x Abu Dhabi, UAETuesday 23 January 2018

Lebanon's comeback moving on fragile legs

The former Switzerland of the East is in recovery, but it needs significant reforms in its economic system if early progress is to become sustained growth.

The many tourism attractions in Lebanon include the ruins of a Roman amphitheatre in the seaside town of Byblos.
The many tourism attractions in Lebanon include the ruins of a Roman amphitheatre in the seaside town of Byblos.

Foreign investors are taking a second look at Lebanon after decades of writing the country off as a basket case. Let us hope they do not regret it. Over the past three years, the economy has shown remarkable resilience, and the near future looks bright. It should be a thumping summer in Beirut. If current projections turn out to be broadly accurate, Lebanon may see real growth of about 6 per cent this year, double what is forecast for the UAE.

In many ways, this optimism is not excessive. There has been a recent upturn in foreign direct investment (FDI) in the Lebanese construction sector, with much of that inflow emanating from Middle East-based investors and underpinned by the ongoing property boom. Several regional Middle East companies such as Zawya and Arqaam Capital, and international firms such as Deloitte and Booz Allen, have recognised Beirut as a regional gateway in order to benefit from the depth of its talent pool.

Net FDI last year was US$4 billion (Dh14.69bn), a 20 per cent increase from 2008, and there are reasons to believe that was not a peak, not least because of the expectation of significant privatisation opportunities in the coming years. The mounting signs of recovery are unequivocally good news, and the idea of good, old-fashioned Lebanese resilience lives on in the short term, but that does not mean sustained prosperity is guaranteed.

In light of the country's slow pace of reform, how long this recovery can go on is unclear. Local and international investors will need to see a list of reforms take hold if the glimmer of light we now see is not to be extinguished by a house price deflation, after the double-digit property price hikes since 2006. The willingness to address Lebanon's imposing challenges - the most significant of them is one of the world's highest per capita debt burdens - appears to be in place, but efforts to push through the thorough reforms necessary have thus far been frustrated by sectarian interests.

And for Lebanon to get the most from its competitive advantages, in particular its intellectual capital, it will have to improve its business climate and the efficiency with which it marshals its existing resources. There is, for example, a hazard lying within its state-owned utilities sector, with which many tourists will become familiar this summer when the electricity goes off in Beirut for hours every day.

Electricite du Liban, the ailing energy provider of the former Switzerland of the East, bears mounting losses, causing the local economy to lose, by some estimates, as much as $5.75bn every year, and that is one reason that the rush to halt the haemorrhage is a race against time. As Fuad Siniora, a former Lebanese prime minister, said in Dubai recently, it is vital to make the tough changes when times are good.

Lebanese resilience and an economic turnaround may have been the plat du jour thus far, but laying the foundation for structural reforms will be much harder. Nevertheless, so long as recovery is discernible, the hope is that the risk of a political backlash against the reformers should be slight and the country's longer-term prospects brighter as a result. The herd of foreign investors runs a great deal on simple, old-fashioned trust. If they are confident that Lebanon is heading in the right direction - even if the verdict is mixed in such areas as "ease of doing business" - they tend to get in sooner rather than later.

The country's banks certainly led the way in rebuilding trust in Brand Lebanon in recent years as they avoided the global credit crisis by steering well clear of structured products and property speculation. In 2008, the Beirut cynics - and there are many who got burnt, having bought into previous "rebirths" that sprouted in the two decades since the end of the Civil War - expected that such financial innocence would make no difference and that the sector would be battered anyway. But that was not the case as Lebanese banks saw deposits soar during the period, adding to the view that the country was not in danger of default in spite of its heavy debt burden.

In part because of a strong home bias, gross remittance inflows, more than half of which originated from the Gulf states, were 19 per cent of GDP in 2008. Last year, the country had the world's highest rate of growth in tourist arrivals - an almost 40 per cent increase from 2008 at a time when tourist numbers fell 4.3 per cent globally and 5.6 per cent in the Middle East. Lebanon's much-better-than-expected surge in capital inflows has contributed to a leap in economic activity and is, for the time being, playing the role of a traditional fiscal stimulus package as the Lebanese government remains constrained by the need to service a debt burden that is about 160 per cent of GDP.

This unique paradigm provides an opportunity for structural reforms, but as wide as this window has opened, it could close as the global economy recovers and offers investors, including the Lebanese diaspora, many other stable and enticing opportunities all over the world. Salwa Hammami is a senior economist with Arqaam Capital, spearheading market research and analysis. Before joining the firm, she was the director of financial markets for the Dubai International Financial Centre Authority