Lebanon Amid the Arab Spring July 2013

Credit Libanais SAL Executive Summary July 2013 Economic Research Unit P re-Arab Spring P ost-Arab Spring Average (20082010) Average (20112012) ...
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Credit Libanais SAL

Executive Summary July 2013

Economic Research Unit P re-Arab Spring

P ost-Arab Spring

Average (20082010)

Average (20112012)

2008

2009

2010

2011

2012

2013

8.60%

9.00%

7.00%

1.5%*

1.5%*

2.00%*

4.33

4.84

4.96

3.40

2.30

N.A.

8.00% 4.90

1.50% 2.85

Balance of Payments ($ Million) Foreign Assets ($ Billion) Trade Balance ($ Million) P UBLIC FINANCE

3,461 19.73 (12,658)

7,899 28.30 (12,758)

3,325 30.85 (13,711)

(1,996) 32.24 (15,893)

(1,537) 35.74 (16,797)

(17.9)(2) 37.17(4) (7,193)(2)

5,612 29.58 (13,235)

(1,767) 33.99 (16,345)

Budget Primary Deficit / Surplus ($ Million) Total Deficit ($ Million) Deficit to GDP Gross Public Debt/GDP Ratio BANKING SYSTEM

2,730 (2,921) 9.84% 158.42%

3,380 (2,960) 8.54% 147.63%

1,203 (2,894) 7.80% 141.69%

1,662 (2,342) 6.00% 137.53%

(110) (3,925) 9.49% 139.53%*

(5)(1) (783)(1) 141.34%*

2291.50 (2,927) 8.17% 144.66%

776.00 (3,134) 7.75% 137.53%

Growth in Total Assets Growth in Total Deposits Growth in Loans to the Private Sector Dollarization Rate Net Profit - After Tax ($ Million)

14.59% 15.58% 22.59% 69.57% 1,215

22.27% 23.08% 13.32% 64.46% 1,429

11.87% 12.17% 23.10% 63.24% 1,838

9.04% 8.38% 12.73% 65.92% 1,743

8.04% 8.46% 10.35% 64.82% 1,620

8.11%(3) 9.82%(3) 7.24%(3) 65.43% 513(2)

17.07% 17.63% 18.21% 63.85% 1,633

8.54% 8.42% 11.54% 65.37% 1,682

M ACROECONOM IC INDICATORS

Lebanon Amid the Arab Spring – July 2013

Real GDP Growth Rate Net Foreign Direct Investment ($ Billion) BALANCE OF P AYM ENTS

* Figures Reflect IM F Estimates ( 1) A s A t E nd o f M a rc h, 2 0 13 , ( 2 ) A s A t E nd o f A pril, 2 0 13 , ( 3 ) A s a t E nd o f M a y , ( 4 ) A s a t E nd o f J une

Highlights The Arab Spring has been touted by many as one of the landmarks of the twenty first century. For decades, many Arab countries have been governed by oppressive leaders, restricting civil liberties and harnessing the resources of the economy to their own benefits, building up as such the momentum for a sentiment of resent and dissatisfaction among citizens. The first spark of the Arab Spring started in Tunisia, and then spread rapidly to other Arab economies, toppling age-long regimes via a domino effect whilst stirring civil wars in other neighboring countries. The Arab Spring, however, and which is still raging nowadays, has come at a catastrophic cost, whether on the human front, claiming tens of thousands of lives, or on the economic front, sending economies into shambles. More specifically, and according to our estimates, real GDP losses have amounted to $9.23 billion in Tunisia, $1.15 billion in Yemen, $62.26 billion in Libya and $19.3 billion in Syria. In the case of Egypt, however, it could not be determined whether the losses, and which were not significant relative to GDP in the first place, were a result of the Arab Spring or a simple shift in the economic cycle. On the local front, Lebanon was to a certain extent spared from the Arab Spring phenomenon, yet its geographical proximity to ailing Syria and the various inter-connections with neighboring Arab countries meant that the political and economic spillovers were inevitable. The tourism sector was one of the first sectors to feel the pinch of the Arab turmoil, as the resulting political instability and deteriorating domestic security conditions prompted some GCC countries to issue travel warnings to Lebanon. The real estate sector followed suit, with prices stagnating and the number of transactions dropping markedly, ending as such a four-year rapid acceleration spree. Accordingly, and due to its high reliance on the tertiary sector, the Lebanese economy suffered major setbacks, prompting international agencies to downwardly revise their growth estimates for the years 2011, 2012 and 2013.

Cost Burden on Lebanon According to our economic model, we have concluded that the Arab Spring has slashed some 3.3% of Lebanon’s real GDP growth per annum over the 2011-2013 period, thus generating a cumulative economic cost of around $6.03 billion in real terms, representing 20.21% of the country’s year 2013 real GDP.

Credit Libanais Economic Research Unit    Research: Credit Libanais Economic Research Unit E-mail : [email protected] Phone/Fax: +961 1 326786

IMPORTANT NOTICE

This economic research publication has been prepared by the economic research unit at Credit Libanais SAL on the basis of published information and other sources which are deemed reliable. It is intended for limited use only and its re-distribution without the prior written consent of Credit Libanais is strictly prohibited. Credit Libanais does not make any warranty or representation, expressed or implied, as to the accuracy or completeness of the materials contained herein. Neither the information nor the opinions expressed herein constitute, or are to be construed as an offer or solicitation of an offer to buy or sell investments. change without prior notice.

Credit Libanais Economic Research Unit   

Opinions and data expressed herein are subject to

 

TABLE OF CONTENTS

    I.

II.

III.

IV.

THE ARAB SPRING TURMOIL

1

A. Overview

1

B. Economic Costs

4

1. Tunisia

6

2. Egypt

9

3. Yemen

12

4. Libya

13

5. Syria

16

C. Implications of the Turmoil on Rating Metrics

18

D. Challenges and Opportunities

19

ECONOMIC REPERCUSSIONS OF THE ARAB SPRING ON LEBANON

20

A. Economic Growth

20

B. Tourism and Hospitality Sector

21

C. Real Estate Sector

23

D. Banking Sector

24

1. Direct Impact

24

2. Indirect Impact

28

E. Beirut Bourse Activity

29

F. Rating Actions

31

G. Lebanese Companies Exporting to/via Syria

32

H. Impact of the Arab Spring on Major Economic Indicators

34

QUANTIFYING THE ARAB SPRING COST BURDEN ON LEBANON

36

A. Overview

36

B. The Empirical Model

38

1. Methodology

38

2. Variables

39

3. Regressions and Results

39

POSSIBLE REMEDIES TO STIMULATE ECONOMIC GROWTH

42

A. Measures Enacted by the Authorities

42

B. Alternative Measures

43

APPENDIX: ECONOMIC IMPACT OF ARAB SPRING ACROSS COUNTRIES IN THE REGION

Credit Libanais Economic Research Unit   

44

SYNOPSIS OF TERMS “ABL”

Association of Banks in Lebanon

“BDL”

Banque du Liban

“BSE”

Beirut Stock Exchange

“CAGR”

Compounded Annual Growth Rate

“CLASI”

Credit Libanais Aggregate Stock Index

“CLCI”

Credit Libanais Contruction Sector Stock Index

“CLFI”

Credit Libanais Financial Sector Stock Index

“EGP”

The Egyptian Pound

“GCC”

Gulf Cooperation Council

“GDP”

Gross Domestic Product

“IMF”

International Monetary Fund

“LBP”

The Lebanese Pound

“LLP”

Loan Loss Provisions

“LYD”

The Libyan Dinar

“PCH” “Real Estate Registry”

Public Corporation for Housing General Directorate of Land Registry & Cadastre

“S.O.H.R”

Syrian Observatory of Human Rights

“SYP”

The Syrian Pound

“TND”

The Tunisian Dinar

“U.N.”

The United Nations

Credit Libanais Economic Research Unit   

“UNHCR”

The United Nations High Commissioner for Refugees

“$”

The United States Dollar

“USD”

The United States Dollar

“VAR”

Vector Auto Regression Estimates

“YER”

Yemeni Riyal

Credit Libanais Economic Research Unit   

I.

THE ARAB SPRING TURMOIL

A. OVERVIEW

  The Arab Spring has been touted by many as one of the landmarks of the twenty first century. For decades, many Arab countries have been governed by oppressive leaders, restricting civil liberties and harnessing the resources of the economy to their own benefits, building up as such the momentum for a sentiment of resent and dissatisfaction among citizens. It is believed however, that while many uprisings were ignited by local demands, others may have been stirred by foreign interventions for political purposes. The Arab Spring was sparked in Tunisia by the self-immolation of Mr.  Mohamed Bouazizi, the thing which fueled major protests, with the fire rapidly spreading to other Arab countries such as Egypt, Yemen, Libya, and Syria only to name a few. The following diagram sheds light on the timing of the major uprisings the Arab world has witnessed over the last two and a half years:

* The Syrian uprising is still ongoing at the time of writing of the report

  Although the different uprisings had somewhat similar starts, they followed different courses of action ultimately, with some remaining within the frame of peaceful protests which were met by violence from the authorities (Tunisia and Egypt), others involving limited military skirmishes between ruling and opposition parties (Yemen) and others escalating into a full-scale civil war (Libya and Syria). Similarly, the outcomes of said uprisings varied, with leaders being forced into exile (case of Tunisia), prosecuted (case of Egypt), stepping down in part of a deal (case of Yemen), being killed (case of Libya) or remaining in power at the time of writing of the report (case of Syria). This is further highlighted by the table on the following page.

                  Credit Libanais Economic Research Unit   

1

Country

Naming(s) of the Uprising

Uprising Methods

Outcome

Fate of Ruling President

Tunisia

Sidi Bou Zid Revolt - Jasmine Revolution Dignity Revolution

C ivil Resistance - Self Immolations Demonstrations - General Strikes

Resignation of Prime Minsiter Ghannouchi - Dissolution of the Political Police Dissolution of the RC D (former ruling party) - Elections to a C onstituent Assembly on 23 October 2011

Mr.Zein El Abidine Ben Ali was ousted from Presidency and forced into exile in Saudi Arabia

Egypt

25 January Revolution Freedom Revolution - Rage Revolution - Lotus Revolution

C ivil Disobedience - C ivil Resistance - Self Immolations Demonstrations - General Strikes - Riots - Online Activism

Resignation of Prime Minister Nazif and Shafik - Assumption of power by the Armed Forces - Suspension of the C onstitution - Dissolution of the Parliament - Lifting of the 31-year-old state of emergency - Dissolution of the NDP (former ruling party) - Disbanding of State Security Investigations Service Election of Mr. Mohamad Mursi as President before being unseated and succeeded by Mr. Adly Mansour as interim President of Egypt

Mr. Hosni Mubarak was overthrown and sentenced to life in prison

Yemen

Yemeni Revolution

C ivil Resistance - Self Immolations Demonstrations - General Strikes - Mutiny - Army Defections - Armed C onfrontations

Resignation of Prime Minister Mujawar - Mr. Ali Abdallah Resignation of MPs from the ruling party - Saleh was Occupation of several areas of Yemeni overthrown and territory by al-Qaeda and Houthi rebels - granted immunity Restructuring of the military forces by from prosecution sacking several of its leaders Presidential election held with Mr. Abd Rabbuh Mansur Al-Hadi being newly elected

Libya

Libyan C ivil War

Full-scale civil war with foreign intervention

Gaddafi Government overthrown Assumption of interim control by National Transitional C ouncil -Ongoing interfactional fighting

Mr. Moammar Gaddafi was overthrown and killed

Syria

Syrian C ivil War

Full-scale civil war

Release of some political prisoners Dismissal of Provincial Governors Resignation of the Government - End of Emergency Law - Defections from the Syrian army - Formation of Free Syrian Army - Battles between the Syrian army and the Free Syrian Army in many governorates - Formation of the Syrian National C ouncil -Syria suspended from the Arab League

Mr. Bashar al Assad is still in power, with the Syrian army controlling most of the major cities such as Damascus, Homs, Latakia, Tartus, Hama and parts of Aleppo*

* The image on the following page depicts the military situation in Syria as of June 27, 2013

                    Credit Libanais Economic Research Unit   

2

  Source: Wikipedia    • • • •

Cities controlled by the Syrian Army Cities controlled by anti-Assad forces Cities controlled by Kurdish forces Ongoing fighting/unclear situation

                    Credit Libanais Economic Research Unit   

3

Apart from the economic cost of the uprisings, and which will be discussed in the following section, the Arab Spring also had a catastrophic human cost, with the bulk of the losses stemming from the Syrian civil war, which has been spanning for two years and four months by the time of writing of the report. The following table reflects the human casualties resulting from the Arab Spring.

  Country

Deaths

Injuries

338

2,147

846 (during revolution) - More than 300 (post revolution)

6,467

Yemen

2,000

22,000

Libya

25,000

50,000

4,000

Syria

80,000 (May 2013 U.N. Estimate) 96,430-120,000 (SOHR estimates) 72,959-96,431 (opposition estimates)

-

130,000

Tunisia Egypt

Missing

Refugees

2.5–3 million internally displaced 1.2 million refugees (March 2013 UNHC R estimates)

So urce: A sso ciated P ress, Detro it News, Washingto n P o st, Libya Herald, U.N., SOHR, UNHCR, Credit Libanais Eco no mic Research Unit

                                         

    B. ECONOMIC COSTS Malik and Awadallah (2011) [1] identified the failure to develop a competitive private sector as the major impediment in some Arab countries. In this perspective, the writers noted that steps towards the enhancement of the role of the private sector in the economy in some Arab countries were identified as a threat by the ruling politicians, and were thus immediately halted. Therefore, and given the importance of private investment to foster economic growth, we can expect that the amendment of the aforementioned countries’ constitution and institutions, in favor of the private sector, would be beneficial to their overall economic activity. The cost of such reforms, however, should not be neglected. More particularly, and from what we observed in the recent uprisings, change comes at a significant economic cost, and which materializes in the form of direct and indirect losses to the economy, trimming as such the potential benefits of the transition into democracy and economic freedom. These costs mainly stem from an increased political instability in the short run, which normally generates a drop in real GDP in the years immediately following the upheaval. The cost of the Arab Spring varies from a country to another, depending mainly on the intensity of the uprisings, the duration of the turmoil, and the prevailing economic and political situation of

Credit Libanais Economic Research Unit   

[1] Malik A. and B. Awadallah, ”the economics of the Arab Spring”, CSAE Working Paper WPS 2011/23, December 2011.

4

the country before and after the conflict. For instance, in Tunisia, and where the riots have lasted for only a couple of weeks and the transition has been somewhat smooth, the cost of the upheaval was relatively low, comparing to other countries. Nevertheless, the total economic costs borne by Tunisia might increase further depending on the time the Tunisian authorities may need to implement necessary institutional changes. On the other hand, and despite the initial protests phase leading to the ousting of President Mubarak which lasted for only 18 days, more than two years after the start of the riots, Egypt seems somewhat far away from finding a consensus on the path to adopt in an attempt to initiate the recovery. In fact, many protests occurred over the past few months, first pointing at the slow pace of the reforms, then expressing concerns about the constitution adopted by President Mursi, and its implications in terms of political and economic freedom in the country. Furthermore, it is worth highlighting that Egypt’s Supreme Constitutional Court (SCC) recently (June 2013) ruled that the upper house of parliament and the constitution-drafting assembly were elected illegally, widening as such divisions within the country. Consequently, the total cost of the upheaval in Egypt depends on the consequences of the successive protests on future political stability, and investors’ confidence. In early July 2013, and after massive demonstrations President Mursi was unseated via a military coup. Conversely, in Syria and Libya, the protests immediately turned into full-scale civil wars and ravaged both countries. In Libya, the civil war lasted for only eight months yet severely damaged the country’s infrastructure, especially its oil production capabilities. Therefore, we can expect the total cost of the civil war in Libya to be extremely high, even though it has lasted for less than one year. However, Libya’s recovery depends mainly on the speed at which it can resume its oil production levels prior to the uprising, the thing which makes the upturn faster than in oil importing countries. Concurrently, Syria witnessed a much longer civil war, which is still ongoing at the time of writing of the report. Thus, the consequences of the conflict are likely to be much more harmful for Syria’s economic growth than in Libya. It is worth noting in this context that according to some estimates [2], the cost of the regional turmoil reached $2.52 billion in Tunisia, $9.79 billion in Egypt, $14.2 billion in Libya and $27.3 billion in Syria in 2011. Consequently, Geopolicity estimates that the total cost of the regional turmoil (including Bahrain and Yemen) reached $55.84 billion in 2011. It is worth highlighting, in this perspective, that the cost of the uprisings was measured as the sum of the loss in GDP and the loss in public finances. It is unclear, however, whether the Arab Spring will prove beneficial to the aforementioned countries on the long run. It is worth noting, in this perspective, that the positive consequences will depend mainly on the countries’ ability to overcome political instability arising from the riots and to promote political and economic freedom. Economic and political reforms are indeed essential to spur growth and offset the immediate costs of a change in a political regime.

Methodology: After briefly analyzing the macroeconomic conditions prevailing before and during the Arab Spring in the concerned countries, we have estimated the cost of the upheaval on the countries’ real GDP. We first plotted the linear trend of real GDP in the ten-year period preceding the riots (2000-2010) and extended it to the eight-year period following the uprisings, i.e. to the year

Credit Libanais Economic Research Unit    [2] Geopolicity consultancy group “Re-Thinking the Arab Spring” report

5

2018. This trend line represents the benchmark to which we have compared the real GDP after the beginning of the uprisings. We estimated the cost of the Arab Spring as the output gap (difference between the linear trend for the period 2000-2010 extended to the year 2018 and the observed GDP) since the outbreak of the turmoil. Consequently, we measured the cost of the Arab Spring by summing the discounted output gap at the average real GDP growth rate for each year following the uprisings, until real GDP catches up with its linear trend, with the reference year being 2013. Hence, for the years preceding the year 2013, the cost of the Arab Spring is the future value of the output gap as at the end of the year 2013, while for years following the year 2013, the economic cost was calculated as the present value of the output gap as at year-end 2013. As for the discount rate that was applied, we have adopted the average GDP growth rate over the ten-year period preceding the uprising, being reflective of the opportunity cost of the concerned economies.

1. Tunisia In a recent study, Gallup, the international consultancy firm, stressed on the importance of analyzing the “Wellbeing” of a population in order to measure its satisfaction concerning the country’s economic activity. More particularly, the study noted that in Tunisia, and notwithstanding the relatively strong GDP growth rates in the recent years (4.53% average growth over the 2006-2010 period), a small number (14%) of Tunisians were “thriving” in the year 2010, while the majority of the population complained of not benefiting from their country’s economic prosperity [3]. The consultancy firm sighted this deterioration in the population’s living conditions as well as the poor business environment and corruption as being the major causes behind the growing animosity towards Ben Ali’s government. In the decade preceding the uprising (2000-2010), Tunisia witnessed a relatively high GDP growth rate, averaging at around 4.45%.

in %

Evolution of Tunisia's GDP Growth Rate Prior to the Arab Spring

7 5.47

6

6.26

5.96

5.65

4.85 5

4.52

4.30

4.00

4

3.11 3.12

3 2

1.70

1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF, Credit Libanais Economic Research Unit

However, the healthy economic growth witnessed during the pre-Arab Spring period was mainly exploited by the ruling elite at the detriment of the population. In fact, and despite the aforementioned GDP growth rates, unemployment remained above the 12% threshold during the decade preceding the revolt. This, along with the growing inflation rate and the rising economic instability, triggered the riots and led to the destitution of the ruling elite. With the beginning of

Credit Libanais Economic Research Unit   

[3] The Gallup Organization

6

the aforementioned uprisings, real GDP growth shed to -2% in 2011 leading to a sharp drop in real GDP to TND 51.23 billion in 2011, down from TND 52.24 billion a year earlier. On the labor market front, unemployment rate skyrocketed to 18.9% of total labor force in 2012, up from 13% two years earlier, owing to the drastic change in the business and economic environment in the country. In addition, inflation rate is expected to peak at 6% compared to 4.4% before the revolt [4].

Evolution of Tunisia's Inflation Rate

in %

7 6.0 6

5.6 4.9

5

4.7 4.7 4.4

4.2

4.2

3.6

4

4.0 3

2.9

2.8

4.0

3.5

3.5

3.4 2.7

Start of Tunisian Uprising

2 1.9

2.0

1 0

Source: IMF, Credit Libanais Economic Research Unit

Evolution of Tunisia's Unemployment Rate

in %

20

18.9

18 16 14 12

16.7 15.7

15.3 15.1

16.0 15.0

14.2 14.5 12.8

12.4

14.0

13.0

12.4

12.5

13.3

13.0

13.0 12.0

10 8 6 4

Start of Tunisian Uprising

2 0

Source: IMF, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit    [4] IMF Figures

7

However, this deterioration in the macroeconomic environment in Tunisia is expected to be transitory. In fact, all indicators are likely to reverse their downward trend as soon as the country recovers its political stability. It is worth noting, in this perspective, that the IMF World Economic Outlook database projects Tunisia’s economic growth to reach 3.6% in the year 2015 and remain steady thereafter. Consequently, real GDP is expected to recover its long-run trend starting the year 2017. We have thus estimated that the cumulative economic cost of the uprising will reach $9.23 billion (reference year: 2013) in terms of GDP over the six-year period ending in 2016 (estimated economic recovery), which accounts for 28.35% of year 2010 real GDP. This value represents the output gap over said period (as observed on the chart on the following page), discounted at the rate of 4.45%. However, it is worth highlighting that this only reflects the short-run consequences of the uprisings. In reality, the overall impact of the Arab Spring on the Tunisian economy will depend on the government’s ability to implement necessary reforms to revitalize economic growth. Aforementioned reform measures include promoting fundamental freedoms and reforming the institutional environment to encourage private investment, capital inflows, and free markets. in TND Billion

Output Gap Estimation

70 65 60 55 50 45 40

Recovering Long-term Trend

Start of Tunisian Uprising

35 30

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

real GDP

trend line 2000‐2010

Source: IMF, Credit Libanais Economic Research Unit

Evolution of Tunisia's GDP Growth Rate vs Long‐term  Trend

       

in %

7 6 5 4 3 2 1 0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

‐1 ‐2 ‐3

Real GDP growth

trend

Source: IMF, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

8

2. Egypt Notwithstanding the relatively vigorous economic growth in Egypt, the turmoil propagated to the country just one month after it erupted in Tunisia. More particularly, the country’s GDP had been growing at a robust average real GDP growth rate of 4.98% over the ten-year period preceding the uprising.

in %

Evolution of Egypt's GDP Growth Rate Prior to the Uprising

8

6.84

7.09 7.16

7 6

5.38

5 4

3.52

4.09 3.19

4.47

4.67

5.15

3.19

3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF, Credit Libanais Economic Research Unit

However, economic prosperity did not reflect positively on employment, with Egypt’s unemployment rate remaining almost stable at a relatively high rate of around 9%. On the other hand, inflation also accumulated steam over the last decade from as low as 2.4% in 2001 to 16.2% in 2009 [5].

Credit Libanais Economic Research Unit   

[5] IMF Figures

9

Evolution of Egypt's Unemployment Rate

in %

16 14.3 13.6

14

10

11.5

11.3

12

10.5

12.1

14.0 13.4

12.3 12.5

10.9

11.8

10.1 9.0

8

9.2

8.8

8.7

9.4 9.2

6 4

Outbreak of the Arab Spring

2 0

Source: IMF, Credit Libanais Economic Research Unit

IMF Figures

linear trend 2000‐2018

Evolution of Egypt's Inflation Rate

in %

18 16.2 16 13.7

14

11.7

12

11.7 11.1

11.0

9.5

8.8

10

8.4

8.1 8

8.6 8.2

6 4

4.2

2.8

2

2.4

3.2

Outbreak of the Arab Spring

7.7 6.3

2.4

0

Source: IMF, Credit Libanais Economic Research Unit

With the onset of the uprising, Egypt’s major macroeconomic indicators deteriorated. Notably, real GDP growth rate shed 3.2 percentage points to 1.8% in 2011, compared to 5.1% in 2010, hence amplifying the output gap over the three-year period following the riots. Consequently, the IMF expects the unemployment rate to peak at 14.3% of total labor force in 2014. However, surprisingly, inflation rate narrowed by 8 percentage points immediately after the start of the conflicts in Egypt, to 8.2% in 2012, comparing with 16.2% in 2009 [6].

Credit Libanais Economic Research Unit   

[6] IMF Figures

10

Effect of Egypt's Turmoil on Economic Growth in %

8

7.16

Start of Egyptian Revolution

7 6 5

4.67

6.53

7.04

6.51

5.52

5.15

4

3.26

3 1.78

2

2.22

2.01

1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: IMF, Credit Libanais Economic Research Unit

However, it turned out from our analysis that the output gap subsequent to the squabbling in Egypt was not deep enough to be interpreted as being the direct consequence of the riots. In fact, it is not clear whether said output gap should be assigned to the riots or simply to the business cycle. Therefore, the cost of the revolt cannot be measured by the output gap. The gap analysis leads us to presume that economic activity will most likely recover as of 2015, with real GDP growth rate reversing its downward trend and reaching 7% (IMF estimates) in 2017, thus placing real GDP on a steeper long-run trend. It is obvious that the pace of growth in real GDP will be restored as of 2015, accompanied by a projected gradual drop in unemployment rates to 12.5% in 2017 and 11.8% in 2018.

in EGP Billion

Output Gap Estimation

900 800 700 600 500 400 300 200 100 0 2019

2018

2017

2016

2015

2014

2013

2012

Trend 2000‐2010

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Real GDP

Trend 2012‐2018

Source: IMF, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

11

3. Yemen The Yemeni economy has been growing at a robust pace over the period preceding the uprising casting an average GDP growth rate of 4.45% over the 2000-2010 period, noting that GDP growth has peaked at 7.7% in 2010 just before Yemen was hit by the wave of revolutions in the Arab world. Accordingly, Yemen’s GDP increased from YER 256.72 billion in the year 2000 to YER 389.87 billion in the year 2010 [7]. Evolution of Yemen's GDP Growth Rate Before the Arab Spring

in %

7.70

8 7

6.18 5.59

6 5

3.80 3.94 3.75 3.97

4

3.17

3.34

3.65 3.87

3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF, Credit Libanais Economic Research Unit

Said economic growth was however, accompanied by skyrocketing inflation rates, averaging 10.99% over the 2000-2010 period, mainly fueled by the high volatility of the Yemeni Riyal against the USD. It is worth noting, however, that the high inflation rates persisted throughout the Arab Spring uprising, standing at 19.5% in the year 2011 and 11.0% in the year 2012, with expectations of a more tamed inflationary environment over the 2013-2018 period [7]. Evolution of Yemen's Inflation Rate

in %

25 19.0

20

15 11.0 10

11.2

12.5

12.2

19.5

9.9 10.8 11.9

8.7

11.0

10.8 7.9

5 3.7

Start of Yemeni Uprising

7.5

9.2

8.0 7.5

7.3

0

Source: IMF, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

[7] IMF Figures

12

The turmoil in Yemen lies somewhere between the Tunisian and Egyptian uprisings (protests and strikes) on the one hand and the Libyan and Syrian uprisings (full-scale civil wars) on the other in terms of intensity and duration. More particularly, the deadlock lasted for one year and one month and involved military clashes, defections and an assassination attempt which targeted the back-then incumbent President Mr. Ali Abdallah Saleh. Accordingly, GDP growth plummeted to negative grounds during the year 2011, averaging -1.99% over the 2011-2013 period [8]. Our analysis of the output gap projects real GDP to return to its long-run trend by the year 2017. in YER Billion

Output Gap Estimation

600 500 400 300 200 Start of the Yemeni Uprising

100

Recovering Long-term Trend

0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

real GDP

trend line 2000‐2010

Source: IMF, Credit Libanais Economic Research Unit

We have estimated the cumulative economic cost of the Yemeni revolt at $1.15 billion (reference year: 2013) over the seven-year period ending in 2017, a figure that represents 65.21% of 2010’s real GDP. The economic cost represents the output gap over said period (as observed on the chart above), discounted at the average GDP growth of 4.45%.

4. Libya The oil-rich Libyan economy has demonstrated solid yet highly volatile economic growth over the 2000-2010 period. More specifically, GDP growth fluctuated between 13.02% in 2003 and -0.79% in 2009 before dipping to -62% in the year 2011 in the aftermath of Libya’s civil war [8].

Credit Libanais Economic Research Unit   

[8] IMF Figures

13

in %

Evolution of Libya's Inflation Rate

20 15.9 15 10.4 10

6.2

5

1.3

6.1

2.7 1.5

0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

‐2.9 ‐10

2003

2002

2001

2000

‐5

3.5

2.0

2.5

2.4

5.2 4.0 4.0 3.8

‐2.1

‐8.8

‐9.9

Source: IMF, Credit Libanais Economic Research Unit

‐15

in %

Evolution of Libya's GDP Growth vs GDP Volatility

120 100 80 60 40 20 0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

‐20 ‐40 ‐60 ‐80

Volatility

GDP growth

Source: IMF, Credit Libanais Economic Research Unit

It is worth noting that Libya’s long history of economic prosperity from oil production was mainly beneficial to the ruling elite, which was highly involved in economic activity. In fact, the ruling family controlled the bulk of the country’s wealth, by distorting the legal framework to their advantage.

Credit Libanais Economic Research Unit   

14

in LYD Billion

Output Gap Estimation

70 60 50 40 30 20

Start of the the Libyan Civil War

10

Recovering Long-term Trend

0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

real GDP

trend line 2000‐2010

Source: IMF, Credit Libanais Economic Research Unit

It is worth noting that the negative consequences of the Libyan civil war on the economy are expected to last for a relatively long period of time. In fact, real GDP is not expected to streamline with its long-run trend before the year 2018 as depicted by the output gap analysis above. The economic burden of Libya’s revolutionary changes is estimated at LYD 79.53 billion ($62.26 billion), being the output gap over the aforementioned period discounted at the average real GDP growth rate of 4.45%. Said gap represents 167.07% of 2010’s real GDP. Libya’s economic gap from the Arab Spring is the result of the sharp 62% [9] drop in real GDP during the civil war in 2010. Furthermore, the cumulative economic cost per capita is expected to reach $9,532.29 until economic recovery is reached. Libya’s relatively rapid recovery, given the large initial drop in its real GDP, is mainly buoyed by the fast recovery in oil production to 1,483,044 barrels per day in 2012, after a sharp drop to 501,466 barrels per day in 2011 [10]. Evolution of Libya's Oil Production in Thousands of  Barrels per Day 2,000 1,800 1,600

1,789 1,810

1,845

1,874

1,483

1,790

1,400 1,200 1,000

Start of the Libyan Civil War

800 600 400

509

200 0 2006

2007

2008

2009

2010

2011

2012

Source: EIA, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit    [9] IMF Figures, [10] EIA

15

5. Syria The economic reforms in Syria’s financial sector and its openness to the world economy over the last decade have accentuated economic growth over the 2000-2010 period with real GDP averaging 5% over said period. Consequently, the unemployment rate dropped significantly to 8.61% in 2010, down from 12.30% in the year 2004 [11].

in %

Evolution of Syria's Economic Growth vs Unemployment Prior to the Uprising

14

12.3 10.9

12 10 8

6.9

6.2 5.0

6

9.2

8.3

8.0

8.6

8.1 5.9

5.7 4.5

3.4

4 2 0 2004

2005

2006 Real GDP Growth

2007

2008

2009

2010

Unemployment Rate

Source: IMF, Credit Libanais Economic Research Unit

Nevertheless, the outbreak of the Arab Spring did not spare Syria, which succumbed in early 2011 to the political and civil tensions, escalating into a full-scale civil war that is still raging until our present day. According to World Bank and ESCWA estimates, real GDP shed 2% in 2011, 31.4% in 2012 and 7.1% in 2013.

Output Gap Estimation 1800 1600 1400 1200 1000 800 600 400 200 0 1995

Real GDP 2000

Trend 2000‐2010 2005

2010

2015

Source: IMF, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

[11] IMF Estimates

16

We have estimated the economic cost of the conflict at SYP 1,351.12 billion ($19.30 billion) as at year-end 2013 (reference year: 2013) representing some 91.93% of the country’s 2010 real GDP. The exact economic cost of the civil war in Syria is actually hard to calculate in the absence of economic growth estimates that extend beyond the year 2013. However, and with the persistence of the war in Syria and the economic sanctions imposed by the international community, there is no doubt that real GDP will sustain its downturn in the upcoming years, the thing which will amplify the economic cost burden. It is worth highlighting that the economic cost of the uprisings in terms of real GDP in Syria excludes all costs related to infrastructure damage and the losses in capital subsequent to the sharp depreciation of the Syrian pound. In this perspective, the following diagram sketches the depreciation of the Syrian Pound against the USD throughout the aggravation of hostilities in Syria. Evolution of SYP/USD Exchange Rate Throughout the Arab Spring

120 101.9

100 77.27

80 55.89 60

45.7

40

46.98 Start of Arab Spring

20 0 Year End 2009

Year End 2010

Year End 2011

Year End 2012

26‐Jun‐13

Source: Central Bank of Syria, Credit Libanais Economic Research Unit

It is worth noting, in this perspective, that the Syrian Center for Political Studies expected the cost of the Syrian civil war to have reached $40 billion in the first four months of 2013, and some $84.4 billion since the beginning of the upheaval. More particularly, the report estimated that the economic cost to GDP reached $8 billion, while the cost of capital depreciation as a result of the depreciation of the Syrian pound was estimated at around $13 billion. Furthermore, military expenditures increased sharply to around $7 billion with the onset of the conflict, hence draining public finances and resulting in a 17 percentage points increase in Syria’s sovereign debt-to-GDP ratio to 65% in the first quarter of 2013. Sanctions: A significant part of the aforementioned losses to the Syrian economy stemmed from the economic sanctions imposed by the international community. Said sanctions were mainly implemented by the European Union and the USA, and affected different aspects of the Syrian economy. These measures involved restrictions on the country’s imports and exports, financial penalties on the regime, restrictions on infrastructure projects, asset freezing, and travel restrictions.

Credit Libanais Economic Research Unit   

17

The sanctions revolved mainly around restrictions on the import of weapons in an attempt to curb violence. Furthermore, and given the country’s reliance on oil exports (the country used to export $7-8 million of oil on a daily basis before the beginning of the conflict), sanctions were enacted on Syria’s oil exports. The aforementioned sanctions consist of an embargo on Syrian oil exports depriving the country as such from a major source of revenue, and undermining its economic activity. The Syrian oil minister Mr. Sufian Allaw estimated the cost of the sanctions at around $4 billion, which accounts for around 12.5% of year 2010 GDP (i.e. before the eruption of the conflict). The sanctions adopted also banned the import of equipment related to oil and gas extraction and production. In parallel, 19 of the 22 Arab league countries adopted restrictive measures on Syria in 2011. Said restrictions included stopping transactions with the Syrian Central Bank & the Syrian Commercial Bank, imposing restrictions on governmental trade and financial transactions with the Syrian government, added an asset freeze on the government and on some of the regime’s officials. The 19 countries also implemented a travel ban to Syria and a suspension of funding for Arab projects in Syria. It is worth noting, in this perspective that according to the Syrian Center of Statistics, some 52.5% of Syria's exports were to the Arab world in the year 2009. However, said sanctions inflicted a substantial damage on the Syrian population, with the price of local goods increasing drastically. Therefore, and in a recent conference, European foreign affairs ministers discussed a potential easing in economic sanctions concerning exports of goods and services to Syria, in an endeavor to water down the negative repercussions on the population.

C. IMPLICATIONS OF THE TURMOIL ON RATING METRICS The political instability and macroeconomic volatility portrayed in the section above weighed negatively on the concerned countries’ ratings. More particularly, the Economist Intelligence Unit (EIU) gradually downgraded the aforementioned countries’ long-term foreign currency rating, taking into consideration the macroeconomic consequences of the regional political turmoil. The rating actions are described in the table hereunder: Long Term Foreign Currency Rating (EIU) November 2010 Pre-Turmoil

Year 2013 Post-Turmoil

Country

Rating

Outlook

Rating

Outlook

Tunisia

BB

Stable

CCC

Stable

Egypt

BB

Stable

CCC

Stable

Yemen

CC

Stable

CC

Stable

Libya

BB

Stable

B

Stable

Syria

B

Stable

CC

Negative

So urce: EIU, Credit Libanais Eco no mic Research Unit

Credit Libanais Economic Research Unit   

18

It is worth noting that, excluding Yemen, all the above-mentioned countries have seen their long-term foreign currency rating downwardly revised since the onset of the regional squabbling. In addition, and unlike its peers in the region, the outlook for Syria’s sovereign rating remains ‘Negative’ at the time of the writing of the report, amid the chaotic political and economic situation in the country that is still prevailing to date.

D. CHALLENGES AND OPPORTUNITIES The “Doing Business 2013” report, published by the World Bank mentioned the lack of business opportunities in the Middle East & North Africa region as being a major issue for the economic development in the region. The report stressed mainly on the low firm entry density in the MENA region, and the business managers’ concerns about corruption and anticompetitive practices. In 2013, the World Bank ranked Syria, Egypt and Tunisia 144th, 109th, and 50th respectively, with respect to their “Ease of Doing Business” indicator, mainly reflecting the administrative obstructions and the high cost of starting a new business. Accordingly, the World Bank recommended that concerned governments improve governance structures, in addition to increasing transparency and access to regulatory information in order to encourage entrepreneurship. Accordingly and as previously mentioned, the potential positive consequences of the Arab Spring on economic activity in the concerned Arab countries depend on their ability to implement appropriate reforms to foster growth. After several years of political repression and low involvement of the private sector in economic activity, Arab Spring countries should embark on reforms, and encourage foreign and national investment. A progressive withdrawal of the governments from economic activity is an essential condition to promote private investment and foster economic growth. Governments should work to ameliorate governance, through the adoption of a more transparent and efficient legal framework. Accordingly, the concerned governments’ role should be confined to the protection of property rights, which have been frequently violated by dictators and ruling elites. The protection of property rights would create new incentives to invest and produce, thus spurring economic growth. Furthermore, the liberalization of the labor market is another crucial reform that could help concerned countries to reduce unemployment rates and attract additional foreign direct investments. It is worth noting in this perspective that in all of the aforementioned countries, youth unemployment rates were skyrocketing before the Arab Spring, owing mainly to the lack of investment opportunities. Finally, the most fundamental issue to be solved in the short run is the implementation of a quick political transition in order to promote political stability, which is an essential requirement for private investment, economic growth, and job creation.

Credit Libanais Economic Research Unit   

19

II. ECONOMIC REPERCUSSIONS OF THE ARAB SPRING ON LEBANON The Arab Spring has taken a severe toll on the Lebanese economy, with its negative influence starting out at timid levels during the uprising in Tunisia before escalating slowly with the events in Egypt (where two major Lebanese banks have a foothold) and coming into full effect with the propagation of the turmoil in neighboring Syria.

A. ECONOMIC GROWTH Ever since the onset of the Arab Spring, and particularly the Syrian crisis, the Lebanese economy has been stuck in the doldrums, with economic growth slowing markedly especially in comparison with the stellar growth rates recorded over the 2007-2010 period. More particularly, Lebanon’s GDP growth eased to 1.5% in the year 2011, in comparison with a high average growth rate of 8.075% p.a. over the 2007-2010 period at a time when major global economies were suffering negative growth rates. As far as the year 2012 is concerned, the Lebanese Central Bank governor estimated growth to vacillate somewhere between 2% and 3%, in line to a certain extent with the IMF’s estimates of 1.5%. Impact of Arab Spring on Lebanon's Economic Growth

10.00%

8.00% 7.00%

Start of Arab Spring

9.30% 8.50%

9.00% 7.50%

7.00%

6.00% 5.00% 4.00% 3.00%

2.00%

2.00% 1.00%

1.50%

0.00% 2007

2008

2009

2010

2011 (e)

1.50% 2012 (e)

2013 (e)

Source: IMF, Credit Libanais Economic Research Unit

According to Standard and Poor’s, the Lebanese economy, which is “closely linked” with Syria, has been experiencing ever since the escalation of the turmoil in Syria a slowdown in major economic sectors, namely tourism, financial services and construction, which accounted for more than 50% of the country’s Gross Domestic Product (GDP) over the 2007-2010 period. This has prompted the International Monetary Fund (IMF) to lower Lebanon’s projected economic growth for the year 2011 at several occasions namely, from 5.0% in its October 2010 World Economic Outlook (WEO) report to 2.5% in its April 2011 WEO report and 1.5% in its October 2011 Regional Economic Outlook. Similarly, and in light of the grim environment, the IMF was compelled to revise Lebanon’s 2012 projected growth from 5.0% in its April 2011 WEO report to 3.5% in its October 2011 Regional Economic Outlook (REO) and most recently to 1.5% in its April 2013 WEO report. In related news, the Lebanese Central Bank Governor, Mr. Riad Salameh commented that the Syrian crisis has had a devastating impact on the Lebanese economy,

Credit Libanais Economic Research Unit   

20

curbing its growth for the year 2012 by half. As far as economic growth for the year 2013 is concerned, the situation is no different given the ongoing Syrian civil war and its spillover to Lebanon, with the IMF downwardly revising its expectations from 4% in its September 2011 WEO to 2.5% in its October 2012 WEO and 2% in its April 2013 WEO.

6.00%

Successive Revision of Lebanon's 2011 Projected Economic Growth Throughout The Arab Spring

6.00%

5.00%

Successive Revision of Lebanon's 2012 Projected Economic Growth Throughout The Arab Spring

5.00%

5.00%

5.00%

4.00%

4.00%

3.50% 3.00%

3.00%

3.00%

2.50%

2.00%

2.00%

2.00%

1.50%

1.50%

1.00%

1.00%

0.00%

0.00% October 2010 WEO

April 2011 WEO

October 2011 REO

Source: IMF, Credit Libanais Economic Research Unit

5.00% 4.50%

April 2011  WEO

October 2011  REO

April 2012  WEO

October 2012  REO

April 2013  WEO

Source: IMF, Credit Libanais Economic Research Unit

Successive Revision of Lebanon's 2013 Projected Economic Growth Throughout The Arab Spring

4.00%

4.00% 3.50% 3.00%

2.50%

2.50%

2.00%

2.00% 1.50% 1.00% 0.50% 0.00% September 2011 WEO

October 2012 WEO

April 2013 WEO

Source: IMF, Credit Libanais Economic Research Unit

B. TOURISM AND HOSPITALITY SECTOR

  The tourism and hospitality sector was dealt a severe blow during the Arab Spring and remains as one of the most affected sectors by the regional turmoil. This owes to the fact that a significant portion of Arab tourists are land travelers reaching Lebanon via Syria, something that has become quite impossible given the deterioration in security conditions in Syria. In addition, the aggravation of domestic security conditions, an indirect fruit of the tensions in Syria, prompted some Arab nations including Qatar, Saudi Arabia, U.A.E. and Bahrain to issue travel restrictions on their nationals from coming to Lebanon. This was reflected by a sharp drop in the number of Arab tourists arriving to Lebanon over the last two years in comparison with the stellar levels reported in the years before. More particularly, the number of Arab tourists coming to Lebanon has narrowed from 785,985 in the year 2009 and 894,724 in the year 2010 to

Credit Libanais Economic Research Unit   

21

581,597 in the year 2011, 458,069 tourists in the year 2012, and 131,894 tourists in the first four months of the year 2013. It is worth highlighting in this perspective that the aforementioned end of April figure compares to 243,000, 155,096 and 180,593 Arab tourists arriving to Lebanon over the same period in the years 2010, 2011 and 2012 on a respective basis [12].

 

     

Impact of Arab Spring on Arab Tourist Arrivals to Lebanon

  Impact of Arab Spring on Arab Tourist Arrivals to Lebanon

1,000,000

300,000

900,000 800,000

250,000

243,000

700,000 200,000

Extrapolated 2013 Figure

600,000 500,000

150,000

395,682

894,724

400,000

180,593 155,096 131,894

785,985

300,000

100,000

581,597 458,069

200,000

50,000

100,000

131,894

0 2009

2010

2011

2012

April 2013

Source: Ministry of Tourism, Credit Libanais Economic Research Unit

0 April 2010

 

April 2011

April 2012

April 2013

Source: Ministry of Tourism, Credit Libanais Economic Research Unit

 

  On a broader basis, total tourist arrivals to Lebanon also suffered a major setback as captured by the charts hereunder. It is worth noting, in this perspective, that according to the World Bank, loss in tourism spending amounted to $303 million in the year 2012, representing some 0.5% of GDP.

Impact of Arab Spring on Total Tourist Arrivals to Lebanon

Impact of Arab Spring on Total Tourist Arrivals to

in millions

600,000

2.5

565,623

475,534

500,000

438,860

2.0 Extrapolated 2013 Figure

1.5

0.753 1.0

376,561

400,000

300,000

2.168 1.851

200,000

1.655 1.365

0.5

100,000 0.377

0

0.0 2009

2010

2011

2012

Source: Ministry of Tourism, Credit Libanais Economic Research Unit

April 2013

April 2010

April 2011

April 2012

April 2013

Source: Ministry of Tourism, Credit Libanais Economic Research Unit

As a consequence to the dull tourism activity, hotel occupancy at 4 and 5 star hotels in Beirut fell to 58% in the year 2011 and 54% in the year 2012 and this after averaging above 70% during the 2009 – 2010 period. In addition, hotel occupancy in Beirut tumbled to 58% over the first four months of the year 2013 comparing to 79% and 72% through April 2009 and April 2010 (precrisis period) on a respective basis [13]. It is worth noting, in this perspective, that Beirut

Credit Libanais Economic Research Unit   

[12] Ministry of Tourism, [13] Ernst & Young

22

recorded the third lowest occupancy rate among covered Middle Eastern (MEA) capitals during the first four months of 2013 [13]. Impact of Arab Spring on Hotel Occupancy in Beirut 90%

79% 73%

80%

Start of Arab Spring 72%

68%

66%

70%

58%

60%

54%

50%

58%

50% 40% 30% 20% 10% 0% Apr-09

2009

Apr-10

2010

Apr-11

2011

Apr-12

2012

Apr-13

Source: Ernst & Young, Credit Libanais Economic Research Unit

C. REAL ESTATE SECTOR One of the most observable and tangible impacts of the Arab Spring on major economic sectors in Lebanon is its derailing effect on the real estate sector. More particularly, and after posting robust growth rates over the 2006-2010 period, demand for real estate property waned with the onset of the Arab Spring with real estate transactions watering down remarkably and prices in general stagnating to end as such the five-year rapid acceleration spree. In figures, the vigorous growth rate in number of real estate transactions (CAGR of 8.91% over the 2007-2010 period) came to an abrupt end with the propagation of the Arab Spring, with the number of real estate transactions dipping from 94,320 by year-end 2010 to 82,984 by year-end 2011 and 74,569 by year-end 2012. In addition, the number of real estate transactions dwindled from 46,057 throughout the first half of the year 2010 to 37,386, 34,388 and 31,943 over the same period in the years 2011, 2012 and 2013 on a respective basis [14]. Arab Spring's Toll on Number of Real Estate Transactions

100,000 90,000 80,000

Extrapolated 2013 Figure: 63,886

70,000 60,000 50,000

94,320 81,665

40,000 30,000

83,622

82,984

67,041

74,569

20,000

31,943

10,000 0 2007

2008

2009

2010

2011

2012

Jun‐13

Source: Real Estate Registry, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

[14] Real Estate Registry

23

The strained political situation stemming from the Arab Spring also had a detrimental impact on foreign investors’ (and namely Arab investors’) appetite for realty, the thing which was reflected through a drop in the share of foreigners in real estate transactions to below 2% since the start of the Arab Spring [15]. Arab Spring's Toll on Foreigners' Share of  Real Estate Transactions 3.00% 2.50%

2.45%

2.38%

2.53%

Start of Arab Spring

2.04% 1.81%

2.00%

1.86%

1.86%

1.50% 1.00% 0.50% 0.00% 2007

2008

2009

2010

2011

2012

Jun‐13

Source:Real Estate Registry, Credit Libanais Economic Research Unit

D. BANKING SECTOR The Lebanese banking sector is one of the main pillars of the Lebanese economy and a catalyst for growth making it essential to assess the Arab Spring’s impact on this vital sector. It is believed that the Arab Spring had a two-fold impact on Lebanese banks namely a direct impact represented by the repercussions of the regional turmoil on branches and subsidiaries of Lebanese banks having a foothold in the region and an indirect impact that is measured by the degree to which local activity was affected by the economic slowdown in Lebanon.

1. DIRECT IMPACT In the last decade, we have seen Lebanese banks expand regionally and internationally, on the back of the cutthroat local competition, saturated market, and the various periods of political and economic instability. Banks as such succeeded in obtaining licenses across the Middle East and North Africa region, from Algeria in the West to Iraq in the East. While this step has enabled them to tap under-banked economies, diversify their risk profiles, increase their balance sheet and boost their profit margins, it has also exposed banks to the socio-economic risks associated with said markets. In this section, we will discuss the implications of the Arab Spring on two countries where Lebanese banks have a significant presence, namely Egypt and Syria, notwithstanding the presence of Lebanese banks in other turbulent Arab countries where the intensity of the deadlock was minimal.

Credit Libanais Economic Research Unit   

[15] Real Estate Registry

24

Egypt The Egyptian banking sector currently comprises two Lebanese banks namely Bank Audi S.A.E. and BLOM Bank – Egypt. In December 2005, BLOM Bank became the first Lebanese bank to tap the Egyptian market through its gradual acquisition of a 99.35% stake in Misr Romanian Bank for a total consideration of around $98 million. The new entity was rebranded later under the name of BLOM Bank – Egypt [16]. BLOM Bank was promptly followed by Bank Audi, which in March 2006 acquired Cairo Far East Bank S.A.R [17] at a price of $94.4 million. The bank had a network of 3 branches in Egypt and an Islamic affiliate. The impact of the Egyptian crisis on Lebanese banks operating in Egypt has been somewhat mild, thanks to the relatively short timeframe of the crisis added the fact that the revolution remained in a peaceful context. Throughout the crisis, Lebanese banks operating in Egypt continued to report growth across major balance sheet items while in parallel constituting the requisite provisions, the thing which adversely impacted profitability levels. As depicted by the following table, Bank Audi’s Egyptian subsidiary recorded acceptable growth in assets (9.64% in 2011) to $2.979 billion, loans (7.17% in 2011) to $1.315 billion and deposits (10.13% in 2011) to $2.621 billion. On the income statement front, Audi Bank S.A.E. reported double-digit annual growth rates in net interest income and operating profit to $72.3 million and $49.3 million in the year 2011 on a respective basis, yet was forced to constitute some $14.9 million in loan loss provisions and $20.9 million in general provisions. Said provisions came as a result of the political bickering which stroke Egypt in early 2011 and prevailed during the period that followed the end of the revolution. Subsequently, the bank’s net profits contracted by some 99% year-onyear to $0.3 million by year-end 2011. However, and as the political situation somewhat stabilized in the year 2012, the bank’s performance regained normal trend, with various balance sheet and income statement parameters growing significantly. The regained political stability enabled the bank to register an increase in profits to $37.5 million in 2012, in spite of a somewhat sizeable (11.41%) rise in loan loss provisions to $16.6 million [18]. Bank Audi S.A.E.

Balance Sheet Data USD Million Assets Loans C ustomer Deposits Equity

2010 2,717 1,227 2,380 238

2011 2,979 1,315 2,621 230

2012 3,425 1,528 2,642 284

CAGR 12.28% 11.59% 5.36% 9.24%

60.3 37.0 1.6 0.0 26.6

72.3 49.3 14.9 20.9 0.3

107.3 84.8 16.6 0.0 37.5

33.40% 51.39% 222.10% N.A. 18.73%

Income Statement Net Interest Income Operating Profit Loan Loss Provisions C ollective Provisions Net Profits

(1) (2)

(1)

Requested LLP s as per Credit P o licy in Co mpliance with IFRS

(2)

Co llective P ro visio ns and/o r General B anking Risk P ro visio ns as per M anagement's Decisio n

So urce: A udi B ank,A nnual Repo rt , Credit Libanais Eco no mic Research Unit

BLOM Bank Egypt S.A.E, on the other hand, reported significant increases across most balance sheet and income statement categories over the aforementioned period. More particularly, total assets, customer deposits, net loans and net profits expanded at a CAGR of 9.86%, 16.45%, 1.80% and 32.72% to EGP 9.21 billion, EGP 8.37 billion, EGP 2.81 billion, and EGP 81.4 million

Credit Libanais Economic Research Unit   

[16] Zawya and Credit Libanais Economic Research Unit [17] Audi Bank Annual Report [18] Audi Bank Annual Report, [19] BLOM Bank Egypt Website

25

as at year-end 2012 on a respective basis. Impairment losses, however, expanded at a CAGR of 28.52% over the aforementioned period to EGP 73.5 million as at year-end 2012 [19]. BLOM BANK EGYPT S.A.E.

Balance Sheet Data Egyptian Pound Million Assets Gross Loans C ustomer Deposits Allowance for Impairment Losses Segregated Interest Net Loans Equity

2010 7,627 3,180 6,175 402 64.7 2,713 961

2011 8,375 3,193 6,774 434 69.4 2,689 992

2012 9,205 3,222 8,374 365 46.0 2,812 1,107

CAGR 9.86% 0.67% 16.45% -4.74% -15.66% 1.80% 7.32%

197.7 61.1 44.5 46.2

232.1 59.9 27.5 73.7

327.6 63.1 73.5 81.4

28.74% 1.66% 28.52% 32.72%

Income Statement Net Interest Income Net C omission Income Impairment Losses Net Profits

So urce: B LOM B ank Egypt Website, Credit Libanais Eco no mic Research Unit

Syria Amongst all affiliates of Lebanese banks in Arab Spring countries, the Syrian subsidiaries were mostly affected, owing to several factors namely the military nature of the conflict and its long duration (28 months and counting at the time of writing of the report). More particularly, the Syrian affiliates of Lebanese banks, namely Bank Audi Syria, Bank of Syria & Overseas, Byblos Bank Syria, Bank BEMO Saudi Fransi, Fransabank Syria, Sharq Bank, and Syria Gulf Bank incurred significant losses during the Syrian conflict amid the crippling war, the flight of capital outside the country, the reduced confidence in the economy, the high level of provisions, the depreciation of the Syrian pound exchange rate against the USD and the international sanctions imposed on Syria. Figure wise, the consolidated assets of the Syrian affiliates of Lebanese banks contracted by 25.63% on an annual basis to $4.378 billion as at year-end 2012 applying end-of-period SYP/USD exchange rates. Loans and customer deposits were no exception, shedding 38.57% and 27.33% on a respective basis to $1,534.0 million and $3,201.2 million. Profitability was far more affected, with net interest income dropping by 34.32% y-o-y to $89.49 million as at end of December 2012 and net fee & commission income dwindling by 22.46% over the same period to $27.65 million, and this based on end-of-period exchange rates. As a result, net operating profit plunged by 113.96% to a loss of $13.85 million with net profits plummeting to $0.52 million [20]. This further elaborated by the table on the following page:

Credit Libanais Economic Research Unit   

[20] Syrian Commission on Financial Markets and Securities

26

Consolidated Financial Performance 2011

2012

Change Dec 2011- Dec 2012 (based on End of Year Exchange Rates)

Key Balance Sheet Figures Total Assets Shareholders' Equity Net Loans & Advances C ustomer Deposits

$ Million 5,887.16 639.69 2,497.24 4,405.26

$ Million 4,378.06 498.56 1,533.96 3,201.21

% -25.63% -22.06% -38.57% -27.33%

Key P&L Figures Net Interest Income Net Fee & C ommission Income Net Operating Profit Net Profits

136.25 35.66 99.19 35.78

89.49 27.65 -13.85 0.52

-34.32% -22.46% -113.96% -98.55%

Key Ratios Net Loans / Deposits

56.69%

47.92%

Source: Syrian Commission on Financial Markets & Securities, Credit Libanais Economic Research Unit

It is worth noting, in this perspective, that the Lebanese Central Bank Governor commented in November 2012 that Lebanese banks' operations in Syria have lost a combined $400 million since the onset of the conflict, part of which stems from the provisions that were constituted on their loans portfolio. As far as the first quarter 2013 performance is concerned, the heightened uncertainties and risks surrounding Syria’s operating environment started to take a greater toll on the performance of Syrian affiliates of Lebanese banks which recorded a sharp 98.20% annual drop in consolidated net profits to around SYP 52.94 million ($0.61 million) as at end of March 2013 comparing to SYP 2.92 billion in the first quarter of 2012. Bank BEMO Saudi Fransi realized the highest profit figure ($3.04 million), followed by Fransabank Syria ($2.31 million), Bank of Syria & Overseas ($0.21 million), Sharq Bank ($0.20 million), Bank Audi Syria ($0.02 million), Byblos Bank Syria (loss of around $1.98 million), and Syria Gulf Bank (loss of around $3.20 million). On the other hand, had end of periods SYP/USD exchange rates been adopted for currency translation purposes, Syrian subsidiaries of Lebanese banks would have reported a 98.81% dip in net profits. Consolidated Financial Performance

Standalone Financial Performance of Lebanese Banks' subsidiaries In Syria In The First Quarter Of 2013

Bank Audi Syria

Key Financial Figures Total Assets Shareholders' Equity

Bank of Syria & Overseas

Byblos Bank Syria

Bank BEMO Saudi Fransi

Fransabank Syria

Sharq Bank

Syria Gulf Bank

End Of Year 2012

First Quarter 2013

% Change (based on SYP Values)

$ Million

W*

$ Million

W*

$ Million

W*

$ Million

W*

$ Million

W*

$ Million

W*

$ Million

W*

$ Million

$ Million

%

559.04

15.31%

763.62

20.91%

498.27

13.64%

976.32

26.73%

414.19

11.34%

142.86

3.91%

298.25

8.17%

3,948.98

3,652.56

3.56%

80.87

19.89%

64.44

15.85%

72.55

17.85%

83.53

20.55%

49.95

12.29%

29.06

7.15%

26.11

6.42%

454.75

406.52

0.09%

First Quarter 2012

First Quarter 2013

% Change (based on SYP Values)

Operating Income

8.99

16.60%

8.25

15.24%

9.74

17.98%

10.67

19.69%

8.38

15.47%

3.45

6.37%

4.69

8.65%

127.63

54.17

-35.72%

Net Operating Profit/ (Loss)

0.02

-

0.23

-

-4.57

-

2.57

-

2.24

-

-0.50

-

-4.97

-

52.07

-4.97

-114.46%

Net Profits/(Loss)

0.02

-

0.21

-

-1.98

-

3.04

-

2.31

-

0.20

-

-3.20

-

50.95

0.61

-98.20%

*W: Weight SYP/USD: 57.30 as at end of March 2012, 77.51 as at the end of December 2012, and 86.78 as at the end of March 2013 Source: Syrian Commission on Financial Markets & Securities, Credit Libanais Economic Research Unit

On the balance sheet front, the consolidated assets of all seven aforementioned banks came in 3.56% higher during the first quarter of the year 2013 at SYP 316.89 billion ($3.65 billion), with the share of Bank BEMO Saudi Fransi of consolidated assets standing at 26.73%, that of Bank of Syria & Overseas nearing 20.91%, Bank Audi Syria amassing 15.31%, Byblos Bank Syria controlling 13.64%, Fransabank Syria accounting for 11.34%, the share of Syria Gulf Bank reaching 8.17% and that of Sharq Bank settling at 3.91%. On the capitalization side of the balance sheet, the equity of all 7 banks remained almost flat at SYP 35.28 billion ($406.52 million) as at the end of the first quarter of the year 2013, compared to SYP 35.25 billion as at end of year 2012.

Credit Libanais Economic Research Unit   

27

In addition, it is worth highlighting that the military clashes in Syria have forced many banks to close some branches temporarily or merge them with other nearby branches. This is further depicted by the table below:

Bank Audi Syria S.A.

Closed Temporarily

Merged

Harasta Branch - Basal Area - Damascus Reef Governorate

West Mazzeh Branch - Al Massoudi Street - Damascus Governorate Souk al Intaj Branch - Souk al Intaj Street - Aleppo Governorate

Homs Branch - Dablan Street - Homs Governorate Deir al Zour Branch - Al Nahr Street - Deir al Zour Governorate Sitt Zaynab Branch - Safir Hotel - Damascus Governorate

Fransa Bank Syria S.A.

Homs Branch - Hachem Al Atasi Street - Homs Governorate Damascus Free Zone 4 Branches closed in Aleppo

Bank of Syria & Overseas S.A. (Subsidiary of BLOM)

2 Branches closed in Homs 1 Branch closed in Damascus Hosh Blas Branch - Daraa Highway - Damascus Governorate

Byblos Bank Syria S.A.

Al Malak Faysal Street Branch - Aleppo Governorate Homs Branch - Al Arabeen Street - Homs Governorate

Bank al Sharq (Subsidiary of BLF) Syria Gulf Bank (in which FNB owns a 7% stake) Bank BEMO Saudi Fransi

Information not available

Information not available

Information not available

Information not available

Information not available

Information not available

So urce: A l M anac o f B anks in Lebano n 2013, B anks' Websites, B ank o f Syria & Overseas, Credit Libanais Eco no mic Research Unit

2. INDIRECT IMPACT Notwithstanding the lackluster performance of major economic sectors in the light of the turmoil in the region, the Lebanese banking sector remains the center of attraction of the international community, thanks to its proven resilience against domestic and regional shocks. It is worth highlighting that the impact of the foreign operations of Lebanese banks, part of which was discussed in the previous section, is embedded in the consolidated performance of the banking sector elaborated in the section herein. Although the growth rates in the consolidated balance sheet of Lebanese banks slowed in recent years amid the unstable local and regional environments, growth remains robust and sustainable. More specifically, the consolidated assets of the sector grew by 8.04% in the year 2012 and by 8.11% over the one-year period ending May 2013. Lending activity also remained sound, with consolidated loans to the private sector expanding by 10.35% in 2012 and by 7.24% y-o-y up to May 2013, with customer deposits being no exception, adding 8.46% in the year 2012 and 9.82% y-o-y up to May of the current year [21]. 2008

2009

2010

2011

2012

Y-O-Y May 2013

Assets

14.59%

22.27%

11.87%

9.04%

8.04%

8.11%

Loans

22.59%

13.32%

23.10%

12.73%

10.35%

7.24%

Deposits

15.58%

23.08%

12.17%

8.38%

8.46%

9.82%

So urce: A B L, Credit Libanais Eco no mic Research Unit

Credit Libanais Economic Research Unit   

[21] Association of Banks in Lebanon & Credit Libanais Economic Research Unit

28

Impact of Arab Spring on Growth Rates of Consolidated Balance Sheet Assets and Loans Start of Arab Spring

25.00%

22.59% 22.27%

23.10%

20.00% 15.00%

11.87% 14.59%

10.00%

12.73% 10.35% 9.04%

13.32%

8.11% 5.00% 0.00% 2008

8.04%

2009

2010

Growth In Assets

2011

2012

7.24%

Y‐O‐Y May  2013

Growth in Loans

E. BEIRUT BOURSE ACTIVITY As is the case with stock exchanges around the world, the BSE felt the pinch of the local economic slowdown and political tensions, both of which are ramifications of the Arab Spring, in their early stages. More particularly, the aforementioned factors had a negative influence on investor confidence with their impact on the BSE being two-fold, a watered-down activity and significantly lower stock prices. Activity wise, trading value on the Beirut Stock Exchange dwindled from $1.87 billion in the year 2010 to $0.52 billion in the year 2011 and $0.41 billion in the year 2012, resulting in a negative compounded annual growth rate of 53.27% over the 2010-2012 period. Similarly, traded volume contracted from 164.63 million shares in the year 2010 to 77.50 million in the year 2011 and 55.03 million in the year 2012. As a result, the turnover ratio, measured as the aggregate traded volume divided by the total outstanding number of shares, declined from 10.11% in the year 2010 to 3.27% in the year 2012. As far as the year 2013 is concerned, trading activity dipped to $154.51 million in the first half of the year 2013 comparing to $229.27 million over the same period in the year 2012 [22].

Credit Libanais Economic Research Unit   

[22] Beirut Stock Exchange

29

Evolution of BSE Metrics over the 2010-June 2013 Period 2010

2011

2012

Jun-12

Jun-13

CAGR 20102012 (%)

Traded Value ($ 000)

1,870,644

515,373

408,499

229,265

154,508

-53.27%

Traded Volume (000)

164,626

77,504

55,034

29,847

20,995

-42.18%

Market C apitalization ($ Million)

12,676

10,285

10,421

10,069

10,235

-9.33%

Traded Value/Market C apitalization

14.76%

5.01%

3.92%

2.28%

1.51%

-48.47%

Turnover Ratio

10.11%

4.62%

3.27%

1.78%

1.26%

-43.14% CAGR 2010June 2013 (%)

Weighted Average P/E

10.83

8.42

7.53

7.79

7.78

-10.44%

Weighted Average P/BV

1.43

1.12

1.00

1.05

0.99

-11.54%

Source: Credit Libanais Weekly Market Watch, BSE

Performance wise, stock prices in general plunged on the BSE over the end of year 2010 - H1 2013 period, reflected by a 10.44% slump in the market capitalization-weighted price earning multiple (P/E) and an 11.54% dip in the market capitalization weighted price to book multiple (P/BV). More particularly, real estate stocks, mainly Solidere, were far more affected than banking sector stocks, and this due to the strong correlation between the performance of the Solidere share price and the level of political stability. The Arab Spring’s impact on Lebanon’s real estate sector can be evidenced by the 34.23% contraction in the Credit Libanais Construction Stock Index (CLCI) over the period extending between December 31, 2010 and July 10, 2013. On the other hand, the Credit Libanais Financial Sector Stock Index (CLFI), and which mimics the performance of listed banking stocks, shed a much smaller 18.59% over the aforementioned period, as illustrated by the below graphs:

Credit Libanais Financial Sector Stock Index CLFI 1,800

1,400

1,600

1,300

1,400

1,200

1,200

Credit Libanais Economic Research Unit   

08-Jul-13

19-Apr-13

29-May-13

29-Jan-13

20-Dec-12

18.59%

01-Oct-12

24-Apr-12

04-Feb-12

15-Mar-12

26-Dec-11

07-Oct-11

16-Nov-11

19-Jul-11

28-Aug-11

09-Jun-11

30-Apr-11

09-Feb-11

08-Jul-13

19-Apr-13

29-May-13

29-Jan-13

10-Mar-13

20-Dec-12

01-Oct-12

10-Nov-12

13-Jul-12

22-Aug-12

03-Jun-12

24-Apr-12

04-Feb-12

15-Mar-12

26-Dec-11

07-Oct-11

16-Nov-11

19-Jul-11

28-Aug-11

0 09-Jun-11

600 30-Apr-11

200

09-Feb-11

700 21-Mar-11

CLFI

400

10-Mar-13

600

21-Mar-11

800

23.57%

31-Dec-10

CLASI

10-Nov-12

900

800

13-Jul-12

1,000

1,000

22-Aug-12

1,100

03-Jun-12

Index Value

1,500

31-Dec-10

Index Value

Credit Libanais Aggregate Stock Index CLASI

30

Credit Libanais Construction Sector Stock Index CLCI

1,050 1,000

Index Value

950 900 850 800 750 700

CLCI

650

34.23% 08-Jul-13

19-Apr-13

29-May-13

29-Jan-13

10-Mar-13

20-Dec-12

01-Oct-12

10-Nov-12

13-Jul-12

22-Aug-12

03-Jun-12

24-Apr-12

04-Feb-12

15-Mar-12

26-Dec-11

07-Oct-11

16-Nov-11

19-Jul-11

28-Aug-11

09-Jun-11

30-Apr-11

09-Feb-11

21-Mar-11

31-Dec-10

600

F. RATING ACTIONS Since the onset of the Arab Spring, rating agencies have been expressing their concerns over the potential spillover of said turmoil (and particularly the Syrian turmoil) to the Lebanese economy. Inevitably, and bearing in mind the political and geographical interconnections between Lebanon and Syria, the spillover happened, resulting in political tensions and some military clashes in the north of Lebanon. Consequently, some renowned rating agencies changed Lebanon’s outlook to ‘Negative’ from ‘Stable’ previously, leaving the long term and short term foreign currency sovereign ratings unchanged. Rating agencies, however, praised the robust performance of the Lebanese banking sector, the ample foreign currency reserves, and sustained remittances from expatriates. The following table highlights the impact of the Arab Spring on Lebanon’s outlook: Republic Of Lebanon Sovereign Ratings Rating Agency

Standard & P oor's

Tenor

Rating

Outlook (Prior the Uprising as at November 11 2010)

Post Arab Spring Outlook (Date of Revision)

Stable

Negative (M ay 28, 2012)

Long-Term

B

Short-Term

B

M oody's Investors Service Ltd.

Long-Term

B1

Stable

Negative (M ay 14, 2013)

Fitch IBCA Ltd.

Long-Term

B

Stable

Stable

Short-Term

B

So urce: M o o dy's Investo rs Service, Standard & P o o r's, Fitch IB CA Ltd.

As far as Lebanese banks are concerned, the situation was no different with their ratings maintained unchanged notwithstanding the upheaval in the region, and this owing to banks’ robust performance and ample liquidity levels. Some Lebanese banks, however, had their outlook downwardly revised, mainly in line with the change in sovereign’s outlook. More

Credit Libanais Economic Research Unit   

31

particularly, Moody’s Investors Service, changed on May 15, 2013 the outlook of 3 Lebanese banks, namely Bank Audi, BLOM Bank and Byblos Bank, from “Stable” to “Negative”. The agency attributed its decision to the high exposure of the aforementioned banks to sovereign debt, the deterioration of the local and regional operating environments and its negative repercussions on banks’ asset quality, added the potential difficulty authorities might face in supporting said banks “in case of need”. Lebanese Banks - Rating Actions Moody's Investors Service

Rated Banks Long Term Foreign Currency

Financial Strength

Pre-Arab Spring Outlook

Post-Arab Spring Outlook (Date of Revision)

Bank Audi-Saradar

B1

D-

Stable

Negative (May 15, 2013)

BLOM Bank

B1

D-

Stable

Negative (May 15, 2013)

Byblos Bank

B1

D-

Stable

Negative (May 15, 2013)

So urces: M o o dy's Investo rs Service

G. LEBANESE COMPANIES EXPORTING TO/VIA SYRIA Due to the fact that Syrian borders are a mandatory transit point for Lebanese land exporters, the Arab Spring has wreaked havoc on Lebanese companies exporting to and via Syria. More particularly, Lebanese companies exporting via Syria to Egypt, Jordan, Iraq and GCC countries have been suffering from the deteriorating security conditions in Syria, and which turned their export routes into a minefield. This has forced some companies to switch to maritime transport, the thing which unquestionably lifted their cost structure to higher grounds, jeopardizing as such their profit margins. It is worth noting, in this perspective, that over 52% of exports to Egypt, Jordan, Iraq and GCC countries are conducted via land transport historically [23]. Companies exporting to Syria, however, are facing additional challenges, apart from the security concerns. More particularly, and while demand for necessities has been steady or somewhat on the rise, demand for luxury items exported to Syria has lost steam amid the current conditions. Another issue is the depreciation of the Syrian pound, which coupled with the U.S. sanctions on the use of VISA and Master Card as well as the prohibition on USD transactions, have altogether forced exporters to rely on SYP cash transactions that expose Lebanese exporters to foreign exchange risks [24]. Notwithstanding the aforementioned problems, Lebanese exports to Syria have been on the rise throughout the Syrian crisis. More particularly, Lebanese exports to Syria rose from $220.75 million in the year 2010 (pre-crisis) to $294.28 million in the year 2012 and $343.74 million in just the first five months of the year 2013, as the Syrian crisis intensified [25].

Credit Libanais Economic Research Unit   

[23] Al-Akhbar Newspaper, [24] Executive Magazine, [25] Lebanese Customs

32

Impact of the Arab Spring on Lebanese Exports to Syria in USD 000 350,000

Start of Syrian Crisis

300,000 250,000 200,000 343,741 150,000

294,276

100,000

220,746

214,840

2010

2011

50,000 0 2012

May-13

Source: Lebanese Customs, Credit Libanais Economic Research Unit

This acceleration in exports was mainly buoyed by a surge in the export of oil, mineral fuels, and machinery & electrical instruments due to the U.S. and international sanctions on Syria. This is further highlighted by the following charts: Impact of the Arab Spring on Lebanese Exports of Vehicles and their Parts to Syria

in USD 000

Impact of the Arab Spring on Lebanese Exports of Mineral Oil and Mineral Fuel to Syria

in USD 000

Start of Syrian Crisis

Start of Syrian Crisis

14,000

300,000

12,000

250,000

10,000

200,000 8,000

150,000

12,318

6,000

263,304

4,000 2,000

100,000

960

1,559

50,000 1,300

0 2010

2011

2012

May-13

17

144

61,172

2010

2011

2012

0 May-13

Source: Lebanese Customs, Credit Libanais Economic Research Unit

Source: Lebanese Customs, Credit Libanais Economic Research Unit

Credit Libanais Economic Research Unit   

33

Here below is a list of some major Lebanese companies exporting to Syria: Lebanese C ompanies Exporting to Syria C ompany

Activity

Sanita S.A.L

Manufacturing of Paper Tissues

Pulper S.A.L

Vegetable Oil

Henkel Lebanon S.A.L

Detergents and Shampoos

Medco S.A.L

Oil and Gas

Almaza S.A.L

Beer

Lebanon C hemicals C o. S.A.L

C hemicals

Demirjian Global - Off-Shore S.A.L

Off-Shore C ompany

New Lebanese C ompany for C onverting Industries S.A.L - Masterpack

Plastic Bags, Bottles etc.

Bach Snacks S.A.L

Potato C hips and Pasta

Dora Flours Mills S.A.L

Mill

Furniture & Plastic Industries - FAP S.A.R.L

Sponges, C urtains, and Pillows

Petco S.A.L

Plastic Bottles

Zein J. Harb & Partners S.A.L

C ereal and Spices

Société Etablissements Michel Najjar S.A.L

C offee

Freiha Food C ompany - FFC S.A.L

Meat and Vegetable Oil

Société Industrielle du Levant S.A.L

Mill

Solar Land International S.A.L - Offshore

Offshore C ompany

C adbury Adams Middle East S.A.L

Gum and Sweets

Lematic S.A.L

Tools Appliances

Amine Aour - Middle East Foods S.A.L

Trade of C ereal, Meat and Fish

So urce: Chamber o f Co mmerce and Industry o f B eirut, Credit Libanais Eco no mic Research Unit

H. IMPACT OF THE ARAB SPRING ON MAJOR ECONOMIC INDICATORS The table on the following page sheds the light on the realized impact of the Arab Spring on Lebanon’s main macro-economic indicators:

Credit Libanais Economic Research Unit   

34

P re-Arab Spring

P ost-Arab Spring

Average (20082010)

Average (20112012)

2008

2009

2010

2011

2012

2013

Real GDP Growth Rate

8.60%

9.00%

7.00%

1.5%*

1.5%*

2.00%*

8.00%

1.50%

Net Foreign Direct Investment ($ Billion)

4.33 17.78%

4.84 18.23%

4.96 17.46%

3.40 8.20%

2.30 5.12%

1.6+

4.90

2.85

3.65%

17.85%

6.66%

1,332.6

1,851.1

2,168.0

1,655.1

1,365.8

487.6(3)

2,009.5

1,510.4

56%

13%

21%

10%

-6%

-18%

17.00%

2.00%

Real Estate Sales Transactions (Volume)

80,018

83,465

94,202

82,984

74,569

31,943(4)

88,834

78,777

Construction Permits (000 sqm)

14,281

11,509

15,187

13,980

12,362

4,261(3)

13,348

13,171

Beirut Port: Freight Activity(000 Tons)

5,746

5,769

6,469

6,677

7,225

3,366(3)

6,119

6,951

Number of Airport Passengers (million)

3.87

4.74

5.55

5.65

5.96

1.89(2)

5.15

5.81

(12,658)

(12,758)

(13,711)

(15,893)

(16,797)

(7,193)(3)

(13,235)

(16,345)

3,461

7,899

3,325

(1,996)

(1,537)

(17.9)(2)

5,612

(1,767)

29.58

33.99

2291.50

776.00

(2,927)

(3,134) 7.75% 137.53%

M ACROECONOM IC INDICATORS

FDI/GDP Ratio TOURISM Total Number of Tourists (000) Growth in Tax-Free Spending REAL ESTATE

TRANSP ORTATION

FOREIGN TRADE Trade Balance ($ Million) BALANCE OF P AYM ENTS Balance of Payments ($ Million) Foreign Assets ($ Billion)

19.73

28.30

30.85

32.24

35.74

37.17(4)

2,730

3,380

1,203

1,662

(110)

(5)(1)

P UBLIC FINANCE Primary Deficit/Surplus ($ Million)

(1)

(783)

Total Deficit ($ Million)

(2,921)

(2,960)

(2,894)

(2,342)

(3,925)

Deficit to GDP

9.84%

8.54%

7.80%

6.00%

9.49%

-

158.42%

147.63%

141.69%

137.53%

139.53%*

141.34%*

8.17% 144.66%

14.59%

22.27%

11.87%

9.04%

8.04%

8.11%(3)

Gross Public Debt/GDP Ratio BANKING SYSTEM Growth in Total Assets Growth in Total Deposits

15.58%

23.08%

12.17%

8.38%

8.46%

17.07%

8.54%

(3)

17.63%

8.42%

(3)

9.82%

Growth in Loans to the Private Sector

22.59%

13.32%

23.10%

12.73%

10.35%

7.24%

18.21%

11.54%

Dollarization Rate

69.57%

64.46%

63.24%

65.92%

64.82%

63.85%

65.37%

1,215

1,429

1,838

1,743

1,620

65.43% 513(2)

1,633

1,682

Net Profit - After Tax ($ Million) * Figures Reflect IM F Estimates + Figure Reflects IIF Estimates

( 1) A s A t E nd o f M a rc h, 2 0 13 , ( 2 ) A s A t E nd o f A pril, 2 0 13 , ( 3 ) A s A t E nd o f M a y, 2 0 13 , ( 4 ) A s a t E nd o f J une 2 0 13

Credit Libanais Economic Research Unit   

35

III. A.

QUANTIFYING THE ARAB SPRING COST BURDEN ON LEBANON OVERVIEW

Excluding the recurrent clashes in Tripoli, Lebanon has not witnessed yet any major political spillover arising from the Arab Spring. However, and given the socio-economic interconnections between Syria and Lebanon, it is highly likely that the Syrian civil war has had consequences on the Lebanese economy. In fact, as previously mentioned, Syria’s real GDP shed 2% in 2011, 31.4% in 2012, and some 7.1% expected for 2013, the thing which undoubtedly affected various economic sectors in Lebanon of which we mention trade, tourism, and real estate.

 

in LBP Billion

Evolution of Lebanon's GDP vs Long‐term Trend

60,000.00

       

50,000.00

 

40,000.00

   

30,000.00

 

20,000.00

   

10,000.00

 

0.00

2018

2017

2016

2015

2014

2013

2012

2011

2010

Real GDP

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

                                         

 

Trend

Source: IMF, Credit Libanais Economic Research Unit

Evolution of Lebanon's GDP Growth Rate vs Average Growth in % 10 9 8 7 6 5 4 3 2 1 0 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Source: IMF, Credit Libanais Economic Research Unit

Real GDP Growth

Average Growth

The charts above illustrate the performance of the Lebanese economy in the decade preceding the Arab Spring and projected growth during the eight-year period following the turmoil. During the 2000-2010 period, real GDP growth averaged 4.79% per annum, with GDP at constant prices reaching LBP 42,814.65 billion ($28.40 billion) in 2010, up from LBP 26,001.00 billion ($17.25

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billion) in 2000. During the 2010-2018 period, which saw the outbreak of the Arab Spring, average real GDP growth decelerated to 2.27% [26]. Therefore, it seems highly likely that the Arab Spring was behind this sharp drop in economic activity. The slower economic growth is partly attributable to the drop in total investments in the country on the back of the growing uncertainty resulting from the regional turbulences. in LBP Billion

16,000.00

Evolution of Total Investments in Lebanon

14,198

14,000.00 11,584

12,000.00

10,875 10,805

11,463

12,180 12,648

13,140

13,663

10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: IMF, Credit Libanais Economic Research Unit

As depicted by the chart above, total investment in Lebanon fell sharply in 2011, with the beginning of the Arab Spring, and settled at around LBP 11,584 billion ($7.68 billion) in 2011, down from around LBP 14,198 billion ($9.42 billion) a year earlier. The investment component of GDP stood at 26.66% in 2011, down from 33.16% in 2010 [26]. On the public finance front, gross sovereign debt-to-GDP ratio reversed its downward trend in 2012, on the back of the country’s sluggish real GDP growth, added the growing public spending. Public debt-to-GDP ratio declined to 137.5% in 2011, before rebounding to 139.5% in2012, and expected to reach 141.3% in 2013 [26]. in %

200.00 180.00 160.00

Evolution of Lebanon's Debt-to-GDP Ratio

179.4 181.9

168.4

158.4

147.6

141.7 137.5 139.5 141.3 141.7 142.3

140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: IMF, Credit Libanais Economic Research Unit

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[26] IMF Figures

37

Furthermore, GDP volatility, being the standard deviation of observed GDP values against their four year moving average, skyrocketed in the year 2011, with the start of the unrest in the region, as captured by the chart below. In fact, in 2011 and 2012 GDP volatility in Lebanon exceeded real GDP growth, hence reflecting a high level of economic instability in the country during the two-year period following the onset of the Arab Spring.

in %

Evolution of Lebanon's GDP Growth vs GDP Volatility

10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Volatility

GDP growth

Source: IMF, Credit Libanais Economic Research Unit

Nevertheless, when relying solely on the graphical illustrations above, it cannot be inferred that the drop in economic activity is attributable to the uprisings in Syria or to normal business cycle. In order to precisely quantify the consequences of the Arab Spring (principally the turmoil in Syria) on the Lebanese economy, we will strive in the following section to deduce the empirical relation between regional turmoil and Lebanon’s economic growth during the period following the Lebanese civil war (1992-2013).

B. THE EMPIRICAL MODEL 1. Methodology: In order to estimate the impact of the Arab Spring on Lebanon’s real GDP growth, we used the Vector Auto Regression Estimates (VAR) methodology, which allows us to find the equations explaining all endogenous variables as a function of their own lags and the lags of the other chosen endogenous variables. Accordingly, the equations of the VAR model are computed as follows:

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Where X and Y are the variables of the VAR model, and and represent the residuals. It is worth noting that, in order to avoid risks of fallacious regressions, residuals should be stationary. Furthermore, the lag structure of our VAR model was determined using both Schwarz information criterion (SC) and Akaike information criterion (AIC). After applying the optimal lag structure of our VAR model, we were able to write the related equations and estimate the correlation between the chosen variables. In each of the models described hereunder, we only included two variables, of which an endogenous variable being real GDP growth and a dummy variable used to capture alternatively the occurrence of an exogenous shock on Lebanon in the first model and the Arab Spring in the second model. 2. Variables: The two variables in our models are: • •

Lebanese Real GDP growth1. A dummy variable which represents: − Exogenous shocks in the first model, and takes the value 0 in periods of regional political stability and the value 1 during periods of occurrence of exogenous shocks. Accordingly, the variable takes the value 1 in each of 1996, 2000, 2005 (Assassination of then-Prime Minister Rafic Hariri), 2006 (Israeli Aggression on Lebanon), 2011 through 2013 (Arab Spring). − The turmoil from the Arab Spring which takes the value 1 during Arab Spring turmoil years (i.e. 2011 through 2013). 3. Regressions and results:

In the models discussed hereunder, real GDP growth is the dependent variable while exogenous shocks on the one hand, and Arab Spring, on the other, are alternatively taken as independent variables. We did not control for other independent variables that could affect economic growth, given that the purpose of this report is not to determine the factors fueling Lebanon’s economic growth but instead, to isolate the consequences of the Arab Spring on the Lebanese economy. Regressions were conducted using the previously mentioned Vector Auto Regression Estimates (VAR) methodology. Results confirm the negative consequences of exogenous shocks on Lebanon’s real GDP growth, as depicted in the equation below2: Model 1:

0.01

0.04

_

0.06

The coefficient -0.04 reflects the prevailing relationship between exogenous shocks and GDP growth. The exogenous shocks’ coefficient should be interpreted as follows: on average, local political turbulences cause real GDP growth to drop 4 percentage points per annum in Lebanon. Lebanon’s economic activity is, thus, highly dependent on local and regional political stability.

                                                             1

To avoid risks of fallacious regressions, we have performed a Dickey-Fuller unit root test on this variable to verify if it is covariance stationary. The variable turned out to be stationary. 2 Turmoil’s coefficient and the intercept are significant at the 5% level of significance (with their t-statistics standing at -3.32 and 6.63 respectively). On the other hand, the coefficient relative to GDP Growth (t-1) is not significant at the 5% level, but is maintained in the equation to avoid autocorrelation of the residuals. 

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As a result, and given that the Arab Spring is one form of the exogenous shocks discussed in the model above, we formulated a second regression in which we only factored in the impact of the Arab Spring. Hence, the dummy variable in the second model takes the value 1 in 2011, 2012 and 2013. The results of this regression equation reflect the direct relationship between the Arab Spring and Lebanon’s real GDP growth, as follows3: Model 2:

0.03

0.033

0.05

This equation confirms that the Arab Spring uprising, mainly in Syria, is hindering economic growth in Lebanon. The Arab Spring has caused Lebanon’s real GDP growth to shed 3.3 percentage points per annum since the year 2011.

The chart on the following page depicts the results of the stationary test on the residuals of the regression, which proved to be stationary the thing which validates the robustness of our regression model:

                                                             3

 Results reported are significant at the 10% level. The coefficient of GDP Growth (t-1) is not significant at the 10% level, but was kept in the equation to avoid autocorrelation of the residuals. 

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Null Hypothesis: RESID_VAR_ARABSPRING has a unit root Exogenous: None Lag Length: 0 (Fixed)

Augmented Dickey-Fuller test statistic Test critical values:

t-Statistic

Prob.*

-3.454357

0.0015

1% level

-2.679735

5% level

-1.958088

10% level

-1.607830

*MacKinnon (1996) one-sided p-values. Augmented Dickey-Fuller Test Equation Dependent Variable: D(RESID_VAR_ARABSPRING) Method: Least Squares Sample (adjusted): 1993 2013 Included observations: 21 after adjustments Variable

C oefficient

Std. Error

t-Statistic

Prob.

RESID_VAR_ARABSPRING(-1)

-0.741821

0.214749

-3.454357

0.0025

R-squared

0.373301

Mean dependent var

Adjusted R-squared

0.373301

S.D. dependent var

0.000896 0.037325

S.E. of regression

0.029548

Akaike info criterion

-4.159131

Sum squared resid

0.017462

Schwarz criterion

-4.109392

Log likelihood

44.67088

Hannan-Quinn criter.

-4.148336

Durbin-Watson stat

1.845840

So urce: Credit Libanais Eco no mic Research Unit

Given this statistically proven relationship between the Arab Spring and Lebanon’s real GDP growth, we can compute the cost of the Arab Spring in terms of the gap in real GDP for the years 2011, 2012 and 2013. According to our analysis, real GDP should have grown 3.3 percentage points faster during the last three years, namely 2011, 2012, and 2013, without the incidence of the Arab Spring. More specifically, Lebanon’s real GDP would have settled at LBP 44,869.75 billion ($29.76 billion) in 2011, LBP 47,023.50 billion ($31.19 billion) in 2012, and LBP 49,515.74 billion ($32.85 billion) in 2013 had the Arab Spring uprising never spilled over to Lebanon. The gap between our adjusted real GDP, which factors out the Arab Spring by adding the 3.3 percentage point correction, and the actually observed GDP is illustrated in the following chart: in LBP Billion

Output Gap Analysis for Lebanon

60,000.00 50,000.00 40,000.00 30,000.00 20,000.00

Observed Real GDP Real GDP Excluding Arab Spring

10,000.00 0.00 2000

2002

2004

2006

2008

2010

2012

2014

Source: IMF, Credit Libanais Economic Research Unit

Accordingly, we measured the cost of the Arab Spring for Lebanon by calculating the present value of the gap between our adjusted GDP and observed GDP, leading us to conclude that the cumulative economic cost of the Arab Spring over the 2010-2013 period is LBP 9,091.51 billion ($6.03 billion) in real terms, constituting 20.21% of year 2013 real GDP. This cost represents the direct economic repercussions of the Arab Spring on Lebanese economy. However, the risk of a further propagation of the regional turmoil to Lebanon could exacerbate the cost of the Arab Spring on the Lebanese economy

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IV.

POSSIBLE REMEDIES TO STIMULATE ECONOMIC GROWTH

A. MEASURES ENACTED BY THE AUTHORITIES As the ramifications of the Arab Spring started adding pressure on the Lebanese economy, the Lebanese government, and in cooperation with the private sector, the Association of Banks in Lebanon, and the Lebanese Central Bank, undertook a series of initiatives in order to offset, to a certain extent, said repercussions. More particularly, and at the onset of the year 2013, the Minister of Tourism Mr. Fadi Abboud launched a 50-day discount campaign, called “SmiLebanon”, in an endeavor to attract tourists, spur spending and revitalize growth. The campaign, and which lasted between January 8 and February 28, 2013, included 50% discounts on airfares (via the national airliner Middle East Airlines), hotel room rates, and car rental services, in addition to special discounts made by restaurants and shopping venues. As a result, prices including airplane tickets, hotels and airport transfers were as low as $350 for some GCC states, $650 for Europe and $2,100 for some American countries [27]. Said plan helped somewhat in boosting economic activity at shopping venues, yet the demand stemmed mainly from local residents as tourism was hampered by the ongoing political squabbling and instability originating mainly from the Syrian crisis. On its part, the Lebanese Central Bank issued on January 14, 2013 intermediate circular number 313, aiming at encouraging lending activity and ultimately accelerating the pace of economic activity. Accordingly, Lebanese banks were allowed to benefit from an LBP 2,200 billion ($ 1.46 billion) facility, on a first come first serve basis, at a very low interest rate of 1%. Banks would then exploit these lines of credit by extending loans to certain productive sectors as well as housing loans at subsidized interest rates in accordance with the terms and conditions stipulated in the table below: Loan Type

Interest Rate

Loan Period (in Years)

Grace Period

Ceiling

LBP Subsidized loan to productive sectors not 2 Year Treasury Bill Rate + benefiting from Kafalat facilites 1.075%

7

Up to 2 Years

No C eiling

USD Subsidized loan to productive sectors not benefiting from Kafalat facilites

Three-Month Libor + 7.075%

7

Up to 2 Years

No C eiling

LBP denominated commercial loans

40% of 1-Year Treasury Bill rate +3.3%

7

4 Years excluding loan period

LBP 22.5 Billion

LBP denominated BDL housing loans

40% of 1-Year Treasury Bill rate +3.3% 40% of 1-Year Treasury Bill rate +3.3%

30

Up to 1 year

LBP 800 Million

7

Up to 1 year

LBP 22.5 Million

University loans

3.50%

10

1 Year after graduation

No C eiling

Housing loans to judges

2.13%

25

No grace period

No C eiling

Housing loans to the dislpaced

2.13%

25

No grace period

LBP 100 Million

Public C orporation for Housing Loans

20% of 2-Year Treasury Bill Rate + 3.9%

30

No grace period

LBP 270 Million

Housing Loans to the Military

Office loans

2.13%

25

No grace period

LBP 525 Million

Housing Loans to the Internal Security Forces 2.13%

25

No grace period

LBP 600 Million

Loans for productive innovation

0.75%

10

4 Years excluding loan period

No C eiling

Non-subsidized environmental loans

3.75% less 50% of 1-Year Treasury Bill rate

10

4 Years excluding loan period

LBP 30 Billion

Subsidized environmental loans

2-Year Treasury Bill rate +0.15%

10

4 Years excluding loan period

No C eiling

Environmental loan (Solar Energy)

0.75%

3

No grace period

LBP 30 Million

So urce: Lebanese Central B ank, Credit Libanais Eco no mic Research Unit

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[27] Daily Star

42

B. ALTERNATIVE MEASURES Apart from the aforementioned efforts, the following section lists some of the measures that could be enforced in an endeavor to alleviate, to a certain extent, the repercussions of the socalled Arab Spring on the Lebanese economy: -

Reactivating the tax exemption on interest income from deposit accounts for non-residents as per the Free Banking Zone law issued by the ABL and implemented by circulars 9976/1995 and 29/1977, and which was later abolished by article 51 of year 2003 budget law;

-

Structuring funds geared towards providing micro-credit loans in order to encourage productive innovation;

-

Accelerating the reform measures at the Beirut Stock Exchange, especially after the establishment of the Lebanese Capital Markets Committee, with the aim of enhancing transparency, increasing liquidity and share marketability, thus encouraging more local and foreign companies to float their shares and go public;

-

Improving the business environment and reducing barriers to investments by facilitating the procedures to start-up a business, enhancing investor protection, ensuring prompt enforcement of contracts, encouraging cross-border trading and rapid resolving of insolvency and bankruptcy;

-

Accelerating the procedures aimed at enforcing the e-government project in an endeavor to eliminate bureaucracy and corruption on the one hand and enhance transparency on the other;

-

Wider implementation of the Public Private Partnership (PPP) concept which was recently applied with the Service Providers program in the electricity;

-

Avoiding the introduction of new tax measures, particularly that associated with raising the tax on interest from 5% to 7% due to its detrimental impact on banks’ deposit base and outflow of capital;

-

Proceeding with the progress made on the oil and gas sector front and the electricity sector reform plan, given their sizeable perceived impact on public finances, debt stock, and economic growth;

-

Weaving new bilateral trade agreements with several Arab states and subsidizing exporters’ incremental costs associated with maritime transport;

-

Reducing the reliance on the tertiary sector by increasing the contribution of the primary and secondary sectors to GDP via investment and tax-related incentives; and

-

Encouraging hiring via providing incentives for corporations in the form of exemptions from NSSF contributions for new employees.

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APPENDIX 1 ECONOMIC IMPACT OF ARAB SPRING ACROSS COUNTRIES IN THE REGION

Chart 1: Total GDP losses stemming from Arab Spring*

*Discounted Output Gap (difference between observed GDP and 2000-2010 trend) Source: Credit Libanais Economic Research Unit

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Chart 2: Losses in GDP growth rate stemming from Arab Spring*

*Difference between average 2011-2013 and 2008-2010 in real GDP growth rate Source: IMF, Credit Libanais Economic Research Unit

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Chart 3: Losses in Net FDI Inflows stemming from Arab Spring*

*Difference (percentage change) between the average 2009 & 2010 and 2011 & 2012 in Net FDI Inflows. As for Libya and Syria, and due to the lack of available data, the figures reflect the difference (percentage change) between 2010 and 2011 Net FDI Inflows. Source: Index Mundi, Unctad, Credit Libanais Economic Research Unit

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Chart 4: Losses in Tourism Activity stemming from Arab Spring*

*Difference (percentage change) between 2010 and 2011 in the number of tourists Source: Index Mundi, National Estimates, Credit Libanais Economic Research Unit

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CONTACTS

Credit Libanais SAL Economic Research Unit Tel: +961-1-326 786 Fax: +961-1-326 786 [email protected]

For Your Queries: Fadlo I. Choueiri, CFA [email protected] Tel: +961-1-200 028 EXT: 235

Jad Abi Haidar

[email protected] Tel: +961-1-200 028 EXT. 251

Joelle Samaha

[email protected] Tel: +961-1-200 028 EXT. 232

Patrick Karawani

[email protected] Tel: +961-1-200 028 EXT. 275

Christelle Mouawad [email protected] Tel: +961-1-200 028 EXT. 230

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