Nine months after being given the responsibility to form a government in Lebanon, ex-Prime Minister Saad Hariri stepped away from the role due to political impasse. Political decohesion hit record levels as the Free Patriotic Movement party, to which President Michel Aoun belongs, refused to negotiate on cabinet formation proposals. The president requested a parliamentary discussion session for July 26 in order to name a new PM-designate to form a cabinet. Although four names have been rumored as potential candidates, the process is unlikely to be smooth or rapid, as they would face similar challenges from the FPM party and President Aoun.  

The lira crashed to record lows on the black-market rate in the wake of Hariri’s decision, depreciating to LL 24,270 against US$ 1; (the official peg is LL 1,507). Delayed reforms have accelerated depletion of reserves, with subsidies being lifted on most essential goods, including medicine most recently.

Our View

The Lebanon government is now within FrontierView’s defined downside scenario as the country enters a period of political vacuum, with it likely to last until the May 2022 general elections; alternatively, the best-case scenario is an ineffective cabinet void of foreign support. Political uncertainty will continue, and protests will likely protract until 2022. The lira is expected to continue depreciating, and private confidence will weaken further. Unemployment will continue to climb as more businesses face bankruptcies and pressures to cut costs. Economic activity will continue to contract in 2021 following an already-severe 22% contraction in 2020.

Business Implications

Businesses will face an increasingly price-sensitive market amid a severe decline in demand from the private sector, forcing drastic revisions of performance targets for 2021 and 2022. Operational challenges will worsen, with firms needing to make judgement calls on increasingly financially strained partners and distributors. Finally, businesses will have to double down on their marketing efforts to protect brand-equity through this year of turmoil to avoid any large-scale trading down from consumers.

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