal seems to be a sound one, according to Hamdan, who says his firm conducted a survey of 2,500 households in Lebanon, the majority of which stated they would be willing to pay higher prices if they were guaranteed 24-hour a day electricity. According to Hamdan, the sector itself will take about five years to reform if the government is serious about undertaking the task. Time looks to be of essence since he also states that electricity consumption is rising at around 10 to 15 percent a year.
Outstanding public debt by type of holder ($billions) (Actual value*)
* The figures are equal to the principal paid plus the interests due
** IDI : International Development Institutions
+ FG : Foreign Governments
(1) Include: public TB’s, public entities TB’s and financial institutions TB’s
(2) Include: Eurobonds holders (banks, non banks, residents and non residents), foreign private sector loans and special TB’s in FC
A social insecurity
Another state-owned entity that is draining government finances is the highly politicized National Social Security Fund (NSSF). Iskandar, who previously consulted the government on how to reform the fund, says the NSSF is “cancerous and is not going to improve.” There are no reliable figures that detail the government’s liabilities to the fund. One chief executive officer of a Lebanese bank who spoke off the record stated that in the lead up to 2009, the NSSF’s records had not been audited for eight years.
“It is facing a crisis. They are spending money without accounting for it,” says Chaaban.
The 2009 budget proposal bluntly states, if only in small print, that, “NSSF dues have been paid by the Ministry of Finance in previous years but these amounts were not allocated in the national budget.”
Media reports have suggested that the fund is running a deficit of around $456 million and Chaaban states that only 35 percent of workers are registered in the fund because many employers and employees choose not to register. Another statistic that points to the fund’s inefficiency is that government spending on public health was estimated at 12 percent of total spending, or $820 per capita, while Syria spent only $110 per capita and Jordan $500 per capita in 2005, according to the 2009 UN Arab Human Development Report. Spending on health and the NSSF are accounted for separately in the 2009 budget proposal.
Spending without fixing
The central bank has been swapping short term debt for long term debt to maintain the semblance of financial stability. At present, the Banque du Liban has succeeded in “buying time,” as Hamdan puts it.
Time, however, does not seem to be a luxury the Lebanese government can afford, as it has to budget for an increase in expenditure of 42 percent, or $10.82 billion, even with a budgeted spike in revenues of 36 percent, or $7.55 billion. As Executive went to press, total budget deficit in the first three quarters of 2009 had reached $2.22 billion. As such, it seems highly likely that the budget deficit target of 10.6 percent of GDP set for the Lebanese government by the IMF, could well be met.
Notwithstanding the fact that the government has to bear the burden of interest payments on the debt, the NSSF, EDL and other expenditures, it still ran a primary surplus of $693 million in the first three quarters of 2009 and budgets for $746 million by the end of the year. The government is still using the budget of 2005 as a baseline, according to Chaaban, by allocating what is overspent to the next year; but without the interest payments on the debt, the government would in fact be profitable.
Lebanon’s fiscal performance
Promises, promises
The Lebanese government has few options to get out from under its mound of debt. It will have to make several political decisions, including those related to the Paris III commitments, the enactment of administrative reforms and privatization of key state-owned enterprises such as telecommunications and electricity, to garner enough revenue to pay off at least some of the debt in the hopes of having it reach a manageable level.
With new finance minister Raya Haffar stating that she will pursue Paris III commitments, there is renewed pressure to enact many of the initiatives proposed. According to the finance ministry, $5.7 billion worth of Paris III pledges have been signed as of end-September 2009, with disbursements increasing by $600 million from April to November 2009.
Paris III’s planned initiatives are expected to be opposed by many — from the parliamentary opposition to local commercial banks.
“The terms were negotiated in a different political atmosphere,” says Iskandar, in a reference to the former Rafiq Hariri government that drew up the initial program. “I don’t think there will be any progress because politically it is not feasible.”
Indeed, considering recent proposals, changes appear unlikely. Increasing the value added tax (VAT) to 12.5 percent is highly unpopular amongst the parliamentary opposition and will require a new law to be drafted and passed. Hamdan says that between 1998 and 2008 the average national wage has increased by only 20 percent, and cumulative inflation by 80 to 90 percent. Thus, he says, it is doubtful that an increase in VAT is possible in the near future.
“I know most of these ministers and I don’t think they will sign onto this approach,” he says.
With the threat of inflation looming because of a falling dollar and rising oil prices, this possibility seems even less likely to be popular with the wider public. Officially, the consumer price index registered at 106.7 in September 2009, according to official figures. Chaaban has little faith in official figures since, he says, a useful methodology was only recently adopted.
“They used to count only Beirut and the basket was not representative of the actual consumption pattern. At some point even housing was not included,” he says, warning that inflation, while steady in 2009, could rise by at least 5 percent in 2010.
While this figure is much less than the rates experienced during the oil boom of 2008, Chaaban says the phenomenon of asymmetric transmission, whereby prices go up but don’t come down, continues to affect Lebanon’s consumers. Even according to official figures, which use December 2007 as a baseline, CPI for the items with some of the highest weights such as housing, food, beverage and transportation have all risen by more than 10 points as of September 2009.
This may not bode well for those keen on implementing the global income tax, for which a draft law currently exists, making it more “possible that it might be implemented with some changes,” says Chaaban.
Increasing taxation rates from 5 to 7.5 percent on interest earned from banks also seems to be a highly unpopular move with many local banks that hold much of the public debt and thus have considerable political influence.
“If there is no reform, the banks will be reluctant to go in this direction,” says Hamdan. The only Paris III earmarked requirements that seem likely to continue are those associated with reforms in the public sector, from which Chaaban believes the government can only receive around $1 billion to reform EDL in 2010.
The only other option seemingly available to decrease the debt is to privatize the telecom and electricity industries. The former looks set to remain a contentious issue between the various national and international players who have diverging opinions on whether the sector should go private or stay public.
“I think that the minister of telecommunication will defend increasing the assets [of the telecom industry],” says Hamdan, in reference to the proposal to increase the assets of the telecom sector by improving its current infrastructure and selling it off at a higher price. That may well prove to be an arduous task if the telecom ministry’s operations continue to be politicized. “Selling it in this form amounts to giving the investor the current structure of prices and revenues, so you are essentially securing the flow of hidden taxes,” says Hamdan, who supports this proposal.
Others, however, disagree. “The sector is not going to move in the right direction without really having momentum from the private sector,” says Kamal Shehadi, chairman of the country’s Telecom Regulatory Authority. “By that I mean all of the economic associations will have to get on board.”
And given the track record of public ownership, his sentiments are echoed by many consumers who are tired of having some of the highest telecom costs in the world.
As Executive went to press, a ministerial policy statement had yet to be approved by the Council of Ministers. Expectations are that it will closely resemble the previous statements adopted by the past two governments.
There is still a sense of optimism that the new government ministers can overcome some of the economic hurdles, even if they will have to fight over details in the process.
“They are not politicians that are there just to oppose each other. Even if they oppose each other they will reach a compromise, as they are technical people who can discuss things,” says Chaaban. “Because the government took so much time to form I think now everybody is expecting it to deliver.”
CPI (2004=100)
