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Expropriation Risk: 58 61 64 65 ▲ Political Violence Risk: 66 66 67 68 ▲ Terrorism Risk: 45 45 45 46 ▲ Exchange Transfer and Trade Sanction Risk: 91 91 91 91 ► Sovereign Default Risk: 92 92 92 92 ►
TREND ▲
A year after the resignation of the Lebanese government headed by Prime Minister Hassan Diab following the August 4, 2020, Beirut port explosion, a new government has now been formed and public desperation due to the worsening economic situation and the lack of electricity and fuel has subsided somewhat. The prospect of donor aid has stopped the slide of the Lebanese lira to the dollar. However, state institutions are still not functioning very well, there is a lack fuel and urban areas have no lighting at night, with electricity blackouts common.
At the peak of the crisis in July and August, demonstrators blocked roads in many areas in protest over the depreciation of the lira, leading to overlapping crises. Public anger at political elites is still significant and could translate into widespread violence as emergencies in public health and electricity aggravate the situation.
The economic outlook in Lebanon has worsened since August 2019 after the Lebanese currency fell in value, going from LBP1507.50:USD1 to LBP1,585:USD1, sparking nationwide protests as the government planned to impose taxes on fuel, tobacco and voice calls made through the WhatsApp application.
The currency pressures have consequences across society: the poorest starve, while the middle classes cut spending or consider relocating abroad. Purchasing power has declined as minimum wages in Lebanon have been reduced from the equivalent of USD450 to about USD50 per month, or less than USD2 a day.
Inflation has led to a 600% increase in the prices of foodstuffs. In a country where half of all food and most consumer products are imported, the combination of dollar scarcity and up to 92% real wage depreciation has impoverished large parts of the middle classes, many of whom carry multiple passports and now consider emigration. A large part of Lebanon’s medical staff has already left.
According to the UN Economic and Social Commission for Western Asia, poverty in Lebanon has exceeded 55% and unemployment has shot up after 23% of the workers in the main sectors were laid off. As a result, food insecurity is widespread, with half of the population being worried about not being able to access food. Parliament recently authorised a USD246mn loan from the World Bank to provide cash assistance to poor families, but no significant efforts have been made to stop the wider collapse. A government food stamp system passed earlier this year has still not come into effect.
On September 10, new Prime Minister Najib Mikati finally managed to form a government, which is composed of politically appointed experts. Mikati’s cabinet is likely to open negotiations over aid and loans with the IMF but will stall structural reforms until parliamentary elections in spring 2022. This means a period of relative calm but no progress in solving the country’s economic crisis.
TREND ►
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. Moreover, Lebanese clients could easily default due to the banking situation, exposing investors to risk.
The political and economic crisis is affecting foreign direct investment (FDI) in Lebanon negatively. FDI decreased from USD2.6bn in 2018 to USD2.1bn in 2019, with further decreases projected for 2021 after a small increase in 2020. In March 2020, Lebanon announced its intention to default and restructure its nearly USD31bn of dollar-denominated debt. The ensuing downgrade of its sovereign debt rating is affecting investor confidence.
In addition, Lebanon continues to suffer from the economic slowdown of the Gulf Cooperation Council, the effect of the Syrian crisis, the fragile macroeconomic situation, high unemployment, brain drain, energy supply shortages and regulatory obstacles. The combination of COVID-19-related lockdowns, the legacy of the political logjam and rampant currency devaluation is further weakening otherwise growing sectors in information, technology and industry and hampering the potential of a Westernised and highly skilled workforce.
Political protests began in October 2019 but retreated in March 2020 due to the COVID-19 lockdowns. Sporadic riots, gunfights over petrol, and road blockages have become regular occurrences in recent months and are likely to increase. Military leaders have publicly criticised officials for lacking a response to address the spreading social chaos resulting from the economic crisis. In areas of tight sectarian political control, most notably the Beqaa 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 Mikati government has lessened the near-term prospects of violence.
Hezbollah has introduced their 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 February 2021, the Lebanese Armed Forces arrested 18 Islamic State-linked suspects, raising concerns that the terrorist organisation is planning to regain a foothold in the country. The area of the arrests in the Arsal region on the eastern border with Syria was the focus of spill over from the war in Syria between 2012 and 2017, when several cells of Islamic militants carried out or were arrested planning attacks.
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 have depleted army resources and could make it easier for militants to re-enter the Lebanese arena. The situation in Afghanistan -- now that the Taliban is back in control of country -- may give Islamic State in the Middle East renewed energy and resources.
Since October 2019, the Lebanese financial sector has imposed ad hoc capital controls, preventing most Lebanese from transferring money abroad, despite 75% of accounts in Lebanese banks being denominated in dollars. 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.
Despite public prosecution of bankers involved in illegal capital transfers in 2020, the government has not been able to stop capital flight, nor put an end to capital controls as part of measures to tackle a severe liquidity crisis. Even with a new government in place, fiscal austerity, persistent capital controls, further devaluation and potential impairment applied to wealthy depositors to recapitalise the banking sector seem inevitable. This will affect Lebanon’s potential as a destination for foreign investment, degrading its position in 2021 and further into 2022.
Lebanon’s new government will be forced to reach an agreement with the International Monetary Fund (IMF) to stave off a complete collapse of the economy. IMF intervention could restore confidence in the currency by introducing a new monetary policy framework and a fiscal adjustment programme. The IMF has developed the framework for such reforms following the 2019 Paris II donor conference, where economic reforms were made conditions for loans.
The Mikati-led government may be able to meet some reform demand but will be stymied by political elites including director of the Lebanese Central Bank Riad Salameh. Discussions between the central bank and the IMF stalled in December 2020 at the diagnostic stage and international donors may demand the replacement of Salameh, a demand that President Michel Aoun would strongly back. Mikati, however, is not inclined to replace him, which means that IMF talks will eventually falter.
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