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Lebanon and Syria Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views

The ongoing civil war in Syria is having severe repercussions on the Lebanese economy. Lebanon’s medium-term growth trajectory will settle well below pre-crisis levels due to a lack of investment in transportation and energy infrastructure. Despite renewed fears over the economy’s gaping external asymmetries, a loyal depositor base in the domestic banking sector, combined with a massive arsenal of foreign exchange reserves, should help bolster underlying stability through what may turn out to be a potentially prolonged period of political volatility. This will minimize the potential for an unexpected devaluation of the pound in 2014.

Major Forecast Changes

W e have revised our real GDP growth projections, and now forecast the economy to expand by 1.8% and 2.3% in real terms in 2014 and 2015, respectively, from our previous forecast of 2.5% growth this year and 2.9% the next. We reaffirm our view that elevated political instability and the lack of structural reform to the economy will contribute to below potential growth over the next five years.
Core Views

Syrian President Bashar al-Assad’s is unlikely to regain full control of the country. However, areas in the west and the south set to remain under the control of Assad’s loyalists, and the regime has recently achieved significant strategic gains at the expense of the opposition. Our core scenario is a continuation of the civil war over the coming years. Among all the sanctions imposed by foreign governments, EU oilrelated sanctions are having the biggest detrimental effect on the country. The EU oil embargo has significantly reduced oil revenues, which comprise 25%-30% of fiscal revenues. However, financial lifelines from key allies – most notably Iran – will support the regime.
The Syrian civil war has seen increasing foreign interference, with Turkey, Qatar, Saudi Arabia and the West supporting the rebels, and Iran, Russia and Lebanon’s Hizbullah aiding the regime. This will contribute to prolonging the conflict, which we believe could continue over the next five to ten years.

Major Forecast Changes

W e project consumer price inflation in Syria averaging 55.0% in 2014 and 40.0% in 2015, from 87.7% in 2013, compared to our previous projections of 60.0% in 2014 and 50.0% in 2015. The decline in the pace of inflation will mainly result from high base effects and a gradual settling down of the ongoing conflict. The stabilisation of the Syrian pound will also contribute to decelerating price pressures.

Table Of Contents

Lebanon and Syria Business Forecast Report Q3 2014
Executive Summary - Lebanon. 11
Core Views11
Major Forecast Changes..11
Key Risks To Outlook..11
Chapter 1.1 Political Outlook - Lebanon... 13
SWOT Analysis 13
Domestic Politics ... 14
Presidential Vacuum To Compound Security Risks..14
The failure of the Lebanese legislature to elect the country's new president will compound risks to security in 2014, although the
potential for a return to civil war is low. Legislative elections set for November 2014 could be delayed, and the political crisis will hit the
economy hard.
table : Politic al Over vie w14
Long-Term Political Outlook.. 16
Political Upheaval Inevitable In The Long Term?...16
Political stability will remain hard to come by in Lebanon over the coming decade. The ongoing civil war in Syria is deepening sectarian
tensions, while another military conflict with Israel could trigger institutional change.
Chapter 1.2 Economic Outlook - Lebanon... 19
SWOT Analysis 19
Economic Activity... 20
Growth Subdued In The Next Five Years...20
We forecast real GDP in Lebanon to expand by 1.8% in 2014 and 2.3% in 2015. Given elevated political instability and the lack of
structural reform to the economy, growth will average only 2.6% over the 2014-18 period - much below the country's potential.
table : Economic Acti vity .20
Banking Sector ... 22
Banking Sector: Solid Fundamentals Shielding Against Risks22
A loyal depositor base and solid fundamentals in the Lebanese commercial banking sector will provide significant buffers against key
risks to stability in 2014. That said, the sector's conservative risk management strategy and a challenging macroeconomic environment
will hinder profitability over the coming quarters.
PMI 24
Manufacturing Activity Subdued In 2014...24
Lebanon's PMI readings could occasionally cross the 50 level in 2014. However, we do not expect the index to remain consistently
above such level over the rest of 2014, indicating subdued manufacturing activity this year.
Chapter 1.3 10-Year Forecast - Lebanon.. 27
The Lebanese Economy To 2023... 27
Long-Term Growth Depends On Structural Reforms27
Lebanon's economy will face a host of structural challenges in attempting to meet its long-term growth potential, with a massive
infrastructure deficit, elevated public debt load and ongoing political risks weighing on our outlook through 202 3. That said, a robust
banking sector should help support growth.
table : Long -Ter m Macr oec onomic Forec asts ...27
Chapter 1.4 Business Environment - Lebanon 29
SWOT Analysis 29
Executive Summary - Syria... 31
Core Views31
Major Forecast Changes..31
Key Risks To Outlook..31
Chapter 2.1 Political Outlook - Syria. 33
SWOT Analysis 33
Domestic Politics 34
Assad Re-Election To Reinforce Regime's Continuity..34
Syria's President Bashar al-Assad's re-election reaffirms our view that the civil war will continue over the next five to ten years, as the
regime maintains its hold on power and a diplomatic solution remains off the cards.
table : Politic al Over vie w34
Long-Term Political Outlook.. 35
Conflict Scenarios Point To Turbulent Decade Ahead..35
We expect the civil war in Syria to continue for many years. A negotiated settlement following a protracted conflict or a formal breakup
of the country appear at this stage the two most likely outcomes, while an outright victory by either the regime or the rebels is less
probable. Under any scenario, prospects for a stabilisation of the country over the coming decade are very low.
table : Long -ter m scen ari os...36
Chapter 2.2 Economic Outlook - Syria. 39
SWOT Analysis 39
Economic Activity... 40
GDP Contraction Slowing In 2014...40
We project real GDP in Syria to contract by 11.9% in 2014 and a further 7.9% in 2015, from a 13.5% decline in 2013. The gradual
deceleration in the pace of contraction of the economy will result from base effects and the partial stabilisation of the conflict along
sectarian lines.
table : Economic Acti vity .40
Monetary Policy .. 42
Inflation Declining Modestly In 2014...42
We project Syrian consumer price index inflation (CPI) to average 55.0% in 2014 and 40.0% in 2015, from our estimate of 87.7% in
2013. Disruptions to trade and production resulting from the civil war will ensure that the headline print remains elevated over the
coming years. However, high base effects and potential for a partial stabilisation in the value of the pound will lead to a gradual decline
in CPI over the coming quarters.
table : Monet ary Policy ...42
Chapter 2.3 10-Year Forecast - Syria 45
The Syrian Economy To 2023 45
Weak Human Capital To Constrain Growth...45
The impact on the economy of the ongoing civil war will be felt over the long term. Under a scenario whereby the conflict ends, private
consumption, exports and infrastructure development will drive growth in Syria over the coming decade. That said, the effectiveness of
these drivers depends in part on the success of structural reforms.
table : Long -Ter m Macr oec onomic Forec asts 45
Chapter 2.4 Business Environment - Syria.. 49
SWOT Analysis 49
Chapter 3:BMI Global Assumptions.. 51
Global Outlook. 51
Emerging Market Deceleration51
Table : Global Assu mpti ons .51
Table : Devel oped States , Real GDP GrowtH, %...52
Table : Emerging Markets , Real GDP Growth , %..53

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