x Abu Dhabi, UAEWednesday 26 July 2017

Lebanese infighting may sour investors

Region Some of the sticking points involve the division of important economic and business portfolios such as telecommunications and finance.

A drawn-out and acrimonious cabinet formation process may affect investor confidence even after a government has been formed.
A drawn-out and acrimonious cabinet formation process may affect investor confidence even after a government has been formed.

BEIRUT // While Lebanon showed a marked increase in foreign direct investment (FDI) last year according to recent UN figures, analysts and the country's investment authority say that it has not risen enough and that the current political deadlock may again undermine efforts to attract capital.

FDI in Lebanon jumped by 32 per cent to US$3.61 billion (Dh13.26bn) last year, according to the UN Conference on Trade and Development. It is one of the biggest increases in the MENA region and leads the Arab world in FDI as a ratio of GDP at 12.5 per cent. However, the bright picture becomes a lot murkier when non-productive investments in Lebanon's traditionally buoyant property sector are set aside.

These may account for as much as 70 per cent of the total FDI, says Nassib Ghobril, the head of economic research at Lebanon's Byblos Bank. "A lot of the money comes from Lebanese expatriates who bought real estate here last year." The head of Lebanon's investment and development authority, Nabil Itani, also qualifies the figures. Lebanon missed out on the huge sums of oil money that were available until last year because the country was mired in conflict, he said.

When it stabilised after June of last year, the global financial crisis hit and capital became tight. "Now there is the uncertainty of the government formation, which has lasted for more than three months and which does not send a positive signal." Lebanon's parliamentary elections in June this year were won by the western-backed March 14 bloc of Saad Hariri. The prime minister-designate is now on his second attempt to form a government of national unity, with no end in sight to negotiations with the minority, which includes the powerful Hizbollah movement.

Some of the sticking points involve the division of important economic and business portfolios such as telecommunications and finance. The drawn-out and acrimonious cabinet formation process may affect investor confidence even after a government has been formed, warned Mr Ghobril. "If there is no consensus on so many issues, investors will wonder how the cabinet can work together to implement some of the changes that are needed."

He also pointed out that the outgoing government, formed after factional fighting in May last year, has not made any progress on long-awaited reforms. Lebanon has traditionally had the kind of open economy and government that are conducive to foreign investment and the country was ahead of many others in the region in terms of regulations until recently. But the rest of the region has caught up and Lebanon's political trouble has meant that reforms have been languishing.

For example, the package agreed at the Paris III donor conference at the beginning of 2007, after the devastating war with Israel in 2006, set out some specific goals that have never been implemented. Some of these have to do with improving the country's infrastructure, one of the conditions for attracting foreign investment. However, the crucial telecoms sector has not been reformed, nor has the energy and electricity sector been restructured, as was promised in Paris III. Other reforms have to do with financial regulations and tax incentives.

One option that is being considered is the creation of special economic zones to attract specific investments. Mr Itani talks with great enthusiasm about a "healthcare city" and a "media city". Still, he says that determined cabinet action is needed to establish such zones, which have mushroomed around the region. While Mr Ghobril puts more of an emphasis on political will as well as stability, Mr Itani views it as part of his investment's authority's job to sell "brand Lebanon" to the outside world. The country has a deservedly good reputation because it has displayed financial stability under difficult political and security circumstances, and has shown some resilience in the face of the global financial crisis, he said.

Mr Itani points to the huge increase in deposits in Lebanon's banks in the aftermath of the collapse of Lehman Brothers last year. Some $14.5bn, mostly in remittances from Lebanese living abroad, was received in the 12 months to August this year. "The challenge now is to get the money out of the deposit accounts where it is sitting, into active investments," he said. "We have to make clear that Lebanon is not all about war and conflict, but that it is about life and trade, as it always has been."

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