What seemed impossible for the past eight months finally realized on the eve of February 2019, with Lebanese political factions agreeing to form a government. Lebanon’s new ‘unity government’ reconciled the country’s fiercest political factions under the mission-statement of saving Lebanon from economic ruin. Naturally, confidence increased amongst businesses and MENA executives.
Formation of the new government pumped confidence into a strenuously tense economic and political climate, easing some of the policy uncertainty that had plagued the economy since the elections in May 2018. Critically, government formation unlocked US$ 11 billion in soft loans and grants from the Conference for Economic Development and Enterprise Reforms (CEDRE) in Paris. The US$ 11 billion alleviates liquidity strains Lebanon suffers due to its high debt-GDP ratio. Consensus over implementing reforms was a shared anthem amidst the government formation talks. Planned reforms, presented as part of the CEDRE agreement, include tackling corruption and improving Lebanon’s operating environment, resolve the Syrian refugee crisis (by negotiating with the Syrian government a safe return home strategy) that has critically crippled the state’s public goods and oversaturated the labour market, as well as restructuring the loss-making electricity sector.
Where do the opportunities lie?
MNCs should expect the government formation to reduce economic risks and clarify policy and fiscal plans supporting the business expenditure and gradually increasing investments. Albeit early days, policy discussions between the polarized political factions have been harmonic. The draft policy statement was released a week into the new government’s term.
Confidence in stability has risen as part of the eight-month long negotiations incorporated a fail-proof safety measure that was implemented to prevent another government collapse. In 2011 eleven ministers resigned, enough to dissolve the government leaving the country in a state of governance vacuum. Economic risks and the political and civil-safety repercussions of repeating such events are drastically higher now.
Executives should be able to rely more on the lira stability. The US$ 11 billion will reduce the risks of reserves depletion and currency-peg readjustment. In the big picture, the government intends to implement fiscal reforms aimed at cutting the deficit by 1% annually for the next five years, easing economic strains. Specifically, public sector recruitment will be frozen in 2019 under all categories. This will address the deficit issue as it amounts for the largest portion of state-expenditure.
The government will scale back on the public sector salaries to rejuvenate the private sector creating better opportunities for MNC and improving sustainability of economic growth. Executives should anticipate spaces opening up in the healthcare industry (as the government plans to introduce a universal healthcare system), and in the water and waste management fields. Investment in infrastructure is on top of the priority list for the new government.
Reforms extend to the state-run electric provider, where subsidies will be cut, and privatization will be pursued. The aim is providing 24-hour electricity supply; making the use of private generators obsolete and thus lowering operating costs. The government has also stated its intention to restart natural-gas drilling license auctioning before end of this year.
What risks should MNCs watch out for?
- Unemployment – freezing public sector recruitment in 2019 and reducing the size of government employees over the next four years risks increasing unemployment. An underdeveloped private sector cannot absorb 35,000 new graduates annually; limiting growth in consumer demand
- Operational costs – Costs will rise for both consumers and the producers as electricity subsidies shrink and until the provision of 24-hour electricity is achieved
- GCC relationship – An increased ministerial Hezbollah representation runs a (low) risk of decaying Lebanon’s ties with the GCC, causing reducing monetary support and worsening sanctions. If government policies, stemming from said ministers consistently divert from Saudi preferences, this risk becomes incrementally more real.
- Resignations– Despite the government’s fail-safe assurances against a walkout, in the off-chance of disproportional corruption blaming of 8-March alliance ministers, resignation could begin amongst its ranks, causing instability in governance, and bringing back uncertainty to the country.
What does FrontierView expect?
Lebanon’s economic outlook has been changed to positive for the next year, as fiscal reforms address the large fiscal deficit and corruption tackling missions improve the business climate. Moreover, the reducing uncertainty will play an essential role in resurrecting consumer confidence and increasing consumer demand. This coupled with the central bank’s housing subsidy program will accelerate economic activity in the country.
This positive view, nonetheless, should be taken with precaution. Severe political disengagement can lead to paralysis in the country. Failure of reforms will refocus the spotlight on default and currency-peg readjustment risks.
Executives should monitor the following signposts:
- Finance bill 2019 –will clarify how revenues will be raised without increasing taxes. The extent of commitment to reforms will also become clearer. MNCs can use this as an insight to where investments will be prioritised, and opportunities lie.
- Corruption investigations –The manner in which the investigation develops will gradually better explain how different political parties will respond.
- Oil prices –A spike in global oil prices is likely to slow down subsidy cuts in the electricity sector and potentially delay fiscal reforms.
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