Lebanon and Syria Business Forecast Report Q1 2015

  • December 2014
  • -
  • Business Monitor International
  • -
  • 46 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

We forecast real GDP in Lebanon to expand by 2.6% in 2015, from our previous forecast of 2.4%. That said, elevated political instability will continue to hinder exports and consumer spending. Despite a reduction in terrorist attacks in the capital Beirut over the past quarters, levels of political violence remain elevated in the country. 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'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. Jihadist group Islamic State (IS) gained significant ground over recent months, and currently holds approximately 35% of the country's territory. Other radical groups such as the al-Nusra Front (JN) are also gaining ground, while the more moderate opposition is on the defensive. 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 comprised 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

We forecast real GDP to shrink by 7.1% in 2015, from our previous forecast of 8.2%, due to some signs of a resumption of production in government-controlled areas. We project real GDP to decline by an annual average of 4.8% over the period to 2019. The resilience of state institutions will result in a slower pace of decline in areas under regime control, while the economic situation in areas under the control of rebels will worsen significantly.

Table Of Contents

Lebanon and Syria Business Forecast Report Q1 2015
Executive Summary - Lebanon 11
Core Views 11
Major Forecast Changes 11
Key Risk To Outlook 11
Chapter 1.1 Political Outlook - Lebanon 13
SWOT Analysis 13
Domestic Politics 14
Political Vacuum Detrimental To Economy And Security In 2015 14
Lebanese political institutions will be unable to undertake economic reform and decisively improve the security situation, resulting in
slow expansion of the economy and continued political instability in 2015.
TABLE: Political Overview 14
Long-Term Political Outlook 16
Muddling Through Challenges 16
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
Uninspiring 5-Year Outlook Amidst Protracted Instability 20
Growth in the Lebanese economy will accelerate only modestly over the coming years due to protracted political instability and a lack of
structural reform. We project real GDP to expand by 1.8% and 2.6% in 2014 and 2015, respectively, with private consumption remaining
the key growth driver of the economy.
TABLE: Economic Activity 20
Monetary Policy 23
Inflation To Increase In 2015 23
Price pressures will increase in Lebanon in 2015 as a result of accelerating consumer spending and a pickup in housing and food
prices. We forecast consumer price inflation averaging 3.4% in 201 5 and 3.6% in 2016, up from our estimate of 2.2% in 2014.
TABLE: Monetary Policy 23
Banking Sector 24
Acquisitions And Foreign Expansion Key For Profitability 24
Acquisitions and foreign expansion will be key to increase profitability in the Lebanese commercial banking industry in 2015. Asset
expansion will remain robust as credit growth continues apace and risks to stability are limited.
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 2024.
TABLE: Long-Term Macroeconomic Forecasts 27
Business Monitor International Ltd www.businessmonitor.com 3
Contents
Executive Summary - Syria 29
Core Views 29
Major Forecast Changes 29
Key Risk To Outlook 29
Chapter 2.1 Political Outlook - Syria 31
SWOT Analysis 31
Domestic Politics 32
US Strategy Ineffective, But Deeper Military Involvement Unlikely 32
The US will not deploy combat troops on the ground in Syria and Iraq to fight the jihadist insurgency or remove Syrian ruler Bashar
al-Assad. The US involvement in the Syrian and Iraqi fronts will be protracted, as the current strategy of aerial bombings will fail to
eradicate radical rebel groups.
TABLE: Political Overview 32
Long-Term Political Outlook 34
Conflict Scenarios Point To Turbulent Decade Ahead 34
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-term scenarios 34
Chapter 2.2 Economic Outlook - Syria 37
SWOT Analysis 37
Economic Activity 38
Protracted Contraction As Economic Disparity Increases 38
The Syrian economy will continue to shrink over the next five years as a result of the protracted civil war. Economic activity will gradually
stabilise within government-held regions, which will see a partial resumpt ion in production and exports, and territory under rebel control,
which will become increasingly impoverished.
TABLE: Economic Activity 38
TABLE: MENA - Operational Risk 39
Currency Forecast 40
SYP: Pronounced Losses Ahead 40
Elevated inflation and the continuation of the civil war will result in significant losses for the Syrian pound over the coming years. We
forecast the unit to trade at SYP220.00/USD in the official market by the end of 2015, and to lose almost 80% of its value by the end of
2018.
TABLE: Currency Forecast 40
TABLE: Exchange Rate 41
Chapter 2.3 10-Year Forecast - Syria 43
The Syrian Economy To 2023 43
Protracted War Leads Economy To Shrink 43
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. Economic activity will partially stabilise within different regions of the country, with government-control led areas faring
better than rebel-held territory.
TABLE: Long-Term Macroeconomic Forecasts 43
Chapter 3: BMI Global Assumptions 45
Global Outlook 45
Warning Signs Growing 45
Table: Global Assumptions 45
Table: Developed States, Real GDP GrowtH, % 46
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 46
Table: Emerging Markets, Real GDP Growth, % 47

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