Index trend
Previous quarterly editions
Expropriation risk: 70 70 70 70 ► Political violence risk:67 73 74 80 ▲Terrorism risk:50 53 56 64 ▲Exchange transfer and trade sanction risk: 82 82 82 82 ►Sovereign default risk:92 92 92 92 ►
Overall Risk Temperature: 81 (High 1) TREND ▲
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
2
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
5
Lebanon has been directly involved in the war between Hamas and Israel since October 7, 2023, through the militant Shia organization Hezbollah’s exchanges with Israel on the southern border. Not quite a war, the situation could be described as a gray zone aggression both from Israel’s side and Hezbollah’s. Both parties launched aerial attacks on military targets but stopped short of war until October when Israeli ground forces moved into Lebanon.
For Hezbollah, the attacks included short-range rockets, mainly Russian-produced Katyusha rockets that cause damage but lack precision. Such attacks have been part of a decades-long pattern of small-scale exchange of fire over the border after the end of the last major confrontation between the two parties in 2006. In contrast to this set pattern, Hezbollah has escalated their gray zone aggression over the past year in a declared attempt to punish Israel for its war on Hamas and at the same time deter Israel from a large-scale invasion of Lebanon. While few civilians have died, the attacks caused forest fires, much material damage and general fear, forcing nearly 100,000 civilians in northern Israel to relocate. Hezbollah has also sometimes used drone attacks, most notably in response to Israel’s assassination of Hezbollah’s military leader Fouad Shukri in July. The drones targeting Israeli military intelligence headquarters near Tel Aviv were shot down before impact, and Israel decided not to escalate.
Both sides played a delicate game of brinkmanship, seeking to contain their adversary by maintaining a gray zone level of aggression. While Israeli communities near the border have been forced to cancel the school year beginning in September, in anticipation of a long-running conflict, Hezbollah’s constituency in southern Lebanon has borne an even heavier burden, suffering extensive damage on agriculture, regular aerial attacks and a constant threat from drones. At least 150 civilians were killed in Lebanon from, or attributed to, Israeli attacks, most recently a series of booby-trapped pagers and walkie-talkies targeting Hezbollah soldiers in September.
Hezbollah’s leadership preferred to maintain this limited level of engagement that, alongside attacks from other Iranian allies in the region, was an irritant and a threat to Israel. It was not ready for the full-scale war, which is risky for its standing in domestic Lebanese politics and will also take out much of its military capacity. The war will also hurt Israel militarily and financially, but Hezbollah will lose more.
TREND ►
State-based expropriation risks in Lebanon are minimal. Expropriation as a direct result of the financial crisis and banking sector turmoil will not affect foreign investors, who are unlikely to use local banks. However, some Arab investors may choose to use Lebanese banks for direct transactions and business deals. Moreover, Lebanese clients could easily default due to the banking situation, exposing investors to risk.
In March 2022, one of Lebanon’s largest banks was closed following a judicial order. Since later 2022, heists from frustrated customers have forced more banks to close, and in February 2023 all banks closed for over a week, following a particularly violent incident. The economic situation has improved slightly since then, with the United Nations predicting 1.7% growth in 2024 and 3.8% in 2025, from 0.2% contraction in 2023. A complete collapse of the banking sector looks less likely than in 2023, when long-standing uncertainty over the central bank was partly resolved.
Despite a better outlook, the political and economic crisis is still negatively affecting foreign direct investment in Lebanon, which decreased from $600 million in 2021 to $525 million in 2022, down from a peak of $4.9 billion in 2009. In March 2020, Lebanon announced its intention to default and restructure its nearly $31 billion of dollar-denominated debt. The ensuing downgrade of the country’s sovereign debt rating continues to affect investor confidence. The escalated conflict between Hezbollah and Israel since October 2023 has only added to the economic slump.
Lebanon continues to suffer from the economic slowdown of the Gulf Cooperation Council, regional uncertainty over the Hamas-Israel war, the effect of the Syrian crisis and the inability of refugees to return home from Lebanon, the fragile macroeconomic situation, high unemployment, brain drain, energy supply shortages and regulatory obstacles. Since October 2023, reduced revenue from tourism and reluctant investors awaiting the outcome of the war has meant a drop in revenue.
The combination of COVID-19-related lockdowns, ongoing political logjam (with only an interim government since the May 2022 elections and no president since November 2022) and rampant currency devaluation has further weakened otherwise growing sectors in information, technology, higher education and industry and is hampering the potential of a Westernized and highly skilled workforce. Green energy projects are waiting in the pipeline but need a political environment conducive to foreign investment.
TREND ▲
Political protests began in October 2019 but retreated in March 2020 due to COVID-19 lockdowns. Sporadic riots, gunfights over petrol, road blockages and bank heists have become regular occurrences and are likely to increase. In 2023, there were large protests over the dire economic situation, and the past six months have seen demonstrations in support of Palestinians and Hamas.
With the outbreak of war between Hezbollah and Israel, political violence is a risk across the country, with the authorities unable to contain popular anger, vigilante groups and sectarian confrontations.
Islamic State (IS) is known to stage a resurgence when central government is weak and when sectarian tensions can be exploited. Deteriorating living conditions, protests and the pandemic have depleted Lebanese army resources and could make it easier for militants to reenter Lebanon.
The situation in Afghanistan, with the Taliban back in control, may give IS in the Middle East renewed energy and resources. Since 2022, there have been reports of growing IS presence in the Palestinian camps, and anger against Israel creates a fertile ground for militarization.
There is also the possibility that Hamas activates its groups in Lebanon to target Western and particularly U.S. interests in Lebanon.
Since October 2019, Lebanon’s financial sector has imposed ad hoc capital controls, preventing most Lebanese from transferring money abroad, despite 75% of accounts in Lebanese banks being dollar-denominated. Small savers have generally been restricted access while larger account holders with political connections were able to transfer savings, leading to billions of dollars in capital flight in late 2019 and early 2020. This situation has created a thriving parallel informal financial sector run by criminal networks and partly controlled by Hezbollah.
Prime Minister Najib Mikati’s interim government has been unable to stop capital flight or end capital controls as part of measures to tackle a severe liquidity crisis. Even if a new government is in place and a presidential candidate can be agreed on before general elections in 2026, fiscal austerity, persistent capital controls, further devaluation and potential impairment applied to wealthy depositors to recapitalize the banking sector seem inevitable. This will further undermine Lebanon’s potential as an investment destination.
TREND ►A new government will be forced to reach an agreement with the International Monetary Fund (IMF) to stave off a complete economic collapse. IMF intervention could restore confidence in the currency by introducing a new monetary policy framework and a fiscal adjustment program. The IMF has developed the framework for such reforms following the 2019 Paris II donor conference, where economic reforms were made conditions for loans. Talks in late 2022 have stalled and are unlikely to lead to a formal agreement until after a new Lebanese government is formed.
Meanwhile, although Russian and Chinese influence is growing, neither country has the will or capacity to deliver significant funds to Lebanon. Chinese diplomacy that led to better relations between Saudi Arabia and Iran in March 2023 and successfully mediated relations between Hamas and Fatah in July 2024 is unlikely to translate into an immediate breakthrough in government formation. France and Qatar continue to work on a deal, but there is still significant intransigence from several parties who fear that they might lose influence or will be held accountable for Lebanon’s economic demise if they do not command control over key ministries. The Gaza war has only added to the deadlock in government formation.
The Mikati-led interim government has not been able to meet any reform demand; it has been stymied by political elites, including the director of Lebanon’s central bank, Riad Salalmeh, who retired this year and is now under arrest charged with corruption. His interim replacement, Wasim Mansouri, will need a more permanent replacement, pending political agreement on a new director, before meaningful economic reforms can commence. Discussions between the central bank and the IMF stalled in December 2020 at the diagnostic stage, and international donors will now push for a more cooperative central bank director — knowing, however, that this will only materialize if parliamentary elections in 2026 allow for a new political alignment more open to economic reforms.
The economic situation has stabilized somewhat since 2023 due to a fixed exchange rate around 85 Lebanese pounds to the U.S. dollar. However, central bank reserves remain low, and consumer prices have risen further because of the Russian war in Ukraine since February 2022 and the Gaza war since October 2023 that have hit imports and tourist revenue, respectively. Ongoing public investigation of fraud in the banking sector is leading to closure of banks and uncertainty about the country’s main financial institutions. While the government has passed a $3.3 billion draft budget for 2024, it says practically nothing about augmenting investment in public services or fixing the country’s ruptured social contract.
A new government will eventually have to tackle these challenges and make the necessary concessions to the IMF. While reformists surprisingly won 15 seats in the May 2022 elections, they have failed to form a united front. Hezbollah’s block, despite losing its majority, looks set to continue its domination. Lebanon therefore looks set for a continuation of government vacuum in the context of effective rule by the traditional elite, which decreases the likelihood of political reforms and economic recovery.
