Beirut Is Booming

It seems that the entire global market has fallen on hard times. But if you were doing business in Lebanon today, you'd be less likely to feel the effects of a world suffering from a financial meltdown. Through a series of past regulatory changes and current events, the country has been somewhat sheltered from the economic chaos.   In fact, while the rest of the financial world is being shaken to the core, Beirut has been booming.

Lebanon's domestic financial system has had virtually no direct exposure to distressed financial products or markets and it remains very liquid and well capitalized, and economic growth has remained strong. The country has survived the crisis thanks to prudent macroeconomic and financial policies in recent years, including an interest rate that was in line with deposit inflows and a build-up of international reserves.

The country has previously been associated with political instability, regional insecurity and civil unrest—not with financial innovation. But it appears that these old problems, rather than being a financial albatross, may have actually contributed to a more positive economic climate for Lebanon. Lessons learned from past chaos have created the building blocks for a conservative economic system—since the next crisis was expected at any moment they had to be prepared for the worst. Now it's clear that prudent accounting has served this tiny country well.

As the financial crisis decimates markets around the world, economists at Lebanon's Bank Audi and other big banks in the country are reporting record-setting balance sheets. Last year, 2008, was the best year ever for the Lebanese banking sector. In stark contrast to the global financial crisis, the Lebanese banking system, which has recently become renowned for its strict regulations designed to insulate the economy against political crises, has risen like a Phoenix. Lebanese banks are coming off their best year ever, with high returns and $120bn in assets.


Historical Perspective

Let's review the events that have led up to today's economic policies in Lebanon.

In 1992, the country began wide-scale reconstruction to rebuild the physical and social infrastructure that had been demolished by both the long civil war (1975-90) and the Israeli occupation of the southern most points (1978-2000). The civil war greatly hampered the government's efforts to raise the revenues needed to fund the recovery efforts. High interest rates and efforts to stabilize their currency contributed to a heavy debt burden and a sizable rise in budget deficits.

The country has had a firm commitment to the Lebanese pound and has kept it pegged to the dollar since September 1999. That was the year during which Lebanon's Central Bank changed the rules to discourage commercial banks from investing in risky overseas investments. It was a way to get local banks to funnel the excess liquidity of the banking sector into their own economy.

But plagued by mounting indebtedness, in November 2002 Lebanon submitted to a comprehensive review of its financing needs at the Paris II Donors Conference. The country received pledges totaling $4.4 billion.  A full $3.1 billion of that was earmarked to support a substantial fiscal adjustment and $1.2 billion was to support economic development projects. But in spite of the aid it received, the government drug it's feet on conforming to the new reforms, and by 2006, even before the war, the debt problem had grown worse.

At the end of the war, another $940 million in relief and early reconstruction aid was pledged to Lebanon during a donor's conference at Stockholm in August 31, 2006. A few months later at the International Conference for Support to Lebanon in January 25, 2007, (known as "Paris III") an additional $7.6 billion was pledged for reconstruction and economic stabilization.  Unlike the Paris II financial aid, much of the Paris III donations were to be contingent on Lebanon's meeting agreed benchmarks in implementing its proposed five-year economic and social reform program.

The International Monetary Fund (IMF) agreed to initiate a Post-Conflict Program and to assign a team to Lebanon to provide technical assistance, to monitor the progress of reforms, and to advise donors on the timing of aid delivery.

Lebanese Finance

Changes in Banking

In 2007, Lebanon was teetering on the brink of all out civil war. Because it was a risky political environment and because there was growing concern about the global economy, chief banker Riad Salameh made a very fortuitous decision.  He barred the banks from investing in anything complicated or that included toxic subprime loans. Risky packages bundled up with debt were strictly off limits.

Basically, the bottom line mandate was this: "Do not invest in products you don't understand or that are not transparent."  What a concept! It was an order that helped shield Lebanon's banks from the global financial collapse.

The banks followed orders and scaled back on debt while at least 30% of their assets were held as cash. Salameh even forced weak banks to merge with bigger ones if it appeared that they were heading for trouble.  In other words, unlike the U.S. banking system, somebody with vision was manning the helm. While the rest of the world's banking system slowly unraveled, Lebanon was prepared.

Salameh has often been criticized for his conservative approach and his stubborn streak about keeping a very conservative approach to banking.  But he considered the rampant extension of credit, the unduly high leverage used as a means to get more profits into financial institutions as being against the very nature of banking.  In view of what's happening in the rest of the world, Salameh has good reason to feel vindicated.

According to Riad Salameh, "The system we created has been tested against wars, against instability, against political assassinations. And our sector would be much more developed if Lebanon did not have political and security risks, but it has also induced us to have a conservative reflex because we were always getting ready for the worst case scenario." His conservative approach on extending credit has also spared Lebanon the housing crash that the rest of the world is going through.

Government debt

But the tightly controlled rein on borrowing doesn't seem to apply to the government. As mentioned, Lebanon has taken on multiple loans to help in post war reconstruction.  So much debt has accumulated that today, per capita, Lebanon owes more than any other country in the world. According to official estimates Lebanon's current public debt stands at more than 47 billion dollars and is expected to go up further this year.

On paper this makes it appear highly vulnerable, but the political realities of the Middle East mean that any danger of repercussions is unlikely ever to materialize. Such a high level of public debt has created serious problems for other countries, but the difference here is the perception that Lebanon has friends with very deep pockets who will not let it go down financially. Indeed, that perception became reality during the 2006 war with Israel, when both Kuwait and Saudi Arabia didn't hesitate to deposit large sums of money into the Central Bank to help Lebanon remain stable.

Investing in Lebanon

Lebanon has a free-market and service-oriented economy whose main growth sectors include tourism and banking. The U.S. Department of Commerce's 2009 Country Commercial Guide for Lebanon highlighted the country's favorable investment climate and its liberal economic system.  There are no restrictions on foreign exchange or capital movement, which means foreign investors can manage and hold business and private assets free of government intervention.  

While the government does not dictate how investors choose to engage in any particular sector or project, investors should be aware that Lebanon's investment community is fraught with red tape, corruption, arcane licensing decisions, high taxes, tariffs, and fees, outmoded legislation, and an unpredictable operating environment along with very lax rules governing intellectual property.

Challenges Ahead

Lebanon could still feel the effects of the credit crunch.

Today Lebanon's Central bank treasury vaults are chockfull and in 2008 the banks posted $10.5 billion in deposits, a record high and the best year in Lebanon's financial history. Banks are also enjoying huge profits with average increases of 30 percent from 2007. Profits at Bank of Beirut had a 51 percent over 2007.

But a big chunk of these record deposits and profits are a result of the thousands of highly educated young people from Lebanon who have gone to work abroad and are now sending their money home because investing elsewhere has become too risky. With some 12 million Lebanese overseas and only 3.5 million still in the country, deposits from expatriates make up a third of the economy.

There are concerns that as recession bites elsewhere, Lebanese abroad will start sending less money home. But unlike elsewhere, the savings they have already deposited should be safe.


Future Outlook: Lebanon GDP growth could be reduced in 2009

Lebanon's success has been due to factors such as a well educated and innovative population; a strong banking system that has outperformed all other sectors of the economy in recent years; services that form the backbone of Lebanon's economy.

Lebanon is, and always has been, the gateway to the Middle East. The country sees itself as an ideal platform for any company to use as its entry to the region.  The government is encouraging U.S. and other foreign companies to use Lebanon as their base in the Middle East / North Africa region.

But since the Gulf States provide the bulk of Lebanon's foreign visitors, the current financial crisis means a likely decrease in the number visitors, which would likely impact the rest of the economy and result in a less-attractive destination for companies looking to re-locate.  While services dominate three-fourths of the Lebanese economy, Lebanon’s dependency on tourism, remittances from citizens living abroad, and foreign direct investments makes the country vulnerable.

The IMF has noted that Lebanon has so far weathered the global financial crisis but that it could face huge challenges in 2009 and see its GDP growth cut in half. Lebanon's economy grew 8% in 2008, and it is slated to grow by only 4% in 2009.

Despite its successes, difficult challenges lie ahead, as spillovers from the global recession and the weakened outlook in the Gulf will trickle down into Lebanon's economy.   

The IMF has recommended that Lebanon reduce its debt-to-GDP ratio, raise revenues by reviewing current utility tariffs and redirect expenditures. Lebanese authorities are also being urged to continue observing a "prudent monetary stance" amid what is said was "political uncertainty" ahead of June 7 parliamentary elections.

The 2009 Budget

A current budget for 2009 has not been agreed on yet due to the continued political disputes over the role of independent public institutions.

Bank Audi's Barakat expects 2009 to be a "challenging" year for Lebanon's banks, due to lower returns on overseas investments. But if Lebanon's past is any indication, the banks will continue to be hallmarks of stability. Only seven countries in the world have made money over the past 12 months—the top performer is Lebanon.

There are still plenty of questions about Lebanon's future. Although a new president was elected in May 2008, and the internal political turmoil of 2007 was temporarily abated, Lebanon's political front is still not on solid ground. Politicians are still at odds over drafting up an economic plan, and parliamentary elections are due to be held in June.

Cross Borders

On the bright side, bilateral developments between Lebanon and the United States are encouraging. The United States has emerged as the top exporter to Lebanon with U.S. exports in excess of $1.7bn in 2008 and generally ranking as Lebanon's fifth-largest source of imported goods. This is a new era in Lebanon-U.S. commercial relations.

More than 160 offices representing U.S. businesses currently operate in Lebanon. Since the lifting of the passport restriction in 1997, a number of large U.S. companies have opened branches or regional offices in Lebanon. They include FedEx, Microsoft, Eli Lilly, Coca-Cola, Pepsi Cola, Cisco, American Airlines, UPS, and General Electric.

Banking on the Future

The Lebanese are a nation of survivors.  They have felt the sting of war and instability and have paid a heavy price for the fortunes they are reaping now. Through their travails they have learned how to live as if there were no tomorrow, but also to be optimistic enough to bank for their future.