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Lebanon and Syria Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 52 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 will turn out as a prolonged period of political volatility. This will minimize the potential for an unexpected devaluation of the pound in 2015.

Major Forecast Changes
W e forecast real GDP in Lebanon to expand by 2.4% in 2015, from our previous forecast of 2.3%. Elevated political instability will continue to hinder exports and consumer spending. Despite a reduction in terrorist attacks in the capital Beirut and the northern city of Tripoli over the past few months, risks of a further flaring up of tensions
remain significant. Moreover, given elevated political polarisation, the current government will be unable to enact any structural economic reform this year.
Core Views
Syrian President Bashar al-Assad 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. Jihadist group Islamic State (IS) gained significant ground over recent months, and currently holds approximately 35% of the country's territory. Our core scenario is a continuation of the civil war over the coming years.

A mong 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 forecast real GDP to shrink by 8.2% in 2015, FROM 7.9% in our previous forecast. We project real GDP to decline by an annual average of 7.0% over the period to 2018, by which the economy will be 30.6% smaller in real terms than 2013.

Table Of Contents

Lebanon and Syria Business Forecast Report Q4 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
Vote Delay Aggravating Political Vacuum.14
Lebanon's general election, set to take place in November 2014, will be delayed as a result of the failure of the legislature to elect a new
president. The ongoing political crisis and elevated security risks will cloud prospects for economic reform, resulting in slow economic
expansion over the next five years.
table : Political Over view14
Long-Term Political Outlook.. 16
Muddling Through A Plethora Of Challenges16
Lebanon will not return to civil war over the coming decade, but the country will be politically unstable amidst a plethora of challenges.
A dysfunctional institutional framework will ensure that the political process remains slow, contributing to slow economic growth and
popular discontent versus the political system.
Chapter 1.2 Economic Outlook - Lebanon... 19
SWOT Analysis 19
Economic Activity... 20
Growth Accelerating Modestly In 2015..20
We forecast real GDP in Lebanon to expand by 1.8% in 2014 and 2.4% in 2015, with the acceleration next year largely the result of low
base effects. Persistent political instability and a lack of structural reform in the economy will lead to average growth of only 2.6% over
the next five years - compared to 2.9% over the 2010 -13 period.
TABLE: Economic Act ivity ..20
Banking Sector 22
Low Profitability Amidst Solid Fundamentals...22
Profitability in Lebanon's commercial banking sector will be limited in H214 and 2015, particularly for smaller lenders and foreign banks.
Risks to instability will be limited owing to a loyal depositor base and solid fundamentals.
Manufacturing.. 24
Weak Manufacturing Activity Through 2015..24
Elevated security risks and slow growth in the Lebanese economy will lead to only a modest improvement in manufacturing activity in
2015. Lebanon's PMI readings will be volatile next year, underperforming Israel, the UAE and Saudi Arabia.
Chapter 1.3 10-Year Forecast - Lebanon.. 27
The Lebanese Economy To 2023... 27
Slow Growth As Willingness For Reform Lags..27
Lebanon's economy will expand slowly over the coming decade, a result of high security risks, slowing demographic growth and the lack
of political willingness to undertake structural economic reform. A massive infrastructure deficit and elevated public and external debt
loads will also weigh on our outlook to 2023.
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
Islamic State Resilient Despite Unsustainable Governance Model..34
Jihadist group Islamic State (IS) will strengthen control of north-east Syria over the coming quarters following recent advances. Although
its governance model will prove unsustainable over the long term, IS will remain capable of confronting the Syrian and the Iraqi armies
over the coming years.
table : Political Over view34
Foreign Politics 35
US To Conduct Airstrikes Against IS In Syria...35
The US will conduct airstrikes against jihadist group Islamic State in Syria over the coming weeks. Strikes will slow IS's advance, but the
group will remain a resilient fighting force over the coming years.
Long-Term Political Outlook.. 36
Conflict Scenarios Point To Turbulent Decade Ahead..36
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 arios...37
Chapter 2.2 Economic Outlook - Syria. 41
SWOT Analysis 41
Economic Activity... 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
table : Economic Act ivity .42
Currency Forecast... 44
SYP: Devaluation Inevitable44
TABLE: BMI Curency Forec ast ...44
TABLE: Exch ange Rate 45
Chapter 2.3 10-Year Forecast - Syria 47
The Syrian Economy To 2023 47
Economy To Shrink Due To Protracted War..47
The civil war in Syria will result in a sharp contraction of GDP compared to pre-war levels, and the real economy will only return to
growth in 2020.
tA BLE: Long -Ter m Macr oec onomic Forec asts 47
Chapter 2.4 Business Environment - Syria.. 49
SWOT Analysis 49
Chapter 3: BMI Global Assumptions. 51
Global Outlook. 51
Eurozone Downgrade On Poor Q214..51
Table : Global Asu mpt ions .51
Table : Devel oped States , Real GDP GrowtH, %...52
Table : Emerg ing Markets , Real GDP Growth , %..53

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