2013-01-15 13:43:16 -
Lebanon and Syria Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com
Regardless of how the civil war in Syria plays out, Lebanon´s mediumterm growth trajectory will settle well below pre-crisis levels due to a lack of investment in transportation and energy infrastructure.
Despite renewed fears over the economy´s gaping external asymmetries, we do not believe pressures on Lebanon´s balance of payments position is as pronounced as seen elsewhere across the region. A loyal depositor base in the domestic banking sector, combined with a massive arsenal of foreign exchange reserves, should help bolster underlying stability through what may turn out to be a potentially prolonged period of political volatility. This will minimize the potential for an unexpected devaluation of the pound in 2013.
Major Forecast Changes
In light of a more rapid uptick in inflationary
pressures than originally envisaged, we have revised up our medium-term inflation forecasts, and now project CPI averaging 10.0% in 2013.
On the back of recent historical revisions to Lebanon´s balance of payments data, we have revised our forecasts for the country´s current account, and now project the shortfall coming in at 12.0% in 2013, and falling to 11.2% in 2014.
Key Risk To Outlook
Given Lebanon´s reliance on foreign capital to finance domestic demand (as evidenced through its large current account shortfall), a marked deterioration in regional or global capital markets over the coming quarters could slow financial inflows, which would negatively impact growth.
The collapse of the regime of Syrian President Bashar al-Assad raises significant questions surrounding the dynamics of Lebanon´s domestic political environment. At the moment, it remains unclear how Hizbullah will react to the loss of its key financial and military backer.
Syrian president Bashar al-Assad´s hold on power appears less tenable in the short-to-medium-term, and we see several scenarios for change, including regime continuity with minimal reforms, regime continuity with major reforms and a collapse of the regime followed by chaos or civil war. Our core scenario is a continuation of the ongoing civil war between Assad´s regime and opposition activists through 2013. While we expect Assad to eventually fall approaching the end of 2013, the regime has proved more resilient than expected, and could hold onto power for some more time.
Among all the sanctions imposed by foreign governments, EU oilrelated sanctions are having the biggest detrimental effect on the country. The EU oil embargo has significantly reduced oil revenues, which comprise 25%-30% of fiscal revenues, and additional sanctions on the energy sector would cause further harm.
The short-sighted political and financial reforms enacted by the regime to mitigate protests will have a negative impact on the country´s long-term economic potential, and we do not expect the country to reinstate its economic liberalisation plans over the medium term.
Major Forecast Changes
We have revised down our 2012 and 2013 real GDP growth forecasts, and we project a contraction of 7.8% in 2012 and 3.4% in 2013, compared to our previous forecasts of a contraction of 7.1% and 2.6% in 2012 and 2013, respectively. As a result of the ongoing civil war and of economic sanctions, only government consumption will post marginal growth in 2013, while fixed investment and exports will be hit particularly hard.
Key Risk To Outlook
Although the top ranks of Syria´s military have been largely loyal to the regime, because of their ethnic and religious connections, a mutiny within the higher echelons of the security apparatus could accelerate the fall of the regime.
A sustained conflict would pose strong downside risks to our mediumterm GDP forecasts, as economic activity would be stalled for a prolonged period of time.
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