No News is not Good News for Lebanon

January 22, 2019

Between the no-shows at the Arab Economic Summit, and the continued stalemate in forming a government, there is little news in Lebanon that provides comfort and assurances either to the Lebanese or to the international community. Despite a Qatari pledge of $500 million to be invested in the dollar denominated bonds of the Central Bank and similar support promised by Saudi Arabia, economic prospects continue to be tamped down. The US withdrawal from Syria reverberates regionally and globally as analysts wonder where the “America First” foreign policy hammer will land next.

 

The Economist noted that the withdrawal “portends big changes: an American exit, a triumph for Iran and Russia, the return of Syria and the repositioning of everybody else…To many in Washington, Mr. Trump is thus threatening to throw away America’s cards for no benefit. It controls the oil wells that produce 95% of Syria’s oil and much of its gas; the waters of the Euphrates; prime agricultural land; and five large military bases.” As the move pushes ahead, although conditioned by fits and starts as befitting a policy that lacks consensus in the US, Russia, Turkey, and Iran are maneuvering to fill in the territory once the Americans leave.

 

But as the article pointed out, “Mr. Erdogan’s priority will be to push away Kurdish fighters on Turkey’s border, not to fight IS, which still has thousands of fighters farther to the south. That may give the jihadists an opportunity to re-emerge, as they did after Mr. Obama’s withdrawal from Iraq in 2011…If nothing else, Arabs are dismayed that the fate of Arab Syria is being determined mainly by non-Arab powers—Russia, Iran, and Turkey.”

 

On the other hand, more and more voices are being raised in support of the withdrawal, countering that the US has no long-term interests in Syria and that Russia and Iran, as well as Turkey, will find their efforts to invest in stability and reconstruction to be beyond their individual or joint capabilities. Yet all of these statements are conditioned with caveats regarding the lack of a US strategy, the need to build a consensus among regional allies for replacing the US presence, and how the US must maintain critical ties to certain actors in the region, e.g. Gulf Arabs as a counter to Iran.

 

According to an article posted by The Arab Center DC, there is still much at stake for other power brokers in the conflict. “What is also possible is that Russia and Turkey could strike a deal by which they would share filling the vacuum in eastern and northeastern Syria as well as the Syrian desert. Russian companies are already preparing to extract Syrian gas from these areas, an indication that Russia and Turkey may be the biggest beneficiaries from inheriting the areas previously controlled by US forces.”

 

So the debate goes on with continuing instability along Syria’s borders the only clear outcome, along with unclear alternatives for American allies Israel, Jordan, and Lebanon, who are increasing their outreach to Russia as an insurance policy, and with no clear options for resettlement or repatriation for the refugees. For the US, this latest episode of foreign policy mismanagement reverberates globally. Analyst Amanda Sloat wrote in an Al-Monitor blog, “These disjointed messages reflect the lack of a real policy process inside the government…Instead, we have decision-making by presidential tweet or pronouncement followed by advisers scrambling to implement Trump's guidance in a more rational way. If nothing else, it makes it hard for local actors to trust what Trump's envoys are telling them when they know it could be undermined by the president."

 

This confusion is mirrored in the latest financial news from Lebanon when a Goldman-Sachs report drew attention to the declining capability of Lebanon to address its public debt and financial soundness, which is threatening further investment in the country’s finances. This was immediately countered by Lebanese officials who, due to lack of a formal government, are unable to take remedial action to address policy shortcomings.

 

Some of Lebanon’s key challenges in the report:

  • Economic growth averaged about 1.6% between 2011 and 2018, IMF data show, compared with 7% in the preceding seven years.

  • Political disputes between a pro-Saudi bloc and the Iranian-backed Hezbollah have prevented the formation of a government since May.

  • The temporary resignation of Prime Minister Saad al-Hariri in 2017, widely blamed on Saudi Arabia, has further undermined investor confidence in the economy.

  • Deposit growth, key for local banks to buy government debt, has slowed.

 

The disquiet began in advance of the report when remarks made by the acting Finance Minister Ali Hassan Khalil appeared in a local newspaper “about debt restructuring [which] sparked a heavy sell-off in Lebanon’s dollar-denominated debt.” This was followed by a number of corrective statements from the Central Bank and other authorities. In reporting on the conflicting statements, Reuters noted that “Fitch and Moody’s both…revised the outlook on Lebanon to negative from stable.”

 

The Finance Minister “said a report by Moody's Investors Service that downgraded the country's long-term investment ratings reflects the need for quickly forming a new government and implementing reforms, the Associated Press (AP) reported.” Moody's said its decision reflects the heightened risk that the government's response to increased liquidity and financial stability risks will include "a debt rescheduling or other liability management exercise that may constitute a default under Moody's definition."  

 

 



 

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