Lebanon’s Economy Faces Collapse

Bottom Line: Lebanon's economy faces collapse, and foreign bidders on potentially lucrative offshore oil and blocks are about to be disappointed as the conflict in Syria feeds a political stalemate in Beirut and rising violence. What happens next in Syria will be crucial for Lebanon.  

Analysis: The past three weeks have seen a rash of attacks in Lebanon-largely in Shi'ite-dominated areas of Beirut and in restive Tripoli-including two explosions outside two mosques on 23 August, which killed over 40 people and wounded hundreds more in Tripoli.  Amid the rising violence directly related to the conflict in Syria and the tension over what will happen next there, we are very concerned about the deteriorating economy.

During the first four months of this year, Lebanon's budget deficit has risen more than 38%. Total revenues declined 0.76%, including a 4.4% drop in VAT revenues and over a 13% drop in real estate registration fees. Lebanon's public debt is expected to rise to $65 billion next year, up from $59 billion this year (which is 135% of the country's GDP).  Furthermore, the Economic Committee is threatening to take a one-day nationwide strike on 4 September much further if a new government is not put in place. The strike includes banks, malls, shops and a variety of private businesses, and is an unprecedented move on the part of Lebanon's private sector. At this pace, Lebanon will report a contraction by the end of this year unless the situation in Syria is resolved and a new Lebanese Cabinet is formed to break the political deadlock.  At this point, we cannot expect a new government before next year.  

Most troubling is that Lebanon's oil and gas future, which was just getting off to a start, is now floundering, with some oil companies withdrawing their bids for Levant Basin offshore blocks amid the worsening security situation, but more so over the failure to end the domestic political deadlock.

Recommendation: We expect continued attacks in Hezbollah-controlled areas, including in Beirut, and an increase in security checkpoints over the next two weeks.  We are concerned that in the near-term, as the Syrian conflict is poised to enter a new phase with a possible "coalition of the willing" opting for direct intervention, Lebanon will not be able to keep the security situation from unraveling. Because of the situation in Syria and what we see as very dangerous sectarian provocations being promoted by certain Saudi officials, Lebanon's continued resilience is increasingly uncertain.