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Lebanon and Syria Country Risk Report 2016

Lebanon and Syria Country Risk Report 2016

Core Views The ongoing civil war in Syria is having severe repercussions on the Lebanese economy. Lebanon's medium-term growth trajectory will settle well below pre-crisis levels due to a lack of investment in transportation and energy infrastructure. Despite fears over the economy's gaping external asymmetries, a loyal depositor base in the domestic banking sector, combined with a massive arsenal of foreign exchange reserves, should help bolster underlying stability through what will turn out as a prolonged period of political volatility. This will minimise the potential for an unexpected devaluation of the pound in 2016. A protracted leadership vacuum, elevated sectarian tensions fuelled by entanglement in the Syrian civil war, and the risk of conflict with Israel will all continue to present challenges to Lebanon's stability. The sanctions imposed by the Gulf states on Lebanon since February 2016 will add to the woes confronting the country's tourism sector and wider economy. Barring a rapid resolution to the diplomatic crisis, we cannot rule out the imposition of further retaliatory measures by the Gulf – putting pressure on investment flows into Lebanon, project financing, and remittances. The Lebanese economy will remain in the doldrums throughout 2016, as protracted regional instability and political paralysis at home continue to erode the country's competitiveness. While we forecast growth to inch up to 2.0% in real terms in 2016, from our estimate of 1.6% for 2015, this rate will remain too weak to make a tangible difference to Lebanese living standards. The gradual normalisation of US monetary policy from the end of 2015 onward will lead to a sustained rise in Lebanon's debt -servicing costs. While the Lebanese government is some way off from a refinancing crisis, public investment will be squeezed even further and the country's fiscal outlook remains bleak. Core Views Syrian President Bashar al-Assad is unlikely to regain full control of the country, but has consolidated his control across a belt of territory stretching from the port cities of Tartous and Latakia in north-western Syria, through Homs in the centre of the country to the capital Damascus in the south west. Jihadist group Islamic State (IS) has gained significant ground since 2014, and currently holds approximately a third of the country's territory. Our core scenario sees the civil war continuing for many years, ending in a partition of Syria along sectarian lines – either as the outcome of a negotiated settlement between the warring parties, or through an extended stalemate and de facto break-up of the country. An outright victory by either the Assad regime (actively backed by Iran, Russia and Lebanese Shi'a militant group Hizbullah), or the disparate coalition of rebels aligned against it, appears less probable at this stage. By the end of 2016, we expect the Syrian economy to shrink to the size it was in the early 1990s. While regions held by the regime of Syrian President Bashar al-Assad will remain better off than those occupied by the rebels, business activity and state investment will stay stagnant, and living standards will continue to decline as the Syrian pound loses value. IS will remain resilient for at least the next one to two years, with the defeat of the group requiring both sufficient military force on the ground and a political solution which would satisfy Sunni grievances – both of which are even harder to contemplate in Syria than in Iraq, IS' other bastion. We expect the push for Kurdish autonomy in north-eastern Syria to continue over the coming years, helped by the fragmentation of the country and the allure of the Kurdish People's Defence Unit (YPG) – a capable and largely secular force – to Western policymakers. Yet the Kurds' ability to form a sustainable autonomous state along the Syrian-Turkish border will face significant challenges.


BMI Index
BMI Risk Index – Lebanon
BMI Risk Index – Syria
Executive Summary – Lebanon
Core Views
Key Risks
Chapter 1.1: Economic Outlook – Lebanon
SWOT Analysis
Economic Growth Outlook
Gulf Sanctions Will Intensify Economic Slump
The sanctions imposed by the Gulf states on Lebanon will add to the woes confronting the country's tourism sector and wider
economy.
GDP By Expenditure Outlook
TABLE: COMPONENTS OF GDP BY SHARE
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: GDP GROWTH FORECASTS
External Trade And Investment
Lebanese Exporters: Still In A Slump
Outlook On External Position
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS IMPORTS (2014)
TABLE: TOP 5 GOODS EXPORTS (2014)
Monetary Policy Framework
Chapter 1.2: 10-Year Forecast – Lebanon
The Lebanese Economy To 2025
Slow Growth As Willingness For Reform Lags
Lebanon's economy will expand slowly over the coming decade – a result of high security risks – slowing demographic growth and the
lack of political willingness to undertake structural economic reform.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 1.3: Political Outlook – Lebanon
SWOT Analysis
Foreign Policy
Riyadh's Aid Suspension To Deepen Political Impasse
Saudi Arabia's decision to withdraw a USD3bn military aid package to the Lebanese army will further deepen Lebanon's political
impasse.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Muddling Through A Plethora Of Challenges
Lebanon will not return to civil war over the coming decade, but the country will be politically unstable amidst a plethora of
challenges.
Chapter 1.4: Operational Risk – Lebanon
SWOT Analysis
Executive Summary – Syria
Core Views
Key Risks
Chapter 2.1: Economic Outlook – Syria
SWOT Analysis
Economic Growth Outlook
No Solace For The Syrian Economy
We forecast the Syrian economy to shrink by a further 5.9% in 2016, amounting to a 45% contraction in economic output since 2010.
The economy's productive capacity will continue to be eroded by emigration and the physical destruction of key infrastructure, the
steady depreciation of the Syrian pound, and the de facto partition of Syria into multiple economic spheres.
GDP By Expenditure Outlook
TABLE: COMPONENTS OF GDP (% OF TOTAL)
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: GDP GROWTH FORECASTS
Chapter 2.2: 10-Year Forecast – Syria
The Syrian Economy To 2025
Economy To Shrink Due To Protracted War
The civil war in Syria will result in a sharp contraction of GDP compared to pre-war levels, and the real economy will only return to
growth in 2020.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 2.3: Political Outlook – Syria
SWOT Analysis
Domestic Politics
Assad's Resurgence Increases Saudi-Turkey Intervention Risks
Russia's decision to intervene militarily on behalf of Syrian President Bashar al-Assad has altered the battlefield, but the regime's
fundamental problems remain.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Conflict Scenarios Point To Turbulent Decade Ahead
We expect the civil war in Syria to continue for many years. A negotiated settlement following a protracted conflict or a formal breakup
of the country appear at this stage the two most likely outcomes, while an outright victory by either the regime or the rebels is less
probable.
TABLE: LONG-TERM SCENARIOS
Chapter 2.4: Operational Risk – Syria
SWOT Analysis
Chapter 3: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: LEBANON – MACROECONOMIC DATA & FORECASTS
TABLE: SYRIA – MACROECONOMIC DATA & FORECASTS

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