Previous Quarterly Editions
Expropriation Risk: 69 71 70 71 ►Political Violence Risk:68 68 67 67 ► Terrorism Risk:46 48 50 50 ▲Exchange Transfer and Trade Sanction Risk: 91 82 82 82 ►Sovereign Default Risk:92 92 92 92 ►
TREND ►
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : High Very HighAll protest: High Very High
Cost-of-living protest risk in 2023*Wage protest: -Food/fuel policy protests: Very High
*Note: Protest intensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
Despite a recent breakthrough in Iran-Saudi Arabia relations, regional powers show little interest in helping Lebanon out of its current financial and political crisis. This means any new government and president likely to trigger political reform and economic improvement will likely be decided primarily by the Lebanese.
Inflation has soared steadily since the outbreak of political protests in October 2019 and more sharply in 2023. After hitting 155% in 2021, inflation surged to 171.2% in 2022, the highest in around four decades. In January, inflation more than doubled reflecting increased living expenses. This year alone, the lira has lost one third of its value and has now gone from its pre-2019 value of 1,500 lira to one U.S. dollar to, today, 100,000 lira to one U.S. dollar.
Devaluation has had a dramatic impact on consumer prices and public revenues. Monthly Consumer Price Index data showed an annual increase of 123.5%, primarily due to the high prices of communication, education, and healthcare.
The political effects are tangible. Lebanon has been experiencing decreased employment, GDP, foreign exchange reserves, and revenues with rising inflation. In 2022, the government cut fuel, medicine, and food subsidies, leaving thousands of Lebanese in danger of starvation. There is now widespread mistrust in politicians and bankers in the Lebanese population, and a great sense of anger, in regularly occurring armed bank heists, where desperate citizens demand their savings.
Public sector institutions are crumbling, as many employees cannot afford to drive to their workplaces. There are significantly reduced essential services amid collapsing revenues and drastically reduced spending. As a result,
unemployment and poverty are at historically high levels. Informal economic networks and an estimated USD1 billion in yearly remittances from the Lebanese diaspora are effectively keeping the economy from collapsing.
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 as they 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 autumn 2022, heists from frustrated customers have forced more banks to close, and in February 2023, all banks closed for more than a week following a particularly violent incident. A complete collapse of the banking sector is possible, particularly in light of ongoing uncertainty over the central bank and its embattled director, who is facing corruption charges.
The political and economic crisis is negatively affecting foreign direct investment in Lebanon, which decreased from USD2.6 billion in 2018 to USD2.1 billion in 2019 and is expected to decrease in 2022 after a small increase in 2020 and 2021 1. In March 2020, Lebanon announced its intention to default and restructure its nearly USD31 billion of dollar-denominated debt. The ensuing downgrade of the country’s sovereign debt rating continues to affect investor confidence.
Lebanon continues to suffer from the economic slowdown of the Gulf Cooperation Council, 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.
The combination of COVID-19-related lockdowns, ongoing political logjam (with no government since the May 2022 elections and no president since November 2022, although there are caretaker arrangements) and rampant currency devaluation has further weakened otherwise growing sectors in IT, higher education, and industry, hampering the potential of a Westernised and highly skilled workforce.
Green energy projects are waiting in the pipeline but need a political environment conducive to direct foreign investment to move them forward.
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 have been several large protests over the dire economic situation. Military leaders have criticised officials for lacking a response to address the spreading social chaos resulting from the economic crisis.
In areas of tight sectarian political control, notably the Bekaa Valley and South Lebanon including the southern suburbs of Beirut, riots are less likely. Northern Lebanon and Beirut are particularly vulnerable to political violence. The most desperate attempt to escape by boat, mainly from Tripoli, leading to many such migrant boats sinking on their way to Cyprus.
Hezbollah has introduced its own financial institutions, food markets, and pharmacies with parallel imports from Iran and Syria, to shelter their constituency from state breakdown. In other areas, particularly Tripoli and northern Lebanon, the lack of similar formalised 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. In the absence of a resolution to the political crisis over the presidency and government formation, political violence between rivalling groups is very likely.
TREND ▲
Islamic State (IS) is known to stage a resurgence when central government is weak and when it can exploit sectarian tensions. Deteriorating living conditions, protests, and the pandemic have depleted Lebanese army resources and could make it easier for militants to re-enter Lebanon. The situation in Afghanistan, now the Taliban is back in control there, may give IS in the Middle East renewed energy and resources. In 2022, there were reports of growing IS presence in the Palestinian camps, and in August, a Fatah leader was killed by suspected Islamic militants.
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, nor put an end to capital controls as part of measures to tackle a severe liquidity crisis. Even if a new government is in place by the summer and a presidential candidate can be agreed on, fiscal austerity, persistent capital controls, further devaluation – possibly beyond the 150,000-lira mark in 2023 – and potential impairment applied to wealthy depositors to recapitalise the banking sector seem inevitable. This will undermine Lebanon’s potential as an investment destination, degrading its position further.
TREND ►A new government will be forced to reach an agreement with the 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 programme. The fund has developed the framework for such reforms following the 2019 Paris II donor conference, where it made economic reforms conditions for loans. Talks in late 2022 stalled and are unlikely to lead to a formal agreement until after a new government is formed in Lebanon.
Meanwhile, although Russian and Chinese influence is growing, neither country has the political will nor capacity to deliver significant funds to Beirut. Chinese regional diplomacy that led to better relations between Saudi Arabia and Iran in March 2023 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 fearing they might lose influence or will be 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 stymied by political elites including the director of Lebanon’s central bank, who remains 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. 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.
The economic situation is increasingly desperate. Central bank reserves are low. Consumer prices have risen further as a result of the Russia/Ukraine crisis since February 2022, as Russia and Ukraine account for 70% of Lebanon’s wheat import. Ongoing public investigation of fraud in the banking sector is leading to bank closures and uncertainty about the country’s main financial institutions. This contributes to a difficult environment for the negotiations with the IMF.
Much depends on a new government and its ability to bring about a new political leadership open to making 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, and will likely push through their presidential candidate Suleiman Frangieh. Lebanon therefore looks set for a continuation of the rule of the traditional elite, decreasing the likelihood of political reforms and economic recovery.
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