Lessons from the EU crisis for the Lebanese Economy

Lessons from the Eurozone Crisis
for the Lebanese Economy
June 11, 2014
Nassib Ghobril
Chief Economist
Head of Economic Research & Analysis Department

-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
3
Evolution of economic activity in Eurozone
Source: International Monetary Fund, Byblos Research
Real GDP Growth in Eurozone (% of GDP)

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
4
Public debt level on upward trend in Eurozone
Public Debt Level in in Eurozone (% of GDP)

-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
2006 2007 2008 2009 2010 2011 2012 2013
Greece Portugal Spain
5
Deteriorating public finances
Fiscal Balance (% of GDP)

0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
2006 2007 2008 2009 2010 2011 2012 2013
Greece Portugal Spain 6
Rising public debt level
Public Debt Level (% of GDP)

0%
2%
4%
6%
8%
10%
12%
14%
16%
Italy France Greece Spain
7
Heavy public pension burden
Source: OECD, Byblos Research
Public Pension Spending (% of GDP)

50
55
60
65
70
75
80
85
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Greece Ireland Portugal Spain 8
Deteriorating economic freedom
Source: Heritage Foundation, Byblos Research
Index of Economic Freedom

3.8
4
4.2
4.4
4.6
4.8
5
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Deteriorating competitiveness
Source: World Economic Forum, Byblos Research
Global Competitiveness Index (score)

20
30
40
50
60
70
80
90
100
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Greece Ireland Portugal Spain
10
… and relative to other countries
Global Competitiveness Index (rank)

0%
5%
10%
15%
20%
25%
30%
2006 2007 2008 2009 2010 2011 2012 2013
Rising unemployment
Unemployment Level (% of total labor force)

12
The ECB’s response to the global financial crisis

-2
-1
0
1
2
3
4
5
6
7
8
2008 2009 2010 2011 2012 2013
14
Balance of payments in deficit since 2011
US$bn
Source: Central Bank of Lebanon

0
2,000
4,000
6,000
8,000
10,000
12,000
2009 2010 2011 2012 2013
15
Net private capital inflows down 30% to $4.9bn in 2013
Source: Institute of International Finance, Byblos Research
Net Private Capital Inflows to Lebanon (US$m)

0
10
20
30
40
50
60
70
80
90
100
Q1-
2010
Q2-
2010
Q3-
2010
Q4-
2010
Q1-
2011
Q2-
2011
Q3-
2011
Q4-
2011
Q1-
2012
Q2-
2012
Q3-
2012
Q4-
2012
Q1-
2013
Q2-
2013
Q3-
2013
Q4-
2013 16
Consumer confidence on a downward trend since end-2010
Byblos Bank/AUB Consumer Confidence Index
Source: Byblos Research

Consumer confidence significantly affected by political events
Byblos Bank/AUB Consumer Confidence Index
MP Ghanem
assassination
Gen.Hajj
assassination
Lt. Eid
assassination
Doha
Agreement
Cabinet
formation
Parliamentary
elections
Municipal
elections
Najib Mikati
designated as PM
0
20
40
60
80
100
120
140
160
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
STL issues
four arrest
warrants
Bourj Abi
Haidar clashes
Cabinet
formation
Start of
presidential
vacuum
Beginingof
dispute over
Increase in
minimumwage
Border clashes with
Israeli soldiers
Start of Syrian
crisis
Cabinet
formation
Deteriorationof
security
conditions in the
North and Beirut
Deal on raising
salaries &
minimumwage
Cost of living
adjustment for
public sector
employees
Major Gen.
al-Hassan
assassination
National
Dialogue
sessions
Tammam Salam
designated as
PM
Kidnappin
gwave
Cabinet
resignation
Attacks on
Lebanese
Army
Arrest of ex-
minister Samahaon
terrorismcharges
Saida
Clashes
Car
bombings
in Beirut
and
Tripoli
Minister
Chatah
assassinati
on
Suicide
Attacks on
Lebanese
Army
Threats of U.S.
military strikes on
Syrian targets

9.1%
10.3%
8%
2%
1.2%
0.9%
1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
2008 2009 2010 2011 2012e 2013e 2014f 18
Economy stagnating since 2011
Source: Institute of International Finance
Real GDP Growth (%)

0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f
19
Political shocks resulted in economic opportunity costs
Source: Institute of International Finance, Byblos Research
Real GDP Growth (%)
Government Collapse
Output loss at ~$9.7bn

40
45
50
55
May-
2013
Jun-
2013
Jul-
2013
Aug-
2013
Sep-
2013
Oct-
2013
Nov-
2013
Dec-
2013
Jan-
2014
Feb-
2014
Mar-
2014
Apr-
2014
May-
2014
20
PMI reflecting ongoing stagnation
Source: Markit
Purchasing Managers’ Index
Increasing rate of growth
Increasing rate of contraction
50= no change
from previous
month

21
Inflation rate in line with economic activity
Source: International Monetary Fund Byblos Research
Average Inflation Rate (%)
0.6%
4.1%
10.8%
1.2%
5.1%
7.2%
5.9%
3.2%
2%
0%
2%
4%
6%
8%
10%
2006 2007 2008 2009 2010 2011 2012 2013 2014f

22
Lebanon is 11th most competitive Arab economy
Global Rank
13
19
20
33
36
43
68
77
83
100
103
108
118
141
0 1 2 3 4 5 6
Yemen
Mauritania
Egypt
Libya
Lebanon
Algeria
Tunisia
Morocco
Jordan
Bahrain
Kuwait
Oman
Saudi Arabia
UAE
Qatar
145

23
Deterioration in Lebanon's global competitiveness
103
91
89
92
80 85 90 95 100 105
2013-14
2012-13
2011-12
2010-11

24
Global Competitiveness Index in detail 2013-14
Indicator
Global
Rank
Intellectual property protection 136
Public trust in politicians 148
Irregular payments and bribes 138
Judicial independence 135
Favoritism in decisions of officials 147
Wastefulness of government spending 144
Transparency of government policymaking 139
Quality of overall infrastructure 142
Quality of electricity supply 148

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Restrictive labor
regulations
Inflation
Poor work ethic in national
labor force
Inadequately educated
workforce
Access to financing
Policy instability
Government
instability/coups
Corruption
Inefficient government
bureaucracy
Inadequate supply
of infrastructure
Most problematic factors for doing business in Lebanon
25

Lebanon has least competitive cellular market…
26
Source: Arab Advisors Group, Byblos Research
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Lebanon
Syria
Libya
Qatar
UAE
Kuwait
Yemen
Algeria
Mauritania
Sudan
Tunisia
Bahrain
Morocco
Oman
Iraq
Egypt
Palestine
Jordan
Saudi Arabia

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%
Morocco
Lebanon
Egypt
Jordan
Tunisia
Saudi Arabia
UAE
Bahrain
Qatar
… and the second highest cost of mobile broadband services
27
Source: International Telecommunication Union, Byblos Research
(Cost as % of GNI per Capita)

Indicator Arab
Rank
Global
Rank
Change in
Global Rank
Starting a business 11 120 -4
Dealing with construction permits 18 179 -3
Getting Electricity 6 51 -3
Registering property 15 112 4
Getting credit 5 109 -4
Protecting investors 5 98 -3
Paying taxes 8 39 -3
Trading across borders 11 97 +1
Enforcing contracts 11 126 -1
Resolving insolvency 8 93 -5
Indicator Arab Rank Global Rank
UAE 1 23
Saudi Arabia 2 26
Bahrain 3 46
Oman 4 47
Qatar 5 48
Tunisia 6 51
Morocco 7 87
Kuwait 8 104
Lebanon 9 111
Jordan 10 119
Egypt 11 128
Yemen 12 133
West Bank & Gaza 13 138
Sudan 14 149
Iraq 15 151
Algeria 16 153
Comoro Islands 17 158
Djibouti 18 160
Syria 19 165
Mauritania 20 173
Libya 21 187 28
Ease of Doing Business Index in detail 2014
Source: World Bank, Byblos Research

29
Lebanon’s Governance Indicators
Indicator Global Rank Arab Rank Change in Rank
Voice & Accountability 139 2 +2
Political Stability 199 15 +2
Government Effectiveness 120 10 -5
Regulatory Quality 111 10 -9
Rule of Law 154 12 -5
Control of Corruption 165 15 +6
Source: World Bank Governance Indicators 2012

-12%
-10%
-8%
-6%
-4%
-2%
0%
2009 2010 2011 2012 2013 2014
31
Wide budget deficit is factor for large debt market
Source: International Monetary Fund, Ministry of Finance

0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 32
Ongoing increase in public debt stock
Source: Ministry of Finance, Byblos Research
Public Debt (US$bn)
$2.5bn
$10bn

130%
140%
150%
160%
170%
180%
2006 2007 2008 2009 2010 2011 2012 2013 2014 33
Public debt dynamics have reversed
Public Debt-to-GDP Ratio (%)

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Debt in FC Debt in LBP 34
Public debt stock increasingly in Lebanese pounds
Source: Central Bank, Byblos Research
Breakdown of the Public Debt Stock

-16%
-15%
-14%
-13%
-12%
-11%
-10%
2009 2010 2011 2012 2013 2014
35
Sustained widening of the current account deficit in past years
Current Account Balance (% of GDP)

Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Ratings placed
on CreditWatch with
negative implications
36
Lebanon: S&P Ratings Trend line
Source: Standard & Poor's, Byblos Research
BBB-
BBB
BB+
BB-
BB
B+
B
CCC+
CCC-
CCC
CC
B-
C
SD
CreditWatch/Outlook Action
Downgrade
on public debt
concerns
Downgrade
on insufficient
measures to reduce
fiscal deficit
Downgrade
due to increasing
fiscal challenges
Outlook revised
to ‘negative’
Downgrade
on political impasse
Outlook ‘stable’
Outlook revised
to ‘stable’ on
political uncertainties
Outlook raised
to ‘positive’ on
banking sector resilience
and political stability
Rating upgraded on
ease of political tensions
Outlook kept at ‘stable’
Outlook revised
to ‘negative’ on
increased geopolitical risks
Rating downgraded on
Deteriorating economic
fundamentals and
worsening public finances

1,400
1,500
1,600
1,700
1,800
1,900
1992 1995 1998 2001 2004 2007 2010 2013
Exchange rate stability is cornerstone of confidence and financial stability
37
US$/LBP

0%
1%
2%
3%
4%
5%
6%
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13
USD LBP
Stable deposit rates
38
Average Monthly Deposit Rates
Source: Association of Banks in Lebanon, Byblos Research

0%
1%
1%
2%
2%
3%
3%
4%
Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
Average deposit rate in US dollar US Federal Funds Rate
Average deposit rates in US dollar VS US Federal Funds Rate
39
Average Monthly Deposit Rates

10.6
10.8
10.3
10.8
11.1
11.4
11.6
11.5
9.5
10
10.5
11
11.5
12
2009 2010 2011 2012 2013f 2014f 2015f 2016f
High level of foreign currency reserves
40
BDL Reserves Gross Reserves (in months of next year imports)
Source: International Monetary Fund
10.2 9.8
17.1
25.7
28.6
30.8 30.0 31.7
5.8 7.6
8.0
10.1
13.0
14.4 15.3 11.1
0
5
10
15
20
25
30
35
40
45
50
2006 2007 2008 2009 2010 2011 2012 2013

4.5
5.0
5.5
6.0
6.5
7.0
7.5
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Remittances are a major source of capital inflows to Lebanon
41
Remittance Inflows (US$bn)

0 10 20 30 40 50 60 70
Thailand
Morocco
SriLanka
Lebanon
Indonesia
Ukraine
Vietnam
Bangladesh
Pakistan
Egypt
Nigeria
Mexico
Philippines
China
India
Lebanon is 12th largest recipient among developing countries
42
Remittance Inflows (US$bn)

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Lebanon
Kosovo
Guyana
Honduras
ElSalvador
Liberia
Haiti
TheGambia
Samoa
Lesotho
Armenia
Moldova
Nepal
Kyrgyz Rep.
Tajikistan
Lebanon is 15th largest recipient as % of GDP
43
Remittance Inflows (% of GDP)
Source: World Bank, International Monetary Fund, Byblos Research

0 500 1,000 1,500 2,000 2,500 3,000
Bosnia & Herz.
Moldova
Jordan
Montenegro
Tonga
Guyana
Lithuania
ElSalvador
Armenia
St. Kitts & Nevis
Jamaica
Samoa
Belgium
Lebanon
Luxembourg
Lebanon is second largest recipient on per capita basis
44
Remittance Inflows (US$ per capita)
Source: World Bank, International Monetary Fund, Byblos Research

-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
…but inflows have stagnated in past three years
45
Change in Remittance Inflows (%)

0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014*
46
Deposit growth is key indicator for market stability
Private Sector Deposit Growth (% Change)
*First four months of 2014

0
300
600
900
1,200
1,500
2008 2009 2010 2011 2012 2013 2014*
47
Deposit growth is key indicator for market stability
Average monthly nominal growth of Deposits at Banks in Lebanon (US$ million)

48
Lebanon: deposits are main funding source
82.2%
Low Leverage (end-April 2014)
1.8% 3.2%
Total Deposits = 87.2% of Liabilities of the
Banking Sector
Private Sector
Deposits
Public Sector
Deposits
Non-Resident
Bank
Deposits
8.8%
Capital
Base
Bonds
0.2%
Unclassified
Liabilities
3.8%

48
50
52
54
56
58
60
62
50
55
60
65
70
75
80
85
90
95
100
105
110
115
120
125
130
135
2005 2006 2007 2008 2009 2010 2011 2012 2013
US$bn
Private Sector Deposits PRS
Chronic instability did not reverse deposit growth
49
Political Risk Index
Bank deposits
Source: Association of Banks in Lebanon, PRS Group, Byblos Research

0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014*
50
Slowdown in lending growth but still acceptable
Private Sector Lending Growth (% Change)

Number of ministers in EU Cabinets if Lebanon ratio is applied
51
32
32
50
63
66
67
99
272
360
376
483
0 50 100 150 200 250 300 350 400 450 500
Slovak Republic
Finland
Austria
Portugal
Belgium
Greece
Netherlands
Spain
Italy
France
Germany
Current Government

Lessons from the EU crisis for the Lebanese Economy

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