Lebanon’s economy is struggling to deal with regional instability. Sarka Halas asks whether the recent discovery of energy reserves could be the solution.


Nestled between Syria to the north and Israel to the south, Lebanon’s location at the crossroads of the Mediterranean, Asia, and the Arabian Peninsula has long formed the country’s rich history and cultural, religious, and ethnic diversity.

With a population of 4.4 million and a GDP per capita of US$15,522 – one of the highest in the region – Lebanon has proved resilient to much of the turmoil in its history. However, since the 2012 Syrian civil war, the ensuing spill-over has undermined Lebanon’s sectarian political system, creating instability. The negative effects on the economy have been dramatic, as investor sentiment quickly soured due to instability and violence in the region. Nevertheless, however bleak the picture may be, all is not lost and recent oil and gas discoveries off the country’s Mediterranean coastline have renewed hopes for an economic recovery.


Pressure mounts

The Lebanese economy has been hit from all sides and is now experiencing some of the slowest growth in the region. As well as regional instability and the Syrian war, the global economic slowdown and the European sovereign debt crisis have weighed heavily on the country – Europe is Lebanon’s largest trading partner.
The Syrian war has negatively affected investor sentiment, trade and tourism in Lebanon. The influx of almost 1 million registered refugees is putting pressure on Lebanon’s already deteriorating public finances and investors do not overlook the fact that a deepening Syrian crisis could also lead to instability in Lebanon.

With its young, educated population and lively nightlife, Beirut was once called the Paris of the Middle East, but the influx of refugees has left tourists spending their money elsewhere. A decline in real estate and tourism hit the country the hardest, because neighbouring Arab countries are the main users of these sectors. In 2013 real estate sales dropped by 7.2% and there was a 12% drop in construction permits during the same year. Hotels in Beirut have seen a drop in occupancy rate to 51% and double-digit decrease in average room rates. In 2013, tourism declined for the third consecutive year to 1.3 million visitors.

“In view of the security situation, we do not see a rebound in the coming quarters. But, what is interesting about the economy of Lebanon is that it has a ‘captive’ tourist arrival volume, through its diaspora,” says Florence Eid, founder and CEO of Arabia Monitor, a research and advisory firm focusing on the Mena region.
According to World Bank data for January 2014, Lebanon now has the second slowest economy in the region after Iran. Since 2011, the growth has been at a low 1.5% and the IMF expects this to continue throughout 2014. Compare this to Lebanon’s 8.6% growth rate in 2008, 9% growth rate in 2009, and 7% growth rate in 2010.

Exports have declined by 12% mostly due to cross-regional transport through Syria being interrupted. Lebanon has quite a few trade routes through Syria to neighbouring Arab countries: most of the trade happens via trucks because it is less expensive than sea. Transportation here has declined and insurance premiums have gone up, making export via land more expensive. That has been a major factor in the decline in exports in 2013. Certain sectors such as agriculture and minerals, however, are continuing to perform relatively well.

If a sluggish economy wasn’t enough, Lebanon’s debt burden is currently the third-highest, after Japan and Greece, among government rated by Moody’s Investor Services. Moody’s expects Lebanon’s debt-to-GDP ratio to reach 133% in 2014.

Taking a closer look at the country’s management may also leave investors with a bitter taste: Lebanon sits on a precarious balance of power. Sectarian divides have long undermined the government’s ability to fund projects in sectors such as telecoms and energy.


Pockets of resilience

Despite the bleak picture painted, there are pockets of resilience mostly contained in the banking sector and in new discoveries of vast untapped offshore oil and natural gas reserves.

The Lebanese pound is pegged to the dollar and over time, this has allowed the Banque du Liban to increase its foreign reserves. Even though current account deficits have averaged 11.9% of GDP since 2006, remittances and foreign investments have boosted Lebanon’s foreign reserves, which have more than tripled to US$33bn in 2012.

“The Lebanese diaspora is one of the reasons the economy has been relatively resilient in relation to its global peers and especially the banking sector with diaspora-driven remittances boosting it,” says Eid. Despite political and security concerns, non-resident deposits continued to account for almost 40% of total deposit growth of US$4.4bn in 2013. This is because the Lebanese diaspora’s remittances acts as a stabilising factor according to Eid, and in fact when the domestic situation worsens, remittances increase.

“Lebanon has withstood many political and security shocks in its history and the current one is no different,” says Ziad Ghosn, head of financial institutions and trade finance at Lebanese BankMed. Ghosn says that despite adverse local and regional conditions, the banking sector continued to record solid growth over the 2011 to 2013 period, with total assets rising at an average annual rate of 8.1% and with private sector loans growing at an average annual rate of 11.1%.

“The country’s economy has previously managed to recover rapidly from adverse conditions following shock. As such, the rebound of the economy hinges on improvement in the local political and security situation coupled with a de-escalation of the Syrian crisis,” Ghosn says. He adds that these positive developments would result in improved market conditions which would translate directly into an uptick in economic activity.


Hydrocarbons to the rescue?

The Israeli joke that Moses led his people through the desert for 40 years to reach the one place in the region with no oil can now be put to rest, as substantial oil and natural gas reserves have been found in the Levant basin, the easternmost part of the Mediterranean.

Lebanon, Cyprus, Israel and the Palestinian Territories are the Levant basin states and Lebanon is hoping that these reserves will be the ticket to get the economy humming again.

Seismic surveys and data analysis of about 45% of Lebanon’s territorial waters show a 50% probability that the country has 96 trillion cubic feet of gas and 850 million barrels of oil, energy minister Gebran Bassil said earlier this year. The government says net proceeds are estimated at more than US$600bn.
There are high hopes for the recoverable resources; the country will be setting-up a sovereign wealth fund to manage profits from hydrocarbons. “The industry will have spill-over effects, creating opportunities in real estate development, services, hotels and accommodation, insurance services, rental and leasing, financial services and others,” says Abdul Salam Chebaro, head of group trade finance at Banque Audi, Lebanon’s largest bank in terms of assets.

While Lebanon lags behind its neighbours Cyprus and Israel in exploring and developing its hydrocarbon reserves, some key noticeable steps are slowly being taken to make this a viable industry.

“Much progress has been made on the regulatory front including the introduction of three layers of governance for the sector’s management: The Petroleum Administration, Ministry of Energy and the Council of Ministers,” says Eid. She adds that the Petroleum Administration’s strategy is to safeguard national interests while incentivising foreign direct investment from international oil companies.

With the establishment of new layers of governance comes much-needed legislation which will provide a framework for oil companies looking to invest in the region. Legislation, including taxation incentives, are already in place, but currently the main hurdle is political, says Eid. Political disagreements have blocked the formation of a new cabinet since Najib Mikati resigned as prime minister in March 2013 and this has resulted in the delay of auctions for offshoring licences for exploration to April 10, 2014. Currently, 46 companies have been accepted for pre-qualification and 12 can bid as operators and 34 as non-operators according to the criterion set by the authorities.

After 10 months, a new cabinet headed by prime minister Tammam Salam, was formed in February. The cabinet will be split equally between two opposing factions – the Hezbollah-led pro-Syria group and the western-leaning March 14 movement led by Saad Hariri.

“The new cabinet formation should allow the ratification of decrees that were obstacles to the launch of the gas and oil exploration stage,” says Chebaro.
The infrastructure required for offshore oil and gas development is also underway. Lebanon has launched a tender for the construction of a liquefied natural gas (LNG) floating storage and regasification unit at Beddawi to supply up to 3.5 million tonnes of LNG a year. The government has started to look at the possibility of constructing a coastal gas pipeline along offshore import terminals and refining facilities. The project would cover 173km of coastline and 19 companies have already prequalified for the construction of the pipeline.

Chebaro says the development of the port would be necessary to allow Lebanon to accommodate the traffic and act as support centre for offshore platforms. More importantly, if Lebanon opts for exporting its natural resources rather than keeping them for domestic use, the port would be vital to keep Lebanon competitive amongst its neighbours, he says.

The strategic and geopolitical position of Lebanon gives the country diverse export options. Chebaro says hydrocarbons could be exported towards Turkey or Europe through pipelines or compressed natural gas vessels, towards Asia through LNG tankers, or towards Syria and the neighbouring region through electricity. Europe, hugely dependent on Russia for energy, could look to Lebanon with keen interest given that the geopolitical tensions between Ukraine and Russia putting pressure on its own energy supply.


A look ahead

Following the formation of the new government in February, the International Institute of Finance said the Lebanese economy would rebound slightly to 3% in 2014. However, growth is unlikely to gather steam quickly as the ongoing crisis in Syria will continue to weigh heavily on consumer and investor sentiment.
Even under better domestic and regional circumstances, Lebanon has a long road ahead of it. Eid says the country will have to broaden trade towards alternative markets to reap unexploited opportunities in geographical export diversification. Only 1.01% of Lebanon’s exports go to China, while only 1.37% of exports go to rapidly developing Nigeria, Lebanon needs to capitalise on rapidly growing and untapped markets. New markets in emerging economies would help offset sluggish growth in developed markets. Lebanon’s main export partners are South Africa with 19.3% and Switzerland with 12.2%.

Despite having free trade agreements with countries like Canada and Turkey, and with regional blocs like the EU and the GCC, Lebanon still has to take more active measure for facilitating trade. Reducing tariff and non-tariff barriers to help facilitate trade and keep Lebanon competitive would also be a step in the right direction, Ghosn says. He adds that Lebanon needs to enter into new trade agreements with other countries as well as create advanced free trade zones
in the country.

The real question however is whether Lebanon can exploit its hydrocarbon play. Chebaro says if Lebanon succeeds at the challenge, the extraction of natural resources can put an end to the country’s ballooning public purse, the country’s most significant post-war conundrum, while growth could rise to sustainably strong levels for many years.