Lebanon: Waiting for the sun

Lebanon: Waiting for the sun

Lebanon has remained in decent financial shape, despite political uncertainty and being cut off from major Gulf markets, and could experience a revival once Syria eventually starts to recover, says James Gavin

After two and a half years of political drift as the country failed to elect a president to succeed Michel Suleiman, who left office in May 2014, Lebanon is now showing signs of renewed economic vigour with a new head of state installed, a unity cabinet formed and promising indicators of improving investor sentiment.

The political compromise that saw the veteran former general Michel Aoun named president on 31 October 2016 has done much to reinject a sense of dynamism into a flagging economy. Real estate demand – one significant barometer of economic confidence in Lebanon – spiked in the fourth quarter of 2016. Byblos Bank’s Real Estate Demand Index showed a 17.5% increase in that period over the previous quarter.

 “Toward the end of 2016, Lebanon witnessed a positive political development domestically that brought back a sense of confidence in the country’s ability to boost its economic status. Lebanon elected a new president and succeeded in forming a new cabinet chaired by Prime Minister Saad Al-Hariri,” says Mohamed Ali Beyhum, executive general manager at Lebanon’s Bankmed and chairman and general manager of MedSecurities Investment Company.

The country’s growth outlook has improved markedly in the matter of a few months. The Washington-based Institute of International Finance projects Lebanon’s real GDP growth rate to accelerate from an estimated 1.4% in 2016 to 3% in 2017, viewing the politically developments leading to a modest recovery in private investment and in exports of goods and services.

Michel Chikhani, managing director at BLOM Asset Management Co, cautions that it is too early to expect tangible signs of improved investor sentiment in the form of significant capital inflows. “But people are more aware now that there might be a possibility of an improvement,” he says.

 Marwan Barakat, head of research at Lebanon’s Bank Audi, is nonetheless confident that the political atmosphere will yield positive results. “On the basis of the domestic political settlement that led to successful presidential elections with regional international support, our macro forecast for 2017 rests on an improving growth scenario. We project growth at 4% in 2017, more than twice the average we had over past six years,” he says.

Barakat foresees private investment growing by 15% in the next year, albeit from a low base in 2016. “For the past few years the Lebanese have been delaying investment decisions. Now, with the improvement in the political outlook, we at Audi are seeing more investment initiatives in the country,” he says.

Reform agenda

There may be longer-lasting gains to be made. According to Bankmed’s Beyhum, the long awaited political breakthrough is anticipated to pave the way for the much needed structural reforms and adjustments that would place the country on the right growth track for the coming years.

“The resumption of the domestic political process and the prospect of a government that is able to tackle Lebanon’s reform agenda and set a budget to improve the country’s infrastructure – particularly power, telecom, and transport – would have a material impact on confidence and growth. Hereby, the positive sentiment would boost inflows, support financial stability and promote investment,” says Beyhum.

Last year saw a substantial growth in financial inflows into Lebanon, with a 40% increase in the first 11 months of 2016 to $14.8bn.

The political changes have reinstated confidence in Lebanon’s ability to recover and brought in a positive shift in the relationship with the Gulf states, especially with Saudi Arabia and Qatar. “This reconciliation with the Gulf is expected to continue instigating activity within the tourism sector and would likely result in an improvement in investment. In fact, 2016 witnessed an upsurge in tourist arrivals, increasing 11.2%. Arab tourist arrivals, in particular, increased by 8.7%,” says Beyhum, adding that the affluent Arab visitors are most soughtafter and are no longer discouraged from take the trip by their home states.

 Untapped potential

Although Lebanon has always attracted foreign private investments from the Gulf region, it still harbours a number of unexplored opportunities that remain untapped – in part because of the difficult politics surrounding Lebanon’s confessional divide.

These barriers are being slowly dismantled. For instance, the long-term prospects in the knowledge sector are seen as very encouraging. “To help boost start-up investment, the Central Bank of Lebanon (BDL) issued Circular 331 through which it aimed to promote development of a local high-tech sector. The oil and gas sector also has a lot of potential, and once its policies and framework are set in place, this sector is likely to attract foreign investments, especially from the GCC,” says Beyhum.

“Finally, with discussions to start joint economic committees between Lebanon and Gulf nations in an aim to encourage trade and contribute to economic advancement, we tend to remain hopeful that the overall investment sentiment would improve.”

Capital flows

Bank Audi’s Barakat predicts that the resumption in Gulf investment flows and tourist numbers could lead to a 20% increase in financial inflows, generating $10bn of additional deposits in the banking system. “We don’t see much FDI at this stage. But we see more transfers, deposits and tourism receipts,” he says.

Lebanon’s capital markets should see a continued boost from the political improvement. The Beirut Stock Exchange ended last year on a high note, with total trading value growing from $500m to $887m compared to the year before. In January 2017, total shares traded grew by 60.7% over the same month in January 2016, to 7.2 million, with value traded up by 21.7% to $46.8m.

According to John Gebeily, head of MENA equities at Beirut-based Audi Capital, the Beirut stock market has always been considered a frontier MENA equity market – accounting for only 1.7% of the investable MENA universe and trading at a discount to peers considering the geopolitical regional risks. This makes it attractive to dividendyield- seeking investors, considering the yields on some of the larger listed socks.

 “As core MENA suffers from high volatility, downside risks from oil and currency devolutions and emerging markets suffer capital outflows, peripheral frontier equity markets such as Lebanon and Jordan have seen more appetite from MENA equity investors over the past year,” says Gebeily.

Infrastructure development

Investment managers see positive movements in the bond market too. “There’s been a stabilisation of the credit default swaps, with the CDS spread dropping back from above 500 basis points (bps) to around the 400bps mark,” says BLOM’s Chikhani. “This has had a positive impact on the bond markets, which had been depressed. Now there’s interest again and there are good opportunities for buyers.”

Lebanon’s capital market has the potential for further development, says the IMF, in its January 2017 Article IV assessment of Lebanon. The Capital Markets Authority (CMA) is now operational and a new trading platform is paving the way for market initiatives.

 But the IMF warns that successful development will require a further strengthening of Lebanon’s regulatory and institutional framework. As markets grow, the IMF urges the CMA to strike a balance between innovation and investor protection, shifting the nature of its oversight towards monitoring, risk-based supervision of intermediaries, and market surveillance.

Custody & clearing

The Lebanese market has seen new rules on custody and clearing business, with the CMA publishing policies on clients’ assets protection, account segregation and off balance sheet booking. The aim is to cut down on operational risk and improve quality and thereby build greater confidence in the market.

 “There’s a solid custody and settlement process and an efficient market infrastructure in Lebanon that allows investment managers to operate,” says Chikhani, who heads up BLOM’s wholly-owned asset management firm formed last year to manage and operate its portfolio of local and regional investment funds as well as segregated managed accounts.

Lebanon’s asset management industry remains promising, Chikhani says. BLOM views it as a strategic business development opportunity locally and throughout the region, enabling it to offer products not only to retail clients but to institutional and high net worth investors. The aim, says Chikhani, is to offer differentiated products that are not currently available in the market.

“The asset management department was spun off from Blominvest in order to create a new asset management entity for BLOM in the region. We’ve also established in 2016 a new asset management company in Egypt, known as BLOM Financial Investments, and we’ve had a presence in Saudi Arabia since 2011”

Certificate of deposits

While investment managers will be keeping a keen eye on Lebanon, and the financial inflows are a positive indicator of future prospects, it is still too early to see large-scale portfolio repositioning towards Lebanon on the cards.

However, investor confidence is reaffirmed by BDL’s financial swap arrangements conducted in mid-2016. Says Bankmed’s Beyhum: “In May 2016, the BDL administered a financial operation in an aim to bolster its foreign exchange reserves and commercial banks’ capital buffers. As a basic step, BDL swapped Lebanese pound government debt for new Eurobonds with the Ministry of Finance.

“In June 2016, BDL encouraged domestic banks to purchase the newly-acquired Eurobonds and FX-denominated long-term certificates of deposit (CDs). In their turn, domestic banks were offered sizable incentives to participate in the operation and were able to attract foreign currency deposits from outside the country.”

This, explains Beyhum, enabled banks to recognise a 3% increase in deposits between June and November 2016 to reach $159.2bn as at end-November 2016. On a similar note, Lebanese banks also witnessed growth in their total assets, which increased by 5.5% between June and November 2016 to reach $200.9bn as Lebanese commercial banks remain the chief source of funding to the economy.

 The IMF cautions that with the operation now closed, inflows are projected to return to the levels seen in the early half of 2016 – short of the levels needed to fund the economy over the medium term.

The Syria situation

 The other big challenge is what happens in Syria – inevitably a major influence on Lebanon. The Syrian crisis has smothered Lebanon’s economic dynamism, slowing GDP growth from a pre-crisis average of about 10% in the 2007-2010 period to the low single figures. Investor confidence has been buffeted by Lebanon’s proximity to the war-torn country, though security has, by and large, held up strongly since 2015. Still, Lebanese exporters have been prevented from selling goods via landborne routes to the Gulf economies, losing them market share. The inflow of more than one million Syrian refugees has also been a heavy drain on limited resources, particularly infrastructure.

But despite the scale of the conflict next door, there is hope for better news regarding Lebanon’s relations with Syria. Citi, in a recent research note, said that the recent relative stabilisation of the situation in Syria could provide a more permanent and positive catalyst for political stability and sentiment in Lebanon. The stabilisation of security conditions in some areas of Syria constitutes a major economic opportunity for Lebanon through the reconstruction and development efforts in these areas.

“A significant pick up in Lebanon’s economy is highly contingent on developments in Syria,” says Beyhum. “In the event of a resolution to the Syrian war, Lebanon is expected to benefit from Syria’s reconstruction, re-establish its trade routes, alleviate its fiscal pressures and current account deficit, consequently prompting the economy beyond its potential growth rate of 5%.”

There are other incipient signs of improvements. The tourism sector has improved, and real estate, another weathervane sector, is also showing signs of life. Real estate transaction values rose by 8.8% in January 2017 compared to the same month in 2016, to $570.8m. The government has provided funding support to the sector in the form of low-interest housing loans.

Longer-term, Lebanon is looking to capitalise on its prospective hydrocarbons resources. The government in early 2017 relaunched an offshore licensing round, offering five blocks for exploration, after two crucial decrees authorising exploration were shelved for more than three years. The country prequalified 46 international oil companies to investigate hydrocarbons prospects in 2013, including oil majors such as ExxonMobil. The chance of Lebanon becoming the latest East Mediterranean country to participate in the region’s offshore oil and gas boom is tantalising, and would yield an immediate improvement in the country’s balance of payments, though it must still be considered a long way from fruition. 

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