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Month: September 2019

Lebanon by the Numbers

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The Economic Research and Analysis Department of Byblos Bank Group provides a high-quality weekly analysis of what’s happening in the finance and business sectors in Lebanon. Its well-documented articles offer useful information, data, and analysis of what’s going on inside and outside of government. The charts and tables are clearly explained, as in its latest article on “Draft budget for 2020 projects deficit of 7.4% of GDP.” Unfortunately, the story the numbers tell is not a happy one, and the projections are incomplete at best.

For example, the article compares the 2019 budget and the 2020 projection using Ministry of Finance and Byblos Research sources. It lists 2020 revenues at $12.6 billion versus 2019’s $12.5 billion. This shows that all of the fuss over the 2019 budget will only increase revenues by a bit over 1%, not reassuring to reform-minded investors and analysts. The expenditures side is also weak with less than .02% decrease projected from $16,985 billion in 2019 to $16,982 billion in 2020. Compounding the challenge is that the 2019 budget was not approved until July, which means that the few revenue and expenditure changes will largely not even have an impact until 2020.

Key facts to know:

The 2020 projections say it will cost $16.1 billion to run the government or some 94.5% of all spending. Alas, capital spending, which includes infrastructure, land acquisition, and equipment only makes up the remaining 5.5%, less than a billion dollars in a country that is desperate for upgrades and improvements, and this is even less than the 5.7% called for in the 2019 budget. This is why the CEDRE funding for the national infrastructure projects is so critical; Lebanon can’t move forward without it.

Of course the biggest expenditure is salaries and compensation, some 40% ($6.8 billion) of the budget in 2020 a slight increase over 2019. Debt servicing, the bête noir of rating agencies, will represent some 36% of the 2020 budget, up from 32.5% in 2019. Transfers to EDL are supposed to decrease in 2020 to just under $1 billion, a proposed cut of 40% from 2019 but without significant improvements in generation, supply, and distribution, this remains wishful thinking.

The revenue side is neither ambitious nor practical as it is full of loopholes and depends on revenues generated as a result of the 2019 budget.

Goldman Sachs investment bank offered a measured response to news that Saudi Arabia would offer financial support to Lebanon. At this time it is not clear if this means a deposit with the Central Bank, buying foreign currency bonds scheduled to be issued in October, or subsidizing Lebanon’s purchase of petroleum products, or another option. An investment by Saudi Arabia would “improve depositor and investor sentiment towards Lebanon, which would translate into a pickup in capital inflows and an increase in rollover financing of Eurobonds,” according to the Economic Research and Analysis Department.

However, it also noted that Saudi support alone was insufficient to address Lebanon’s fiscal and monetary deficiencies without significant structural reforms. As of now, “domestic political uncertainties” continue to slow the pace of the implementation of existing reforms, let alone those proposed for 2020 such as privatization of state owned services. According to Morgan Stanley investment bank, “a financial support package of $5-6 billion over the next 18-24 months would help cover Lebanon’s external financial gap [borrowing or attracting funds from overseas] and improve market sentiment.”

Given rising tensions in the Gulf, the heightened risk of military conflict between Hezbollah and Israel and Israel and Iran in the region, and the continued drop off of capital inflows into Lebanon due to security and stability concerns, Lebanon’s financial health is a major concern in the coming year.

One sure sign of Lebanon’s tough road ahead is the continued decline in its ratings as a tourism destination. Although Beirut regularly receives great reviews as a party destination, overall, the country is growing less competitive in the region and globally according to the World Economic Forum’s Travel and Tourism Competitiveness Index (TTCI) for 2019. It is now in 100th place among 140 countries, barely ahead North Macedonia, Nepal, and Moldova; and placed 11th out of 14 Arab countries.

Another measure of economic growth worth following is the utilization of the loan guarantees by small and medium sized enterprises (SMEs) under the Kafalat Corporation program sponsored by the government. Loan guarantees were down 86% in the first two quarters of 2019 to $5 million from $35 million the same period last year. Kafalat offers financial products for SMEs in the manufacturing, agricultural, tourism, high technology, crafts, and energy sectors. Loans are tracked by region and sector, giving a useful picture of what sectors are most attractive to SMEs. So far in 2019, 38.6% of the loans went to agriculture, 31.8% to the industrial sector, tourism received 22.7%, specialized technologies got 4.6%, and the handicraft sector – 2.3%.

For a very useful breakdown of the 269 infrastructure projects in the Capital Investment Plan by type and region of Lebanon that will be targeted in part by the CEDRE funds, check this link from The Lebanese Center for Policy Studies, click here.

The Middle East Fuse is Burning – How Badly Will Lebanon be Scarred?

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The missile and drone strikes on Saudi oil fields push mounting Saudi-Iranian tensions; the outcome of the Israeli elections follows on Israeli reprisals against alleged Hamas provocations and Netanyahu’s promise to annex the Jordan Valley settlements; and Lebanon facing unprecedented financial dislocations are all contributing to growing fears that a regional explosion is coming. The prayers of your aunt Salwah in the village will unfortunately not make a difference. If a conflict erupts, Lebanon is going to suffer. The only question is what will be left? So, while Foreign Minister Bassil and President Aoun, his father-in-law, are in the US week for LDE and the opening of the UN General Assembly, the Lebanese are trying to act as if this too shall pass. And the rest of us are saying, “Insh’allah.”

All is not quiet in Lebanon. Under the veneer of its usual political, social, and economic ills, there are regional forces and Hezbollah whose behavior can only have unpleasant if not disastrous consequences for Lebanon. A particularly harsh critic from Saudi Arabia noted that “Although Lebanon is a small state in terms of its geography and population, it has a reputation in the Middle East for being a theater of war. This is due to the fact that many regional countries have settled their own conflicts and disagreements there via proxies.” He adds that “Those defending Hezbollah by whatever justifications they can think of to convince the Lebanese mind that it works in Lebanon’s interests have been let down by the secretary-general of Hezbollah himself, Hassan Nasrallah, when he said: “The leader of our camp today is the Supreme Leader (Ali Khamenei) and its center is the Islamic Republic of Iran.” This statement is clear proof that Nasrallah is working for Iran in Lebanon and not for Lebanon’s national interests.”

His observation follows the argument of an op-ed in the Wall Street Journal that claims that Hezbollah and its sponsor Iran dominate the government, security services, and financial sector in Lebanon. “The State Department has long classified Lebanon as a “safe haven for terrorism.” In fact, it is something worse. With the banks, the military and the government itself answering to a terrorist organization, Lebanon is fully entwined with Hezbollah.” This statement, based on a selected linking of events since 2006, is pushing a narrative that Lebanon is not to be trusted and therefore, the US should…what? The article does not consider either a strategic or credible solution, or what the consequences of walking away from Lebanon would be.

An article in World Politics Review took a look at the current status of Hezbollah given its combat efforts in Syria. The point of the article is that seven years of fighting in Syria, and role in Iraq and Yemen, have diminished its capacity to fully support its social welfare programs, key to its success as a political party. Not only must it satisfy its base, “All the while, it must navigate the dangerous standoff with Israel to avoid a conflict that neither side wants. For a group that has never been stronger, the dangers have never been more pronounced.”

With its shifting emphasis of operations to the southern area of Lebanon and its missile upgrading facilities, Hezbollah has raised the ante in its role as a “resistance” force. The recent exchanges with the Israelis indicate that Hezbollah is a priority in the crosshairs of the IDF. How the Israel elections turn out, whatever the configuration of the new government, Hezbollah has made itself a ready target for political and security threats from Israel.

This, the increased tensions between Saudi Arabia and Iran, and its internal issues of corruption, are, according to the article, threatening its internal solidarity and may well lead to a pushback from other Lebanese that are fed up with Hezbollah’s interference with Lebanon’s independence and territorial integrity.

Another casualty of Hezbollah’s insistence on its independence of action is that the international investment community’s appetite for supporting Lebanon is diminishing. There is a maxim in business that capital is notoriously risk averse. And Lebanon’s safe haven, government-backed financial credibility is eroding as its risk profile becomes more negative. Corruption, the high rate of public expenditures that increase the public debt, lack of significant reforms, and the excessive debt of government-run entities, continue to drive down the value of Lebanon’s credit ratings, thus curbing enthusiasm for purchasing its debt and investments.

A useful analysis by the Arab Bankers Association in the UK summarized it in this way. “Lebanon’s financial ratios are among the weakest in the world and it is hard for a rating agency to make an exception – in the form of a higher rating – when these objective indicators place the country squarely within a certain rating peer group. Making an exception is even more difficult when decades of public commitment to economic reform have had little appreciable impact on the budget or fiscal deficits.” In the past, much of what should have been done rested squarely on the government. Now that is complicated more than ever by regional issues and perceptions of Lebanon’s stability that are not moving in Lebanon’s favor.

Shortcomings of a Short-sighted US Policy towards Lebanon

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The recent firing/resignation of John Bolton as Trump’s National Security Advisor and the proclamation by the Administration that the basis for foreign assistance henceforth would, as previously threatened, be subject to political criteria such as “what have you done for me (the US) lately,” have serious implications for the US-Lebanon relationship. Understanding how these actions impact Lebanon is even more critical in light of the recent IDC convention and the LDE conference that share a concern for the future of Lebanon and its historic role in the region.

While these meetings and the administration’s actions are not directly tied, the atmospherics towards Lebanon are clearly shifting away from those who support Lebanon’s territorial integrity, independence, and stability towards those driven by concerns for Israel’s security. This should matter to anyone concerned with the US-Lebanon bilateral relationship because, despite the sometimes reckless and self-serving statements of Lebanese leaders that undermine the country’s credibility and legitimacy in the eyes of some in Washington, the bilateral ties are essential for the stability of the region.

So caring about the relationship is more than nostalgia or cultural attachment, although Lebanese-Americans are not shy about either! It is a smart policy that is undercut by those on both sides that think diplomacy takes place in the “souk” and is simply the sum of who got the best deal…Lebanon will always come out on the short end of that transaction.

Let’s begin with foreign assistance. In a recent post, John R. Allen, president of The Brookings Institution, a retired U.S. Marine Corps four-star general and former commander of the NATO International Security Assistance Force (ISAF) and US Forces in Afghanistan wrote a brief blog about the report of the recent Brookings Blum Roundtable, “US foreign aid is worth defending now more than ever.” He believes that foreign aid is “important not just for global stability and prosperity—it serves American interests and promotes our values, as well,” and noted that the emergence of new players, such as corporations, foundations, civil society, and crowdsourcing are redefining the scope, reach, and impact of funding.

The report argues that America can still change course and reassert its leadership in humanitarian aid and development. Allen points out that “Through the deployment of modern technologies such as satellite mapping, crowdsourcing, artificial intelligence, digital ID systems, direct cash transfers to poor people, and other results-driven solutions,” aid programs have the capacity to deal effectively with increased global challenges. He concludes that “To preserve a robust US role in the world, we must understand what the American people care about, engage with them where they are, and find new and novel ways to channel grassroots enthusiasm at the local and state levels so that it has an international impact.”

So, what does this have to do with Lebanon? One of the key themes for IDC and LDE is what can be done to sustain vibrant, effective US support for the country. Currently, the US is the largest source of funding for the LAF, contributes hundreds of millions of dollars directly to Lebanese educational institutions, NGOs, and civil society, and continues to support Lebanon’s survival as an independent state. But, critics warn, a reckoning is coming. As long as Hezbollah poses a threat to Israel, Lebanon will be subject to the same criteria of supporting US interests as other countries in the region.

In an incisive article by Michael Young, the dynamic editor of DIWAN, the blog of the Carnegie Middle East Center in Beirut, he warns, “However, those who are tempted to weaken Hezbollah by targeting Lebanon should be very careful. A full-frontal attack on the country would very likely do nothing but destabilize the state, push an economy in crisis over the edge, and weaken state institutions that, if they do not and cannot confront Hezbollah, nevertheless represent an alternative to the political order that the party would like to impose on Lebanon.” Young asks, do you want a partially effective state or “One in which there is no effective state and all priorities are defined by Hezbollah and its Iranian patrons.”

This short-sighted perspective in the Congress and some members of the administration denigrates Lebanon’s “sectarian complexity” and pressures on the government will more likely weaken those opposed to Hezbollah, “Giving it more latitude to do what it wants in the country.” Hezbollah has great assets that give it leverage…the gratitude of the Assad regime and Iran’s support as a confrontational force against Israel.

He points out that “The real issue is what would happen if Lebanon were to become a free-for-all between Israel and Iran and its proxies. The country would certainly be destroyed, which would permit even a militarily bloodied Hezbollah to reassert itself before long. The party would face a demoralized, impoverished, and exhausted society that would have even fewer means to counter its agenda than it does today.”

So how does the US benefit from turning Lebanon into a failed state? This is the question that those who support a strong bilateral relationship should be asking policy-makers in Congress and the administration. And what would happen to the more than 1 million Syrian and 400,000 Palestinian refugees in the country? Jordan would be the next to be undone, and Iran, the undisputed victor. As Young concludes, “No one in the international community seeks such an outcome. Hezbollah is a major problem for which no easy solutions are available. Obliterating Lebanon to harm the party is the height of folly and would only serve to strengthen Hezbollah.” Not surprising that Israel doesn’t get it but no excuse for the US not to understand what’s at stake.

Fallout Continues over Hezbollah-Israel Sparring; Will a Cease-fire Hold?

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While both sides seem to be relaxing their high alerts for an imminent spike in hostilities, both Lebanon and Israel are stepping back from their rhetorical and armed exchanges this last week and weekend. For Lebanon watchers, the most damaging fatality from the escalation is reinforcing the perception that Hezbollah acts for Lebanon rather than the LAF. World media focused on statements from Hezbollah’s leadership rather than the Lebanese government although, President Aoun’s “declaration of war” did strike some as a dangerous pose. It is Hezbollah’s Secretary-General Hassan Nasrallah who has managed to dominate messaging from Lebanon, strengthening the perception that it acts as a state within a state and the government holds second tier status.

At a time when the renewal of UNIFIL’s mandate was being discussed in the UN Security Council, Israel attacked sites in Iraq and Syria and is alleged to be behind the attack on Hezbollah’s media office in Beirut, claiming it is a center for installing guidance systems on Iranian-provided missiles. While not claiming credit for the attack, Israel justified it, just in case, further aggravating Lebanese sensitivities regarding constant overflights by Israel drones and planes.

According to AP News, The Security Council urged all parties to “exercise maximum calm and restraint and refrain from any action or rhetoric that could jeopardize the cessation of hostilities or destabilize the region.” But these actions and rhetoric are precisely what seems to be the motivation from the Israel side. Facing a tough election, Netanyahu is ratcheting up threat perceptions among his electorate to reinforce his image as the war/peacemaker opposing Iran’s threats. The fact that Lebanon is collateral damage because of Hezbollah’s presence matters little when votes are at stake. Partisans for Israel are promoting the narrative that the LAF is a tool of Hezbollah as is the Lebanese government, sentiments finding their way into the language of pro-Israel/anti-Iran policy hawks in Washington.

The UNIFIL mandate renewal, coming on the heels of the attacks, crystalized the debate regarding Hezbollah’s role in Lebanon. It “reiterated that “Israel and Lebanon support a permanent cease-fire and for the accelerated deployment of Lebanese forces in the south and the country’s territorial waters. In a clear swipe at Hezbollah, “The council again urged all countries to enforce a 2006 arms embargo and prevent the sale or supply of weapons to any individual or entity in Lebanon not authorized by the government or UN force,” a stricture that has been avoided by Lebanon’s governments claiming that Hezbollah is defending Lebanon.

What was helpful was the statement by Acting US Ambassador Jonathan Cohen that the US “remains steadfast in our commitment to UNIFIL and to Lebanon’s security, stability and sovereignty.” He also underlined the importance of the arms embargo and for UNIFIL’s “unimpeded and timely access to the entire UN-drawn Blue Line boundary between Israel and Lebanon.”

In the immediate aftermath of the tit-for-tat this past weekend, Nasrallah declared that Hezbollah would now fire upon any Israeli drones over Lebanon, once again usurping the role of the LAF as the guarantor of Lebanon’s sovereignty and territorial integrity. His statements have gone unchallenged by the Lebanese President who relies on the Shite leadership to stay in office. While this may satisfy those with their focus on maintaining the confessional alignments that support the current government, its weakness is all too evident when the Prime Minister’s first call after the drone attack was to Russia and not the US.

More collateral damage from the increased tension may be coming as international investors, the key to Lebanon’s recovery from its stagnating and debilitating economy and infrastructure may think again about investing in a country that has yet to demonstrate control over its political actors and manage its badly needed reform process. Lebanon’s dysfunctional political culture has the potential for leading to the country’s literal destruction through failure to take responsibility for Lebanon’s future.