Index trend
Previous Quarterly Editions
Expropriation risk: 70 70 70 73 ▲ Political violence risk:74 80 90 90 ►Terrorism risk:53 56 64 58 ▼Exchange transfer and trade sanction risk: 82 82 82 82 ►Sovereign default risk:92 92 92 92 ►
Overall Risk Temperature: 84 (High 1) TREND ►
Special topic: Political polarization
Lebanon is essentially a polarized country, where political, regional and sectarian fault lines run deep because of the sectarian political system and uneven wealth distribution. These structural tensions are exacerbated during times of conflict. Today, after the 2023–2024 war between Hezbollah and Israel, the main dividing line is between supporters of Hezbollah and those who wish to see the militant movement disarmed. This conflict intersects with overlapping conflicts between rich and poor population groups and between those who wish to see the Lebanese system of sectarian representation changed and those who wish to keep it.
The main factor driving polarization is the conflict between Hezbollah and Israel. A fragile ceasefire has been in place since November 2024, but the dangers of renewed conflict are ever present and closely related to the Israel-Hamas war in Gaza. If Hamas is threatened with complete defeat in Gaza, or if Palestinian civilians are killed or forced to leave in large numbers, Hezbollah’s leadership could still decide to respond by attacking Israel. Ongoing negotiations between the Lebanese Armed Forces and Israel over Israeli control of areas in south Lebanon could also provoke Hezbollah into action. If war resumes in Lebanon, more of the civilian population will turn against Hezbollah.
Polarization along sectarian and class lines has always been an important topic of debate in Lebanon. The Israel-Hezbollah war has raised this debate to a high pitch during the past year. Currently, some Christian leaders are pushing for de-arming Hezbollah as a necessary means to stabilize Lebanon. On the side of Hezbollah and its supporters — mainly in the Shia population — such calls are seen as a betrayal that would open the door to normalization with Israel. While the new President Joseph Aoun and Prime Minister Nawaf Salam reject normalization, they have opened the discussion about Hezbollah’s weapons. Their position is that the movement should eventually be integrated into the Lebanese Armed Forces but that forcing it to do so is dangerous and could provoke a civil war.
The political debate about Hezbollah intersects with the effects of the long economic crisis since 2019, which has impoverished large parts of the middle class. Hezbollah has so far been able to shelter some of the Shia population from poverty by providing alternative loans and cheap food and medicine. However, with Iranian support weakening as a result of the fall of the Assad regime in Syria and Iran’s general decline as a regional power, Hezbollah’s internal aid structures are in question. The need for large-scale reconstruction has also left thousands of civilians in a desperate situation. Social tensions resulting from economic polarization will be exacerbated by poor economic performance and continued unrest in the region.
The current outlook for polarization in Lebanon is improving in the sense that the war has finished — for now — and a new political leadership has brought back a sense of optimism that Lebanon’s government can improve transparency and attract foreign investment. However, the relations between Hezbollah and Israel and between Hezbollah’s supporters and opponents remain highly volatile.
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Expropriation risks from the state 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.
Lebanon’s financial crisis continues despite a better political outlook in 2025. Private banks continue to suffer from occasional heists from frustrated customers. The economic outlook has improved slightly, and the World Bank forecasts a 0.4% growth in 2026. A complete collapse of the banking sector looks less likely after long-standing uncertainty over the central bank has been partly resolved.
Fiscal austerity, persistent capital controls, further devaluation and potential impairment applied to wealthy depositors to recapitalize the banking sector will be difficult to avoid, despite new measures to stabilize the economy. Foreign investors are unlikely to regain confidence before a more conclusive sign of reform-oriented governance after the 2026 parliamentary elections.
Despite better outlook, the political and economic crisis is still negatively affecting foreign direct investment flows into Lebanon, which have fallen to $655 million in 2023, down from a peak of $4.9 billion in 2009.
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Sporadic riots, gunfights over petrol, road blockages and bank heists have become regular occurrences. The formation of a new government in January 2025 could increase stability and social peace, but large protests over the dire economic situation, as happened in 2023, remain possible as communities in poor areas suffer from the extended economic downturn and defunct public services. Military leaders have criticized officials for lacking a response to address the spreading social chaos resulting from the economic crisis.
The likelihood of a resumption of full-blown war between Hezbollah and Israel remains high. In that case, political violence will be a risk across the country. However, even in the case of intense Israeli bombardment in most of the country, popular anger, vigilante groups and sectarian confrontations were contained.
In areas of tight sectarian political control, notably the Bekaa Valley and South Lebanon, including the southern suburbs of Beirut, riots are generally less likely. 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. However, Shiite citizens could turn on Hezbollah if reconstruction efforts are slow or falter.
Although Iran reportedly continues to provide funds, they are not meeting demands, and reconstruction of whole neighborhoods in Beirut and the south destroyed in the war is slow. 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. If the Aoun-Nawaf government fails to stabilize Lebanon, political violence between rivaling groups is very likely.
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The Islamic State 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 depleted Lebanese army resources and could make it easier for militants to reenter Lebanon, though the army is now being bolstered again.
The situation in Afghanistan, with the Taliban back in control, may give the Islamic State in the Middle East renewed energy and resources.
Spillovers from Syria are also a concern. In early 2025, there has been fighting along the Syrian-Lebanese border in the Bekaa Valley between Syrian government troops and Lebanese smuggling networks related to Hezbollah. Such skirmishes will continue in the border areas.
Tensions in and around Palestinian camps will continue, as the Palestinian Authority activates its respective groups in Lebanon. Such tensions could spill over into attacks on Western and particularly U.S. interests in Lebanon. This is unlikely to happen without Hezbollah’s consent but could be part of Palestinian infighting if the situation in Gaza and on the West Bank worsens.
The economic situation has stabilized somewhat since 2023 due to a fixed exchange rate around 85,000 Lebanese pounds to the U.S. dollar. However, central bank reserves remain low and consumer prices have risen further because of the Russia-Ukraine war since February 2022 and the Israel-Hamas war since October 2023 that have hit imports and tourist revenue, respectively.
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 experienced 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.
The new government has vowed to fight corruption but will not in the short term be able to stop capital flight nor put an end to informal capital controls as part of measures to tackle a severe liquidity crisis.
TREND ►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.
Salam’s new government is seeking to reach an agreement with the International Monetary Fund (IMF) to stave off economic collapse. Fund 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 set as conditions for loans. Talks begun in late 2022 stalled and are now in the process of being revived as the new government enacts long-delayed reforms demanded by the IMF before a new deal can be agreed.
The government is in a position to agree a deal and get it passed — with difficulty — by parliament. There is a new political realism in Lebanon at present that makes passage of a deal more likely in the short term.
