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Lebanon and Syria Country Risk Report Q1 2016

Lebanon and Syria Country Risk Report Q1 2016

Core Views

The ongoing civil war in Syria is having severe repercussions onthe Lebanese economy. Lebanon's medium-term growth trajectorywill settle well below pre-crisis levels due to a lack of investment intransportation and energy infrastructure.

Despite fears over the economy's gaping external asymmetries, aloyal depositor base in the domestic banking sector, combined witha massive arsenal of foreign exchange reserves, should help bolsterunderlying stability through what will turn out as a prolonged period ofpolitical volatility. This will minimise the potential for an unexpecteddevaluation of the pound in 2016.

A protracted leadership vacuum, elevated sectarian tensions fuelledby entanglement in the Syrian civil war, and the risk of conflict withIsrael will all continue to present challenges to Lebanon's stability.

That said, regional powers appear to have a mutual interest incontaining the country's turbulence.

The Lebanese economy will remain in the doldrums throughout2016, as protracted regional instability and political paralysis at homecontinue to erode the country's competitiveness. While we forecastgrowth to inch up to 2.0% in real terms in 2016 from our estimateof 1.6% for 2015 , this rate will remain too weak to make a tangibledifference to Lebanese living standards.

The gradual normalisation of US monetary policy from the end of2015 onward will lead to a sustained rise in Lebanon's debt -servicingcosts. While the Lebanese government is some way off from arefinancing crisis, public investment will be squeezed even furtherand 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 – which is 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.


Executive Summary – Lebanon
Core Views
Key Risks
Chapter 1.1 Political Outlook – Lebanon
SWOT Analysis
Domestic Politics
Beirut Bombings Underscore Continuing Exposure To Syria
The two suicide bombings in Beirut on November 12, claimed by Islamic State (IS), underscore Lebanon's heavy exposure to the Syrian
civil war amid a paralysed political system and an increasing focus by the radical jihadist group on transnational violence.
TABLE: POLITICAL OVERVIEW
TABLE: SELECTED TIMELINE OF ATTACKS
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 amid a plethora of challenges.
Chapter 1.2 Economic Outlook – Lebanon
SWOT Analysis
Economic Growth Outlook
Growth To Stay Weak As Paralysis Continues
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.
GDP By Expenditure Outlook
TABLE: COMPONENTS OF GDP (% OF TOTAL)
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
Fixed Income
Lebanese Bonds Exposed To Further Losses
Lebanon will face more difficult financing conditions over 2016, with yields on the country's international bonds set to rise. Although local
banks will continue to support the country's debt, waning interest from international investors and the US Fed's tightening cycle point to
a more challenging environment.
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: GDP GROWTH FORECASTS
Banking Sector Update
Banking Sector: Attached To The Economy's Uninspiring Prospects
Lebanon's lacklustre macroeconomic environment will continue to weigh on the country's banks.
Chapter 1.3 10-Year Forecast – Lebanon
The Lebanese Economy To 2024
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
4 www.businessmonitor.com Business Monitor International Ltd
LEBANON AND SYRIA Q1 2016
Chapter 1.4 Operational Risk – Lebanon
SWOT Analysis
Executive Summary – Syria
Core Views
Chapter 2.1 Political Outlook – Syria
SWOT Analysis
Domestic Politics
New Complexity, But Old Stumbling Blocks Remain
Despite significant evolutions since September 2015, the balance of power between Assad and the opposition has not fundamentally
shifted, and significant obstacles remain in the way of a resolution to the Syrian conflict or the end of Islamic State's stranglehold on
eastern Syria.
TABLE: POLITICAL OVERVIEW
TABLE: RECENT DEVELOPMENTS
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. Under any scenario, prospects for a stabilisation of the country over the coming decade are very low.
TABLE: LONG-TERM SCENARIOS
Chapter 2.2 Economic Outlook – Syria
SWOT Analysis
Economic Growth Outlook
Conflict Escalation Will Further Ravage Economy
The escalation of the Syrian conflict will further devastate economic activity over 2016. Although the regime's heartland and the Kurdishled
cantons in the north of Syria will not be as badly impacted, the overall economy will continue to contract at a sharp rate.
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 2.3 10-Year Forecast – Syria
The Syrian Economy To 2024
Economy To Shrink Amid 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. Economic activity will partially stabilise within different regions of the country, with government-control led areas faring
better than rebel-held territory.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 2.4 Operational Risk – Syria
SWOT Analysis
Chapter 3: BMI Global Macro Outlook
Global Outlook
Emerging Markets Bending, Not Breaking
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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