Washington D.C., January 24, 2014 - The Institute of International Finance (IIF) today published a new report on Lebanon. It concluded that growth slowed in 2013, and that the extent of economic rebound in 2014 and beyond hinges on an improvement in the security situation and a de-escalation of the civil war in Syria. 

Dr. Garbis Iradian, Deputy Director of the Africa and Middle East Department at IIF and principal author of the report noted that the difficult security situation in the region has continued to hold back growth, which is estimated to have fallen from 1.2 percent in 2012 to 0.9 percent in 2013. The report outlined two scenarios for 2014 and 2015 to illustrate possible outcomes regarding the main macroeconomic indicators.

Scenario A (continuing tensions):This scenario assumes: (i) continued political paralysis; and (ii) no improvement in the security situation.

Under this scenario, domestic private investment by residents, foreign direct investment (FDI), construction and the number of tourist arrivals would remain weak. This would keep GDP growth at around 1 percent; the fiscal deficit would widen further to about 12 percent of GDP and the government debt-to-GDP ratio would increase further to 157 percent by 2015.

Scenario B (improved security):This scenario assumes: (i) formation of a new unity government in the next two months; (ii) the progress of recent negotiations between the international community and Iran creating conditions that could lead to a halt in the Syrian civil war, which could help ease tensions in Lebanon; and (iii) significant improvement in the domestic security situation.

Under this scenario, private investment by residents, FDI, construction, and the number of tourist arrivals are assumed to rebound in the second half of 2014 and in 2015. Real growth would accelerate to 5 percent in 2014 and 6 percent in 2015. Government revenues would recover, leading to narrower fiscal deficits and a shift in the primary balance from a deficit of 2.5 percent in 2013 to a surplus of 3 percent by 2015. Sustaining such a recovery would require a stable political environment and structural reforms (including addressing the problems of the electricity sector and improving governance).

Dr. Iradian noted that confidence in the Lebanese pound (LL) remains intact despite the civil war in Syria and the recent deterioration in the security situation in certain parts of the country. "Thanks to prudent management and conservative regulation, the banking system remains sound," said Dr. Iradian. "Liquidity buffers are high, capital is above the regulatory minimum, and the ratio of nonperforming loans to total loans remains less than 4 percent. Liquid assets to total assets or short-term liabilities remain comfortable."

Dr. Iradian noted that the fiscal situation has deteriorated recently, reflecting the impact of the security situation and the weak economy. He added that bolstering the fiscal position requires (in addition to recovery in economic activity) a strong political will and, above all, the formation of a strong government based on a broad national consensus.

"Urgent fiscal reforms are being obstructed by rent-seeking and the vested interests of most politicians," said Dr. Iradian. "fter being brought down quite sharply from 2006-2011, the government debt-to-GDP ratio is increasing again, reaching 144 percent at end-2013. Nevertheless, despite very high indebtedness, Lebanon has been able to continue to finance itself, based in part on its solid reputation among international investors."

Dr. George T. Abed, Senior Counselor and Director of the Africa and Middle East Department at the IIF commented: "The Lebanese economy remains subject to uncertainties as long as the fighting in Syria continues and political turmoil in the region persists. While the frequency of violent incidents in Lebanon has increased, the IIF is not of the view that fighting in Lebanon itself will spread. A "˜unity government' could be formed soon and if the election of a new President in May proceeds without incident, market sentiment could improve, thereby nudging the economy towards a moderately brighter outlook than implied by the pessimistic Scenario A. Nevertheless, the deep seated, structural issues facing the Lebanese economy (persistent fiscal deficits, large electricity subsidies, fractured politics), more recently aggravated by the continuing turmoil in the region, would weigh on the prospects for a quick return to high and sustainable growth. Beyond that, the outlook remains contingent on events in Syria and the region more generally, with risks tilted largely to the downside."

Mr. Marwan Mikhael, Head of Economic Research at BLOMINVEST Bank, who hosted a briefing on the report in Lebanon, commented: "There is no doubt that 2014 will be as challenging as 2013. While the war is still raging in Syria, several issues remain to be addressed by any new government starting from the control of the fiscal deficit and continuing with the wage increase and the related sources of revenues. Other main challenges that will weigh on the economic performance include the presidential elections during the year, the formation of a new government, and the evolution of the security situation. Therefore trying to predict economic growth for 2014 is a difficult task. While the IIF has considered two scenarios, one with a low growth of 1 percent and the other with a high growth of 5 percent, we think that growth could be anywhere between these two numbers depending on security and political developments in Lebanon and the region."

Mr. Mikhael added that "two important issues that BLOMINVEST BANK wants to highlight and that are addressed in the IIF report are the solid performance of the banking sector on one hand, and the poor performance of the public sector on the other hand. The banking sector is estimated to have registered a solid positive growth in deposits and profits in 2013 and it is expected to continue to do so this year. However, the fiscal deficit has soured in 2013 leading to a large increase in public debt to GDP ratio. In this context, it is of utmost importance for any new government to rein in the fiscal deficit and try to put again the debt to GDP ratio on a declining and sustainable trend. This will help restore investors' confidence in the economy and put it on higher and sustainable growth path."

The Institute of International Finance (IIF) is a global association of more than 470 financial institutions. Its mission is to support the financial industry in the prudent management of risks, including sovereign risk; the development of sound industry practices and standards; and the advocacy of regulatory, financial and economic policies that are in the broad interests of its members and global financial stability. Within its membership the IIF counts leading global banks, insurers, pension funds, asset managers and sovereign wealth funds, as well as leading law firms and consultancies. More information about the Institute of International Finance is available at www.iif.com.