In the wake of the assassination of former Prime Minister Rafik Hariri, global analysts, think tanks and ratings agencies were not slow to reassess the future of a Lebanon that until then had been bullish in its projections for future growth. One week after the killing, EXECUTIVE spoke to Simon Williams, senior economist for Middle East and North Africa, at the Economist Intelligence Unit (EIU), arguably the world’s leading provider of country analysis and risk assessment, for his thoughts on Lebanon’s prospects.
How did the assassination of former Prime Minister Hariri affect the perception of Lebanon in the eyes of Europe?
Economically, it is fairly self-apparent. Investors, who had looked at Lebanon and at what Lebanon had developed in terms of the last seven years in particular and had been quite excited about the things that Lebanon might be beginning to put forward, will now be very cautious. It brought back a lot of memories of a time when you couldn’t say Beirut without the word war-torn before it. My concern is that in the minds of a number of people, these images will be back. People who know the region well will be sitting back and waiting to see what happens next. Those who don’t know the region I think will put Lebanon on the backburner for some time. I am talking about both direct investors and those interested in making finance available to Lebanon, those working in the banking sector.
Does that indicate repercussions for economic relations between Lebanon and European countries in specific areas, or will the effect be felt mostly in politics?
We have to see what happens in tourism, which appears to be the other area people are talking about. My assumption is that people will be quite nervous, certainly the European and American travelers – those who aren’t Lebanese expatriates. They are, however, not such an important sector for Lebanon. The Gulf region travelers will be far more resilient but certainly in the eyes of your standard European traveler, Lebanon has been set back as a tourism destination.
In the political perception, I think Lebanon has been brought very much into focus. It has pushed the issue of Syria’s dominance of Lebanon way up the agenda. In the past, there had always been the willingness to work with the status quo and not press that issue. That’s gone at least for now not only because of the assassination but also what is happening elsewhere – the Americans with the Syrians and Iraq. However, the assassination has outraged so many people around Europe and in the US and has brought the issue very much into focus in a way that it wasn’t before.
Does the upheaval over the assassination and related increased political awareness stand to have direct economic effects on Lebanon?
I think in the immediate term, probably not. It is not as severe as some people feared. The central bank has tried a very good game of the period since the assassination. I think they have been very successful in creating an air of calm to the degree that this has been possible on the financial market. They talked to the banks and to the main players outside Lebanon as well to reassure them that no crisis is imminent. I think they could do this because of their reputation but also because of the reserves that they currently have access to. I don’t see pressure on the currency emerging particularly at the moment. And it has also been a relatively good time for Lebanon in terms of public finances.
Would you elaborate on this?
The immediate debt issues were eased last year with the refinancing of the bonds that were coming due in 2005 and the selling of that additional debt late last year. I would be far more concerned if there were large numbers of substantial eurobonds set to mature over the next three to six months.
There are two things that worry us immediately: the first would be pressure on the pound resulting from a switch out of pound into dollar assets. I haven’t seen that occurring. What would worry me even much more would be signs of a movement of funds out of Lebanese banks. The liquidity of the banking system is what the economy’s current dynamic rests on. The situation is still very much on its early days but I haven’t yet seen such withdrawals taking place either. The central bank’s management of the situation and its liquidity has bought Lebanon time, which I think is being absolutely vital.
Do you foresee any longer-term increased reluctance on the part of European investors to buy Lebanese eurobonds?
It will be interesting to see. Obviously, the Europeans were never the main purchasers of the Eurobonds. They were purchased overwhelmingly by the local commercial banks. Those Europeans and others who were looking at Lebanese debt instruments represented a fairly small area of the market. Having said that, I think that any prospects for a substantial increase of Western interest in Lebanese debt instruments over the rest of this year have certainly vanished. The political risks surrounding Lebanese debt are now too high for most major European institutions to consider looking at. They weren’t that interested before, partly because of political concerns but also because of the how precarious Lebanon’s debt dynamic is and how fragile government finances are.
From impressions here, the first concern of local business leaders seems political in the short term and to keep a positive outlook in the longer term. Do you see ground for optimism and economic possibility?
I am an economist and economists are never optimistic. We always worry and look for things that could be going the wrong way. In Lebanon’s case, it really depends on what happens next. It’s all really down to the politics. This entails the uncertainties surrounding the election and the formation of a new government and broadly the way in which the dynamic with Syria develops. I really am unsure as to how that process is going to move forward and it necessarily causes me concern. That kind of uncertainty is very damaging for investor sentiment. Investors need to know where they stand and to be reassured of the stability of the political and economic institutions that act as a framework for their investment. While that is not there, confidence is going to be far poorer than it need to be.
How do you see the Syrian situation under these circumstances? Is Syria economically threatened by this whole scenario?
To an extent. Certainly, the interests of some Syrians and some significant Syrian businesses are tied up with their stake in Lebanon. You also got the importance of the remittances of Syrian workers in Lebanon as well as access for Syrians to the Lebanese banking sector. But I think to suggest that the withdrawal of Syrian troops from Lebanon would somehow be a major blow to the Syrian economy is overstating the matter. I still expect the Lebanese to want to work with the Syrians. The Lebanese are business people and the Syrians can provide good business.
How does UN Resolution 1559 come in? Is there any power in this resolution that could be a threat to the Syrian economy by way of sanctions?
This depends on how far the French and the US decide to push the issue in the Security Council and if they commit themselves and formalize the thing they have been saying over the last few days in absolute consistence – that all Syrian troops must be withdrawn if not immediately then in time for the elections. If they formalize that through the UN, it will be very difficult for them to back away and not enforce punitive measures on Syria. I think these measures would have to be quite significant. I don’t know what they’d do and it is difficult to judge, though, especially as there are other international issues that Syria is involved with and that overlap and possibly might have priority over the Lebanon file, the obvious one being the situation in Iraq.
Would an implementation of 1559 not also have economic repercussions on Lebanon?
Indirectly. I wouldn’t expect Lebanon to be directly targeted by sanctions under 1559. There might be some secondary impact from economic restrictions placed upon Syrian activity but I would be very surprised if in the first instance or at all the UN would choose to target Lebanon.
Would you risk naming a figure on the size of the economic impact of sanctions on Syria and Lebanon?
No, I wouldn’t. That’s almost impossible to quantify, given that we don’t know what restrictions are going to be put in place, how they are going to be implemented and how much support for these measures there is from others in the region and around the world.
You described France and the US as the prime movers in this affair. Do you have any sense how the UK is leaning in regard to action vis-à-vis Syria?
The UK is not in the lead but my sense is that it is broadly on board. It motioned for 1559 when it was passed and the comments that [foreign secretary] Jack Straw made have highlighted concerns over the Hariri assassination and Syria’s possible involvement. I think the willingness of the foreign secretary to say this is a good indication of how they are likely to react to 1559.
Bashar Assad made overtures to the UK when he visited London and talked about banking. Could the UK mediate?
Possibly, but it takes two sides to mediate. I think there is a lot of confusion in political circles not only in the UK but also elsewhere as to exactly what game Syria is trying to pursue. There were people who looked at Bashar and were eager to offer the support they could, seeing him as new generation man who had the potential to be a reformer and somebody who was saying that he intended doing the right things in terms of economic reform and taking some steps over Iraq and over Lebanon as well. I think that in looking at what happened over the last six months, these people are now wondering whether they misjudged the situation and misjudged Bashar or whether his leadership is weaker than they previously assumed. I think those doubts would need to be addressed before there could be mediation of any kind.
Let’s say one were to envision something like normal bilateral economic relations between Syria and Lebanon – which of course implies that we assume these relations to be not totally normal today. How do you see the Syrian-Lebanese relations today and how could they be?
It is very hard to envision. It has been such a long time since [normal relations] took place. There are obvious things that Lebanon can offer to Syria, particularly in terms of the excellence of much of its services sector and the financial services sector in particular. Syria needs access to a proper functioning banking sector, which is doesn’t have access to and Lebanon clearly can provide. The Lebanese market is small but of some value as a place and means of getting access to the rest of the world – that gateway function. For Lebanon, Syria is a large market with a young and growing population and it is a relatively untapped market in a lot of ways.
But really the most important determinant of the kind of relationship that might emerge between the two countries would be the scope and speed of economic reform in Syria. As things stand at the moment, given the economic structure that is in place in Syria, it is very difficult for Lebanese interests to take advantages of these opportunities. Syria is not a good place for anyone trying to do business, whether they are Syrian, Lebanese, or anyone else.
I would also like to ask you about how the Hariri assassination affected you as an individual dealing with Lebanon. Did you know Mr. Hariri? What was your personal reaction when hearing the news of the assassination?
Like everyone else, I just felt an overwhelming sense of shock. It’s extremely difficult to believe that such a dominant figure for certainly all the years that I have been traveling to Lebanon and working on Lebanon has gone. I find it difficult to believe that it happened. It is that sense of shock.
How do you see the way forward from this point?
I would stress that the next three months are absolutely crucial. There is such a lot of uncertainty and so many unresolved issues in terms of how the political situation is going to develop. I don’t think that anyone in the foreign business community – and probably people in Lebanon either – is able to think very far past the middle of this year. There is a strong sentiment that things are on hold and that people have drawn in a sharp breath and are waiting to see what happens. I think Lebanon has the capacity to weather that period of uncertainty, provided nothing else happens and there are no further incidents of the kind we saw last Monday. If the outcome of this four-month period isn’t a clear one and if by the second half of this year, we don’t have a sense of where Lebanon is going, then my concern is that the situation starts to deteriorate. There is only so much that even a central bank like BDL can actually achieve.
Would the elections then be a pivotal point for the Lebanese economy?
The elections are certainly a big part of it both in terms of the results and the way in which they are contested and by the way in which the results are dealt with. Among those who I talked to in London and elsewhere about Lebanon there is a general hope that what happened on February 14 will have focused a lot of minds in Lebanon and given people a reminder of how high the stakes are in terms of the management of the political pressures over these next few months. The hope is that this will be used to ensure that that period is managed well and smoothly; otherwise the consequences could be significant.
