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The 2009 Budget has not been agreed on yet due to the continued political disputes over the role of independent public institutions. |
The current global financial crisis is mainly a product of credit problems and deflation. The high-time of this crisis has seen a number of major bank failures, declines in various stock indexes, and large reductions in the market value of equities (stocks) and commodities worldwide. The fact that financial markets and banks are at the heart of the turmoil, which will affect billions of people world-wide through the real economy, is not a coincidence unfortunately.
In fact, this problem was a subject of debate as early as the late 19th century. Karl Marx criticized the credit system for constituting “enormous centralization” and giving “fabulous power” to banks, money-lenderers, and usurers “not only to periodically despoil industrial capitalists, but also to interfere in actual production.”
The crisis highlights a major question on whether the ostensible volumes of trade in the financial sector really equal the actual productivity of the real economy. The fictional extents to which the globalized world of finance has reached amount to an astounding US$ 1.5 trillion of currency trade in unregulated financial markets per day.
This leaves us with an elementary question: does the world really witness economic exchanges that are worth US$ 1.5 trillion per day every day? Attempting to answer such a question brings to facts to mind. First, the speculative activity (stocks exchange) constitutes 95 percent of activity in financial markets. This means that only the remaining 5 percent of this activity is related to trade and other real economic transactions. Second, according to the UNDESA, the richest 5 percent of individuals in the world receive about one-third of total world income and the top 10 percent get one-half.
It is exactly this problematic relationship between the financial sector and the real economy that causes Lebanon’s major concerns in the wake of the financial crisis.
Lebanon’s Tourism Industry
| With the Gulf States providing the bulk of Lebanon's foreign visitors, this crisis could upset the tourism industry in Lebanon. |
While the big financiers and banks in the United States and Europe faltered, their counterparts in Lebanon did not. In 2004, the central bank issued circular restricting domestic financial institutions from freely trading in the sub-prime market. Also, in 2008, it limited bank lending to 60 percent of the cost of real estate projects in order to protect the local financial sector from excessive speculation.
This, however, does not mean that Lebanon is immune to the impact of the global crisis. As opposed to the case in the United States, Europe and the Gulf region, where the stock market was hit first, it is the real economy in Lebanon that might be affected first and in turn that would affect the banking sector.
The World Bank’s acting MENA chief economist Auguste Kouame related that to the dependency of Lebanon’s economy on tourism, remittances, and exports.
While services dominate three-fourths of the Lebanese economy, Lebanon’s dependency on tourism, remittances, and foreign direct investments makes the country vulnerable to the impact of externalities with very little chance to compensate or recover the loss.
The most visible example is expected to be that of a decline in the number of foreign visitors to Lebanon. With the Gulf States providing the bulk of Lebanon's foreign visitors, this crisis could upset the tourism industry in Lebanon.
Remittances
| The World Bank estimated remittance inflows to Lebanon at US$ 6 billion in 2008. |
Edward Gardner - IMF’s Chief Representative in Lebanon, argues that the country could be indirectly affected if the powerful economies in the Gulf region were hit hard by the crisis. This could potentially result in job losses for Lebanese expatriate workers, a fall in remittances, and a decline in foreign direct investment.
"The impact [of the crisis] has not been assessed yet and it is not necessarily negative,” Koume told IslamOnline.net, arguing that neither the number nor the implications of having Lebanese expats return can yet be determined.
According to Kouame, “it is not clear if all 400,000 of the Lebanese workers will return. At the same time, many of them have savings that they might invest in the internal market and create jobs for others.”
Newspapers in Gulf countries expected the return of some Lebanese who had been laid off from the Gulf region to Lebanon.
The Lebanese Finance Minister Mohamad Chatah told the Lebanese Daily As-Safir that the Lebanese people working in Gulf countries have supported the domestic economy through remittances, property purchases, and regular trips back home.
Chatah admitted that if remittances and expatriate investments in Beirut are to shrink, “the calamity will be great.” According to 2007 estimates, remittances constitute around 24.4 percent of Lebanon’s GDP – a number that is definitely alarming. The World Bank estimated remittance inflows to Lebanon at US$ 6 billion in 2008.
Foreign Investment
| Many Lebanese emigrants might consider benefitting from the relatively safe financial bubble in Lebanon. |
As mentioned before, the impact of the crisis on Lebanon’s economy could swing both ways. Remittances could witness a drop, and returning laborers could find themselves in a labor market that cannot absorb them.
However, many Lebanese emigrants might consider benefitting from the relatively safe financial bubble in Lebanon and investing their savings in its banking system. While this factor is also hard to assess, it could create jobs by those Lebanese coming back home to open businesses in Lebanon.
The IMF does not seem too optimistic as it warns of the impact the crisis may have on Lebanon’s economic outlook. IMF officials expect an almost inevitable drop in deposit inflows, remittances, and direct investment from the region. The impact could extend to curb on banks’ profitability.
Economist Kamal Hamdan expects that the crisis may evolve into a recession, impacting the region as a whole. "A credit crunch means that investors will be less inclined to put their money in projects," he added.
To Lebanon, this means a reduction in Arab investments in Lebanon.
“Governments should maintain good fiscal discipline by avoiding heavy borrowing from the financial sector since credit costs have increased all over the world and they may not find enough liquidity since credit markets have frozen,” Kouame explained.
The lifeline here for governments of the region, including Lebanon, is the level of reserves that they have. Fortunately, Lebanon enjoys a safe margin of reserves that could protect the country for two years under a system of sound financial management.
The government plans to privatize the two mobile phone networks in Lebanon. The revenue from the sale is expected to amount to US$ 6 billion, a sum of money that the government intends to use in debt repayments.
While the original plan was to sell the licenses to the operators by early 2009, the economic conditions today make it untimely to call on bids in light of the decreased investments inflow.
On the other hand, some observers argue that Arab capital may attempt to invest in the Lebanese conservative banking system. However, what is definitely certain – as highlighted by central bank governor Riyad Salameh – is that deposits in Lebanese banks will not be invested in the domestic or regional market.
While Lebanon’s conservative banking policy preserves financial stability and prevents any possible crash downs in the banking sector, it does have a negative side.
This policy means increased savings at the expense of lower spending. The crisis urges the authorities to maintain fiscal stability, but it is important to maintain a careful balance with required social spending to help consumers maintain minimal purchasing power. Without this careful balance, the recession could get worse, slowing down an already staggering economy.
A Flourishing Banking Sector
| Bank Audi, Lebanon's biggest bank, recently reported a 19 percent rise in its net profit for 2008. |
Statistics have shown a record increase in deposits by late 2008. The authorities attribute this to the fact that many Lebanese people realized that banks at home are protected from shake-ups, and accordingly repatriated their funds there.
Bank Audi, Lebanon's biggest bank, recently reported a 19 percent rise in its net profit for 2008 and declared that it aimed to increase net earnings and assets in 2009 despite a difficult regional economic situation.
The report registers an increase in customer deposits to US$ 17.3 billion (21 percent) and a total asset climb to US$ 20.4 billion (18 percent). Such increases in net earnings are portrayed as indicators of Lebanon's immunity to the expected decrease in economic growth in the region.
Today, Lebanese banks are less willing to invest abroad. Central Bank Governor Riyad Salameh vowed that the bank will continue to pursue its interventionist policy, which, according to him, has protected the country’s economy from the subprime crisis.
There is almost a unanimity on the fact that bank deposits in Lebanon can stand the crisis for two or three years. This belief is adopted by the authorities and international financial institutions, such as the IMF and the World Bank.
Political Factors
Unlike the eager Lebanese financiers, the IMF has maintained a realistic take on market volatility in Lebanon. It made it clear that Lebanon remains highly vulnerable to shifts in market confidence due to its unstable political environment.
The 2009 Budget has not been agreed on yet due to the continued political disputes over the role of independent public institutions that were originally founded to oversee development projects in the different regions.
The current political bickering taking place in the council of ministers raises the question of the role of the state in administering urgently needed regulations of the market.
The power-sharing system of government and the multi-communal nature of the Lebanese society puts the issue of the role of the state at the forefront of economic concerns. In Lebanon, the answer to this question paves the way not only for economic and financial stability, but also for social and political stability.
Thus, the challenge that poses itself now is how a nation that is so decentralized and fragmented can devise a centralized and coherent policy to face the current crisis. This is the dilemma that can determine the extent of market volatility in Lebanon today.
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