Lebanese politicians are yet to form a cabinet following May 2018’s general election, in which Hezbollah and its allies expanded their political representation. Divisions continue between Saudi-backed Prime Minister Saad Hariri and President Michel Aoun, who is an ally of Hezbollah. Political deadlock will increase protest risks and prevent the country from addressing is large public debt burden.
Terrorism risks in Lebanon have fallen since Hezbollah and the Lebanese army launched a security operation on militant groups in July-August 2017.
The operation targeted jihadist groups operating in Arsal and Syrian border regions, reducing the ability of Islamic State to launch improvised explosive device (IED) attacks. In January 2018, there was 1 recorded terrorist incident in Lebanon, compared to 10 in January 2017.
Protest risks in Lebanon will be elevated in the remainder of 2018, as political deadlock hampers the provision of basic services, generating water shortages, electricity cuts and delays to waste collection. This is driving regular protests across the country, and the risk of business interruption and/or property damage will be elevated. However, there is no evidence to suggest that a co-ordinated protest movement is forming in the country that could pose a heightened risk of property damage or business interruption.
Regional instability elevates the risk of an unintended escalation to interstate war in Lebanon, as Israel, Iran and Hezbollah all maintain a heightened state of war preparedness in relation to the Syrian conflict. Israel is increasingly willing to act against Iran and allied groups in Syria, elevating the likelihood of cross-border incidents. Neither Israel nor Hezbollah would seek conflict in Lebanon, yet there is a heightened risk of escalatory action. Any outbreak of interstate conflict would likely generate significant property damage to Lebanese infrastructure. The 2006 war is estimated to have caused USD 2.8 billion worth of property damage.
Delays in cabinet formation will weigh on business confidence in the medium term outlook, limiting Lebanon’s growth outlook. Economic growth is forecasted at 2.1% in 2018, a marked decline from Lebanon’s boom years of 2007-2011, when the country achieved annual average growth of 9.2%. Structurally higher growth rates are unlikely to occur without reforms to the business environment and action on corruption, which are not forecasted in the current political environment.
Lebanon’s public finances are particularly weak, as persistent fiscal deficits have caused a rapid expansion of public debt. In the last 10 years, budget deficits have averaged 8.1% of GDP annually, while government debt is forecasted to reach 160% of GDP in 2020, up from 154.4% in 2017. With interest rates expected to rise globally in the 12-month outlook, debt servicing will continue to place significant pressure on Lebanon’s fiscal position, with costs equating to 35.4% of total spending in 2017. The political situation in Lebanon will inhibit any significant reforms to public spending in the coming months, while also preventing the country from accessing USD 11 billion in loans and grants pledged by the international community in April 2018.
Despite the challenging financial situation, around 40% of Lebanon’s public debt is held by domestic banks, which continue to experience growth conditions as the Lebanese diaspora provide significant liquidity to the sector through remittances. The central bank also maintains large reserves, with USD 35.8 billion at the end of 2017, equivalent to 13.3 months of import cover. This should mitigate the near-term risk of sovereign default.
Lebanon’s banking sector faces a rising risk of sanctions, as the US appears willing to address the growing influence of Hezbollah in the country. The US is reportedly considering expanding the Hezbollah International Financing Prevention Act (HIFPA), which allows sanctions to be imposed on any foreign persons that provide financial support to the group, and in May 2018 the US, with the Gulf Cooperation Council, imposed financial sanctions on Hezbollah’s leadership. However, the US is unlikely to introduce comprehensive sanctions against Lebanon, unless Aoun removes Hariri from his position. To date, the Lebanese banking sector has been resilient to this action, but if extensive sanctions were imposed the domestic banking sector may not be able to do business with Western banks or receive remittances.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Lebanon. Philippines, Bangladesh and Mali all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org.
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