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Lebanon's GDP rises 4 percent despite fears on political and economic future

Banque Audi report urges politicians not to send wrong signals to market

As the rift among Lebanese politicians widens following the assassination of former Prime Minister Rafik Hariri, bankers and businessmen are assessing the possible negative impact of this showdown on the economy. But despite the deep concern about the political and economic future, Banque Audi said that Lebanon's Gross Domestic Product rose by nearly 4 percent in 2004 due to the rise in the number of tourists and capital inflow into the country.

The bank noted real growth in the agriculture, industry, tourism, construction and banking sectors last year.

Yet Banque Audi, one of the leading banks in the country in terms of assets and profits, has been closely monitoring developments in Lebanon with some concern.

The bank, which released its fourth-quarter report on Lebanon for 2004, said Hariri's assassination has stunned the Lebanese financial market, just as the rest of the country.

The bank urged politicians not to send the wrong signals to the market.

"So far, the markets warded off ensuing pressure. From now on, political leaders have to send the right signals and adopt all decisions and solutions to reinforce the confidence climate," Banque Audi said in its report.

It added that such initiatives would enhance economic and financial stability in the short term and allow the country to secure a long-awaited sustainable growth trend.

In its concluding remarks, Banque Audi noticed that despite the improvement in the economic performance last year, Lebanon is considered by international investment community as the country of investment paradox given the perplexity of its political and economic conditions.

"In the eyes of many, the country is operating at below the growth required for a soft-landing scenario in its persisting imbalances," the bank said.

It added that such a growth is dampened by the turbulent political conditions, amplified most recently be the assassination of Hariri, in addition to the lack of strong adjustment reforms.

Lebanon was heavily criticized by many Western countries and international fund organizations for failing to implement any of the reforms that were promised at Paris II conference in November 2002.

The sharp dispute between President Emile Lahoud Hariri was one of the main reasons for this failure, according to analysts.

They added that Lebanon had many chances in 2002 and 2003 to reduce the public debt and stimulate the economy through a privatization program and administrative reforms, none of which saw the light of day.

But Banque Audi stressed that despite the failure to implement reforms, the performance of the Lebanese economy in general in 2004 was positive.

"Nobody can deny what has been accomplished in Lebanon over the past decade or so, with the significant and rapid reconstruction pace and the strong will of the Lebanese for survival and recovery," Banque Audi said.

It added that the public sector continues to suffer from very high debt and deficit ratios when compared to regional and emerging market peers.

"The private sector, on the other hand, enjoys a strong financial standing with important growth reserves, as it is operating at less than 60 percent of full employment and potential output," the Banque Audi report said.

It also said that the assassination of Hariri has obviously raised concerns across the country's economic and business sectors because of the significant role that he played in the reconstruction of the country over the past decade.

"While the tragic event cannot but leave its imprints on the economy, at least in the medium term, it is early to point toward a specific trend on the possible economic, financial and monetary repercussions," Banque Audi said.

AGRICULTURE AND INDUSTRY

Agricultural exports reached $107 million in 2004, constituting an increase of 24 percent from $86 million in 2003. The substantial rise in agricultural exports is due in part to the Export Plus program that was launched in 2001 by the Investment Development Authority of Lebanon to boost the agricultural sector. The improvement in exports is also due to the re-opening of the Iraqi market and the favorable weather conditions that resulted in a better harvest and improved quality of products during the year. Industrial exports totaled $1.64 billion 2004, up 14 percent from $1.44 billion in the previous year. Industrial exports continue to constitute the bulk of Lebanese exports, as they accounted for 94 percent of total exports in 2004. The improvement in industrial activity was reflected in the rise in related investments as shown by the increase in the import of industrial machinery. Figures issued by the Industry Ministry indicate that industrial-machinery imports totaled $142 million in 2004, up 29.5 percent from last year. The relative improvement in industrial investments has significantly contributed to value-added creation over the year, within the context of significant needs for enhancing the productive secondary sector of the economy.

CONSTRUCTION

The construction and property sectors, two important growth catalysts of the economy, performed favorably in 2004. However, the upward trend in construction activity during the first nine months of 2004 slowed down in the fourth quarter of the year. Figures released by the Order of Engineers show that construction permits, a leading indicator of construction activity, totaled 2.42 million square meters in the fourth quarter of 2004, constituting a decline of 1.5 percent from the previous quarter but posting an 8.1 percent growth from the same quarter of the previous year. Further, cement deliveries totaled 696,764 tons in the fourth quarter, regressing by 18.8 percent from 858,485 tons in the third quarter and decreasing by 1.3 percent from the same quarter of 2003. But construction activity depicted an overall rising trend on an annual basis, albeit at a slower rate than in the preceding two years. The data from the Order of Engineers indicates that construction permits grew from 8.78 million square meters in 2003 to 9.16 million square meters in 2004, registering a growth of 4.3 percent year-on-year. This constitutes the first single-digit growth in three years, as permits rose by 13.4 percent in 2002 and by 15.8 percent in 2003.

AIRPORT AND TOURISM ACTIVITY

According to statistics by the Directorate of Civil Aviation, the average growth of planes and passengers stood at 15.5 percent in 2004 relative to the previous year. The number of landing and departing aircraft at the Beirut airport reached 39,023 planes in 2004, a rise of 13.2 percent relative to the previous year. The number of passengers, a complimentary statistic of airport activity, revealed an increasing trend, progressing by 17.7 percent from its corresponding level in 2003. The rising airport activity largely reflects the flourishing tourist sector, which has shown a strong upward trend throughout the year 2004 The number of incoming tourists to Lebanon totaled 1,278,469 in 2004, constituting an increase of 25.9 percent from the previous year. The rise in tourism activity year-on-year in 2004 is partly due to the dampening effect experienced last year by the tourism sector due to regional uncertainty prior to the war in Iraq. Yet, the important growth driver remains the widening interest of Arab tourists in Lebanon. The distribution of tourists by country of origin in 2004 shows that Arab countries accounted for 42.6 percent of aggregate visitors, followed by Europe with 26.5 percent, Asia with 13.6 percent, the Americas with 11.9 percent, Oceania with 3.7 percent and Africa with 1.6 percent.

BANKING SECTOR

The banking sector performed fairly well in 2004. Measured by total assets, banking activity grew by 12.8 percent in 2004, slightly exceeding the nominal growth of the economy and scantly above the average banking-activity growth rate for the last five years (10.5 percent). Customer deposits continued to be the major drive behind the growth in 2004, growing by LL9,236 billion, i.e. by 12.6 percent on an annual basis, exceeding the average growth of 9.8 percent in the past five years. The banking system has witnessed its best growth ever over the past couple of years, adding a total of $12.1 billion to its deposit base. Even during the months of acute market pressures (i.e October and November 2004), banks deposits recorded a net positive growth, suggesting that incoming deposits were still outpacing outgoing deposits. The real improvement in domestic economic activity contributed to the surge in customer deposits. Add to this the nonrenewal of a large share of treasury bills held by the public, whose portfolio dropped by LL2,103 billion, and which proceeds have been mostly deposited at Lebanese banks. Notwithstanding the constant nonresident interest in the Lebanese banking sector, with nonresident deposits accounting for a 30 percent share in total deposit growth in 2004.

Beirut,03 21 2005
Redaction
The Daily Star
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