Global investment bank Merrill Lynch projected economic growth in Lebanon at 5.8 percent for 2009, down from 8.5 percent in 2008, and forecast growth at 4.5 percent for 2010, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group. Merrill Lynch said that as a small economy, Lebanon’s outstanding performance has helped the country to successfully evade the global recession. While the global economy has been struggling with its worst recession of modern times, Lebanon is likely to register an average 7.2 percent real GDP growth in 2008-09.
It noted that political stability is the key for the Lebanese economy, as the turning point for the economy was the Doha agreement reached in May 2008, and not the full-fledged global banking crises later in the year. It added that the national unity government brokered with the Doha agreement ended the one-and-a-half year-long political stalemate and violent street clashes.
The result was a quick rebound in domestic economic activity. It said that the gloomy global outlook and low interest rates across the globe further fuelled this recovery via increasing capital inflows to Lebanon’s resilient banking sector.
Merrill Lynch indicated that the strong rebound in economic activity helped to mend the large budget deficit, despite the fiscal pressures in the run-up to June 2009 parliamentary elections.
It noted that general budget revenues increased by 28 percent year-on-year compared to a 17 percent increase in expenditures. Consequently, the primary surplus increased by 34 percent year-on-year and is running at close to 2 percent of GDP this year.
Given the outperforming revenues, if the expenditures could be kept under control until the new government takes office, the budget deficit could come down to 9 percent of GDP this year, and further improvement to 8.2 percent of GDP in 2010 is achievable.
Merrill Lynch warned, however, that lowering Lebanon’s high indebtedness requires more than modest primary surpluses. First, the energy sector needs to be reformed, as it absorbs a huge amount of budget resources. In 2008, the transfers to Electricite du Liban accounted for almost 55 percent of the budget deficit. Second, the long-awaited privatization of mobile phone providers needs to be completed and used to bring down the debt.
Finally, the planned tax reform that would increase VAT from 10 percent to 15 percent, and legislation of a global income tax bill, remain the short-term structural priorities. It noted that it is highly likely that the national unity government would slow the reform drive, adding that an improvement in any of these is likely to trigger a rating upgrade. It forecast the public debt to decline to 187 percent of GDP by end-2009 and to 152 percent of GDP by end-2010, and for the gross external debt to reach 180.5 percent of GDP at end-2009 and 178 percent of GDP by end-2010. It also expected the short-term debt cover ratio at 52 percent at end-2009 and 53 percent at end-2010.
Merrill Lynch stressed that a strong banking sector and balance of payment surplus limit Lebanon’s sovereign risk. It said that as banks are the main holder of Lebanese debt, an increase in deposits has helped to bring down bond yields, and this trend is unlikely to be reversed in the short term.
In fact, a period of stress for global banks has turned into a fortunate harvest for Lebanese banks thanks to strong domestic activity, repatriation of Lebanese savings, lower global rates and tightening regulation on banking secrecy elsewhere.