The ongoing civil war in Syria is having severe repercussions on the Lebanese economy. 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 fears over the economy's gaping external asymmetries, 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 will turn out as a prolonged period of political volatility. This will minimize the potential for an unexpected devaluation of the pound in 2016.
A protracted leadership vacuum, elevated sectarian tensions fuelled by entanglement in the Syrian civil war, and the risk of conflict with Israel will all continue to present challenges to Lebanon's stability.
The sanctions imposed by the Gulf states on Lebanon since February 2016 will add to the woes confronting the country's tourism sector and wider economy. Barring a rapid resolution to the diplomatic crisis, we cannot rule out the imposition of further retaliatory measures by the Gulf - putting pressure on investment flows into Lebanon, project financing, and remittances.
The Lebanese economy will remain in the doldrums throughout 2016, as protracted regional instability and political paralysis at home continue to erode the country's competitiveness. While we forecast growth to inch up to 2.0% in real terms in 2016 from our estimate of 1.6% for 2015, this rate will remain too weak to make a tangible difference to Lebanese living standards.
The gradual normalisation of US monetary policy from 2017 onward will lead to a sustained rise in Lebanon's debt -servicing costs. While the Lebanese government is some way off from a refinancing crisis, public investment will be squeezed even further and the country's fiscal outlook remains bleak.
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 against Syria's President Bashar al-Assad will remain a key source of instability.
Rising tensions between the Lebanese Shi'a militant organisation Hizbullah and Israel raise the potential for another major military conflict between the two sides over the coming quarters. Such a scenario would have substantial local and regional implications, reshaping the outlook of the Syrian civil war and presenting a risk to the success of the diplomatic detente between Iran and the P5+1 powers.
|e/f = BMI estimate/forecasts; Source: National Authorities, BMI|
|Real GDP growth, % y-o-y||2.0||1.6||2.0||3.0|
|Nominal GDP, USDbn||49.6||52.8||53.3||56.4|
|Consumer price inflation, % y-o-y, eop||-0.7||-3.4||2.3||2.8|
|Exchange rate LBP/USD, eop||1,512.00||1,508.10||1,507.50||1,507.50|
|Budget balance, % of GDP||-6.2||-7.5||-7.6||-7.2|
|Current account balance, % of GDP||-23.8||-20.6||-17.2||-16.3|
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