Index trend
Previous Quarterly Editions
Expropriation risk: 71 70 70 70 ► Political violence risk:68 67 67 73 ▲Terrorism risk:50 50 53 56 ▲Exchange transfer and trade sanction risk: 82 82 82 82 ►Sovereign default risk:92 92 92 92 ►
Overall Risk Temperature: 79 (High 1) TREND ▲
Special topic: Relationship with the 'global rules-based order'
The government sees the global rules-based order mainly through the lens of the conflict with Israel. The general view is that international mediation is necessary in some cases, such as the security situation on the border with Israel, where United Nations (U.N.) peacekeepers have been present since 1978. The leaders of the Islamist party Hezbollah and other groups associated with it take a more sceptical view of the international order. They see it as dominated by Washington, which favors Israel. U.S. sanctions against Hezbollah’s leaders and some of its Christian allies have strengthened this view.
The state views the U.N. system, international conventions and diplomatic rules of engagement as important means of protection for a small state in a volatile regional environment. Lebanese leaders, however, struggle to persuade external partners that they adhere to international rules; Transparency International ranks Lebanon 148th out of 180 countries for public sector corruption. A severe economic crisis since 2019 also highlights the absence of good governance. Moreover, Hezbollah's refusal to cooperate with the U.N.'s Special Tribunal on Lebanon, which found its members guilty of involvement in the assassination of Prime Minister Rafiq Hariri in 2005, reflects poorly on Lebanon. This is also evident in other cases, such as the 2020 Beirut port explosion investigation. Some Lebanese leaders support and rely on the international rules-based order, but others try to avoid it or completely reject its validity.
This is particularly true for Hezbollah. Iran’s criticism of Western hegemony colors its view of the international order. It participates in its self-declared Axis of Resistance along with Hamas, Syria, Iran and the Houthi movement in Yemen. Tensions have escalated since Hamas attacked Israel on October 7, 2023. Hezbollah leader Hassan Nasrallah frequently mentions U.N. Security Council resolutions during its conflict with Israel, which is on the verge of open war as of April 2024. He has also praised South Africa's indictment of Israel at the International Court of Justice. Hezbollah’s leaders believe that the international order is transforming into a more balanced distribution of power between the West and the Global South, echoing Russia’s, China and other non-Western states. They see Hamas’ war against Israel as part of this revision.
If the rules-based order changes toward greater protectionism and less support for international institutions, regional politics would have an even more divisive effect on Lebanon. The vastly different domestic perspectives on the political system and the country’s foreign alliances have, in the past, caused violent conflict. Lebanon depends on foreign aid, Western and Arab support, and international institutions to manage its various challenges, from economic restructuring to political reforms and the management of large, impoverished Syrian and Palestinian refugee populations. The most immediate damage would occur if the U.N. Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) were to collapse. The Lebanese government lacks the resources to take over its work in refugee camps, which would jeopardize social order.
TREND ►
Expropriation risks are minimal. Foreign investors do not tend to use local banks; however, some Arab investors may use Lebanese banks for direct transactions and business deals. Lebanese clients could easily default due to the banking situation, exposing investors to risk.
In March 2022, one of the largest domestic banks was closed following a judicial order. Since 2022, heists from frustrated customers have forced more banks to close. In February 2023, all banks closed for more than a week following a particularly violent incident. The economic situation has improved slightly since then. The U.N. predicts 1.7% growth in 2024 from 0.2% contraction in 2023. A complete collapse of the banking sector is 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 dollar-denominated debt. The ensuing downgrade of the country’s sovereign debt rating affects investor confidence.
Lebanon has had an interim government since the May 2022 elections and no president since November 2022. Partly because of this, it is struggling to deal with external headwinds, such as economic slowdown in the Gulf Cooperation Council, regional uncertainty over the Hamas-Israel war, the effects of the Syrian crisis and the inability of refugees to return home from Lebanon. The country also faces a fragile macroeconomic situation, high unemployment, brain drain, energy supply shortages and regulatory obstacles. Rampant currency devaluation has further weakened growing sectors in information, technology, higher education, and industry. These challenges also hamper the potential of a Westernized and highly skilled workforce. Green energy projects are waiting in the pipeline but need a political environment conducive to direct foreign investment.y not resurface before the arrival of a reform-minded government.
TREND ▲
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. Military leaders have criticized officials for their failure to respond effectively to the social chaos caused by the economic crisis.
Riots are less likely in areas under strict sectarian political control, such as the Bekaa Valley and South Lebanon (including the southern suburbs of Beirut). Northern Lebanon and Beirut are particularly prone to political violence. The most desperate people attempt to escape by boat, mainly from Tripoli. Many migrant boats have sunk on their way to Cyprus. If UNRWA loses financial support, migrant escape routes could become more prevalent.
Hezbollah has introduced its own financial institutions, food markets and pharmacies with parallel imports from Iran and Syria to shelter its constituency from state breakdown. In other areas, particularly Tripoli and northern Lebanon, the lack of similar formalized patronage leaves many people in desperate situations. The poorest communities, including Syrian and Palestinian refugees, are the most likely to stage bread riots, which could become increasingly difficult to control. Violence between rival groups is very likely without a resolution to the political crisis over the presidency and government formation.
Islamic State (IS) is known to stage a resurgence when government is weak and sectarian tensions can be exploited. Deteriorating living conditions, protests and the pandemic have depleted the Lebanese army’s resources and could make it easier for militants to reenter Lebanon. The return of the Taliban to power in Afghanistan may give IS in the Middle East renewed energy and resources. Since 2022, there have been reports of growing IS presence in Palestinian camps, and anger over Israel’s war on Hamas is creating a fertile ground for militarization.
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 have been 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. Even if a new government is in place and a presidential candidate can be agreed upon 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.
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. Talks with the IMF stalled in late 2022 and are unlikely to lead to a formal agreement until after a new government is formed in Lebanon; however, it is doubtful a new government will be in place before the elections. Parties fear losing influence or being held accountable for Lebanon’s economic demise if they do not command control over key ministries.
The Mikati-led government has not been able to meet any reform demand; it has been hampered by political elites, including the director of Lebanon’s central bank, who is locked in conflict with the public prosecutor. The director has announced his retirement this year, which could be a starting point for meaningful economic reforms.
The economic situation has stabilized somewhat since 2023 due to a fixed exchange rate of around $1 to 85.000 Lebanese pounds; however, central bank reserves are low, and consumer prices have risen further because of the Russian war in Ukraine since February 2022. Ongoing public investigations of banking fraud are leading to bank closures and uncertainty about the main financial institutions. Although the government has passed a draft budget of $3.3 billion for 2024, it does not provide much information about investment in public services or repairing the country’s ruptured social contract.
