The continuing turmoil in Syria has had a limited but significant effect on Lebanon, Fitch Ratings said. The potential for further disruption is high.
The two countries’ economies are closely intertwined, and the impact of the Syrian unrest, marked by an increase in violence and international condemnation of the regime of President Bashar al-Assad, has already been felt in Lebanon. For example, tourist arrivals fell 24% in 2011 from a record high of 2.2 million in 2010, partly because of a fall in visitors from the Arab world, some of whom would travel through Syria to Lebanon. Tourism is Lebanon’s largest foreign exchange earner.
Similarly, although its direct trading exposure to Syria is limited (6%), about 18% of Lebanon’s total trade transits overland through Syria, to Middle Eastern markets which absorb around 45% of Lebanese exports. Higher insurance costs are likely to make Lebanese exports more expensive. Customs receipts were flat last year but this also reflects slower import growth.
However, we have yet to see deposit outflows as a result of events in Syria. In fact non resident deposits continue to rise but at a slower pace: deposits grew at an average rate of 16% y-o-y as against an average of 24% y-o-y during 2008-2010. With dollarisation levels holding steady after an increase in H111, this suggests confidence in the Lebanese banking sector.
Instability in Syria also remains the main threat to political stability in Lebanon. A collapse of the Assad regime could weaken the position of Hezbollah, which has received Syrian backing, with implications for the country’s fragile coalition government. Or Syria may choose to divert attention from its own domestic problems by provoking civil unrest in Lebanon, or conflict with Israel.
Should events in Syria lead to increased sectarian strife or a collapse in government, the resulting uncertainty would be another negative for the business environment. The high level of political instability, both domestic and in its larger neighbour is a major constraint on Lebanon’s rating. Recurrent strife has created an uncertain chronic infrastructure deficiencies, and political conflict and manoeuvring has inhibited investment.
On 5 July last year we affirmed Lebanon’s ‘B’ rating with a Stable Outlook. Were heightened geopolitical tensions to continue these could lead to prolonged declines in non-resident deposits, which would negatively affect the sovereign’s funding profile, and therefore the rating. However, Lebanon has not witnessed any such prolonged declines in deposit inflows since 2006.