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Lebanon and Syria Business Forecast Report Q1 2014

Lebanon economy forecast to expand by 2.5% in 2014


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2014-03-17 07:12:01 - Lebanon and Syria Business Forecast Report Q1 2014 - a new country guide report on companiesandmarkets.com

The ongoing civil war in Syria is having severe repercussions on the Lebanese economy. Regardless of how the civil war in Syria plays out however, Lebanon´s medium-term 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 minimise the potential for an unexpected devaluation

 

 

of the pound in 2014.

We have revised our real GDP growth projections, and now forecast the economy to expand 2.5% in real terms in 2014, from our previous forecast of 3.3%.

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.

As the civil war in Syria shows no signs of abating, tensions between Lebanese political blocs – pro- and anti- Syria´s president, Bashar al-Assad – could continue increasing.

President Bashar al-Assad´s regime is unlikely to regain full control of the country. However, areas in the west and the south set to remain under the control of Assad loyalists, and the regime has recently achieved significant strategic gains at the expense of the opposition. Our core scenario is a continuation of the civil war over the coming years.

Among all the sanctions imposed by foreign governments, EU oil related 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 and banking sector would cause further harm.

The Syrian civil war has seen increasing foreign interference, with Turkey, Qatar, Saudi Arabia and the West supporting the rebels, and Iran, Russia and Lebanon´s Hezbollah aiding the regime. This will contribute to prolonging the conflict, which we believe could continue for several years.

We have revised down our real GDP growth forecasts, and now project a contraction of 7.5% in 2014, compared to our previous forecasts of a contraction of 5.5%, due to the continuing intensification of the conflict. Private consumption, fixed investment and exports will be hit particularly hard.

Although the momentum for US airstrikes on Syria has waned for the time being following Damascus´ acceptance of a Russian proposal that Syria gives up its chemical weapons, the challenges of implementing the ´deal´ are formidable. Although US airstrikes are highly unlikely at this stage, we believe that Washington will keep the military option on the table.

Assad´s regime has proven more durable than expected and it could well succeed in retaining Damascus and large areas of the country in 2014 and 2015. Levels of violence are likely to increase further over the coming quarters, ensuring that the economic contraction continues.

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