Lebanon economy in contraction (july 2013). By Mohamad El Amin

“In spite of several projections by different international organizations that growth had remained positive … our estimates indicate that the economy saw some contraction during the first six months of the year,” said Garbis Iradian, deputy director for Africa and Middle East at the global association for financial institutions.

Iradian said the second half of 2013 could only see a rebound to a marginal positive growth if security conditions improved and a new Cabinet was formed, ending the political impasse.

The failure to form a Cabinet and further deterioration in security conditions would mean the economy would close the year contracting by up to 1 percent, he cautioned.

If such a scenario materializes, it would be the first time Lebanon sees a real GDP contraction since 1989, when it registered a 0.8 percent contraction according to the IMF.

The second half of the year usually sees higher economic activity on summer tourism and holidays.

But with tourism dropping 12.5 percent in the first quarter of 2013, 17.5 percent in 2012, and 23.7 percent in 2011, amid renewed Gulf Cooperation Council travel warnings and scores of security breaches, prospects are severely low.

Plummeting investments were among major factors derailing economic activity, Iradian said. “What continues to drive the economy is private consumption and both local and foreign investments have almost disappeared.”

The IIF forecasts for Lebanon in 2013 a large drop in net private capital inflows, which includes net FDIs. While it remains manageable, the forecast is sign instability and weakening institutions are wreaking havoc on economy, several economists argue.

Net private capital flows have steadily declined from a peak of $12 billion in 2009 to $2.4 billion in 2012 and are forecast to fall to just $1.6 billion in 2013, more than 30 percent lower than last year – according to a report last week by the IIF.

The expected drop in capital inflows this year would be the sixth steepest among emerging markets and the steepest in the Middle East. Lebanon would be the third-smallest recipient of net private capital inflows this year among all emerging markets, ahead of only Ecuador and Egypt.

“What is happening is indeed a function of the political climate and shows reduced appetite on government bonds, lower investor sentiment in addition to the weakening domestic economic activity” said Chief Economist at Byblos Bank Nassib Ghobril.

Major net capital exporters, the IIF report notes, include several Arab oil exporters such as Saudi Arabia and the UAE – countries which had been major sources of capital inflows to Lebanon in the past few years.“Competition is increasing among emerging markets for capital inflows and when you have instability like the situation here, it simply goes elsewhere,” Ghobril said.

Jihad Azour, a former finance minister, told The Daily Star that while the overall resiliency of the economy and the banking sector were still there, the forecasts highlight mismanagement of the economy and dimming opportunities for Lebanon.

While still seeing the economy growing between 1 and 2 percent in 2013, Azour said that even if such growth levels were achieved they would not be enough for Lebanon to keep up with job creation and sustaining government financing needs.

Iradian estimates that the budget deficit could increase by 10 percent even if expenditures remained stable. The weakening economic activity would directly translate in slimmer tax revenues across the board, he said.

Ghobril also believes the banking sector remains resilient particularly after Lebanon benefited from the return of $1.2 billion in Lebanese nationals’ deposits in Cypriot banks following the crisis that wreaked havoc on the island. “Until now we do not have an outflow and it is very comforting to see deposits growing.”

The same is not true for GDP growth. “When you don’t have reforms, no improvement in security or political conditions and investment climate … no wonder there is no growth,” Azour said.