Lebanon and Syria Business Projection Industry Update Quarter 1 2012

Core Views
Regardless of how the civil war in Syria plays out, Lebanon’s mediumterm
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,
we do not believe pressures on Lebanon’s balance of
payments position is as pronounced as seen elsewhere across the
region. 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 2013.

Major Forecast Changes
In light of a more rapid uptick in inflationary pressures than originally
envisaged, we have revised up our medium-term inflation forecasts,
and now project CPI averaging 10.0% in 2013.
On the back of recent historical revisions to Lebanon’s balance
of payments data, we have revised our forecasts for the country’s
current account, and now project the shortfall coming in at 12.0%
in 2013, and falling to 11.2% in 2014.

Key Risk To Outlook
Given Lebanon’s reliance on foreign capital to finance domestic
demand (as evidenced through its large current account shortfall),
a marked deterioration in regional or global capital markets over the
coming quarters could slow financial inflows, which would negatively
impact growth.
The collapse of the regime of Syrian President Bashar al-Assad
raises significant questions surrounding the dynamics of Lebanon’s
domestic political environment. At the moment, it remains unclear
how Hizbullah will react to the loss of its key financial and military
backer.

Core Views
Syrian president Bashar al-Assad’s hold on power appears less
tenable in the short-to-medium-term, and we see several scenarios
for change, including regime continuity with minimal reforms, regime
continuity with major reforms and a collapse of the regime followed by
chaos or civil war. Our core scenario is a continuation of the ongoing
civil war between Assad’s regime and opposition activists through
2013. While we expect Assad to eventually fall approaching the end
of 2013, the regime has proved more resilient than expected, and
could hold onto power for some more time.
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, and additional sanctions
on the energy sector would cause further harm.
The short-sighted political and financial reforms enacted by the regime
to mitigate protests will have a negative impact on the country’s
long-term economic potential, and we do not expect the country to
reinstate its economic liberalisation plans over the medium term.

Major Forecast Changes
We have revised down our 2012 and 2013 real GDP growth forecasts,
and we project a contraction of 7.8% in 2012 and 3.4% in
2013, compared to our previous forecasts of a contraction of 7.1%
and 2.6% in 2012 and 2013, respectively. As a result of the ongoing
civil war and of economic sanctions, only government consumption
will post marginal growth in 2013, while fixed investment and exports
will be hit particularly hard.

Key Risk To Outlook
Although the top ranks of Syria’s military have been largely loyal
to the regime, because of their ethnic and religious connections, a
mutiny within the higher echelons of the security apparatus could
accelerate the fall of the regime.
A sustained conflict would pose strong downside risks to our mediumterm
GDP forecasts, as economic activity would be stalled for a
prolonged period of time.