The scars of civil war still run deep in Lebanon after prolonged battles from 1975 to 1990.
Beirut become synonymous with carnage and street fighting ruined large parts of the city.
Since then, huge reconstruction programmes have brought the country back to life and Lebanon has enjoyed periods of economic prosperity as a trading, financial and tourist hub.
But that is all threatened once again with recent events.
The recent kidnappings in the northern city of Tripoli were an example of potential spillovers from Syria, but the killing of the top security chief on October 19 could have more lasting effects on the country’s outlook.
The economy shrank by 0.3% in the second quarter of 2012, according to the Washington-based Institute of International Finance, which expects the economy to contract another 0.5% in the third quarter when Lebanon would officially enter a state of recession, defined as two consecutive quarterly contractions in real GDP.
Brahim Razgallah, a JP Morgan analyst, explains Lebanon’s economic outlook considering the events of the last few weeks.
The outlook in his report titled “Embracing New Uncertainties” is bleak:
The tourism sector will continue to suffer further as the impact of the kidnapping crisis in August [takes a toll] on total arrivals through Beirut airport.
Ultimately, the killing of the security chief has not only affected the political outlook but also economic prospects, with domestic confidence
being hard hit.
In the meanwhile, Prime Minister Mikati is set to face an increasingly challenging backdrop as supporters of the March 14 coalition maintain the pressure against the government. With the increasing likelihood of negative real growth in 4Q12, full-year real GDP growth could remain flat, in our view.
Deposit growth has also slowed to its lowest level in five years, the report says.
In the past, total deposit growth declined sharply following the assassination of Hariri in February 2005 and the war against Israel in summer 2006.
Renewed uncertainties are likely to push deposit growth below the needed 5-6% level to finance both the private and the public sector this year, Mr Razgallah notes.[caption id="attachment_884" align="aligncenter" width="580"] Deposit growth in Lebanon[/caption]
Generally spillover from the Syrian uprising has impacted Lebanon’s equity market too, as Bank Audi points it in this wide-ranging report on the Lebanese economy.
Here’s the killer line on equity prices and bond spreads:
Lingering concerns about the spillover effects of the Syrian unrest weighed on Lebanese capital markets during the first half of 2012, as reflected by a drop in equity prices, the expansion in bond spreads and the rise in the cost of insuring debt. The stock market index reported a drop of 3.3% in the first half of 2012, a net contraction for the third consecutive year. The average bond spread rose – in parallel – from 321 basis points in December to 363 basis points in June 2012.
In short, Lebanon is creeping back to square one where risk outweighs the return.