BMI Lebanon and Syria Business Forecast Report Q2 2013

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BUSINESS FORECAST REPORT

Q2 2013www.businessmonitor.com

LEBANON AND SYRIAINCLUDES 10-YEAR FORECAST TO 2022

Risks Of Regional War Increasing

ISSN 2049-1980Published by Business Monitor International Ltd.

Copy Deadline: 15 March 2013

2 Business Monitor International Ltdwww.businessmonitor.com

LEBANON AND SYRIA Q2 2012TA

BLE

: LE

BA

NO

N –

MA

CR

OE

CO

NO

MIC

IND

ICA

TOR

S

2012

e 20

13f

2014

f20

15f

2016

f20

17f

2018

f20

19f

2020

f20

21f

2022

f

Nom

inal

GD

P, U

S$b

n [5

]42

.847

.953

.059

.367

.576

.885

.793

.510

2.0

111.

112

2.8

GD

P p

er c

apita

, US

$ [5

]9,

979

11,0

7212

,166

13,5

3015

,302

17,2

8619

,196

20,8

2222

,576

24,4

8226

,920

Rea

l GD

P g

row

th, %

cha

nge

y-o-

y [5

]1.

01.

93.

85.

36.

24.

64.

34.

14.

04.

05.

0

Priv

ate

final

con

sum

ptio

n, %

of G

DP

[5]

86.9

88.6

89.6

90.3

91.0

91.3

92.0

92.7

92.7

92.7

92.7

Priv

ate

final

con

sum

ptio

n, re

al g

row

th %

y-o

-y [5

]2.

04.

05.

06.

07.

05.

05.

05.

04.

04.

05.

0

Gov

ernm

ent fi

nal c

onsu

mpt

ion,

% T

otal

GD

P [5

]12

.512

.512

.712

.512

.212

.011

.911

.911

.911

.911

.9

Pop

ulat

ion,

mn

[6]

4.3

4.3

4.4

4.4

4.4

4.4

4.5

4.5

4.5

4.5

4.6

Con

sum

er p

rice

inde

x, %

y-o

-y, a

ve [1

,7]

6.1

10.0

6.5

6.0

6.0

6.0

5.5

5.0

5.0

5.0

5.5

Lend

ing

rate

, %, a

ve [8

]7.

27.

79.

010

.010

.010

.010

.010

.010

.010

.010

.5

Cen

tral B

ank

polic

y ra

te, %

eop

[2,8

]10

.14

10.0

012

.00

12.0

012

.00

12.0

012

.00

12.0

012

.00

12.0

012

.00

Exc

hang

e ra

te L

BP

/US

$, a

ve [9

]1,

504.

131,

503.

751,

497.

501,

487.

501,

465.

001,

425.

001,

400.

001,

400.

001,

400.

001,

400.

001,

400.

00

Bud

get b

alan

ce, %

of G

DP

[3,1

0]-9

.2-8

.8-7

.8-7

.2-6

.6-6

.1-5

.8-5

.6-5

.3-5

.2-5

.0

Goo

ds a

nd s

ervi

ces

expo

rts, U

S$b

n [4

,11]

26.4

30.2

33.2

36.4

39.5

42.4

45.5

48.1

50.6

53.2

56.0

Goo

ds a

nd s

ervi

ces

impo

rts, U

S$b

n [4

,11]

36.2

40.1

43.8

47.5

51.5

55.2

58.5

61.7

64.6

68.0

71.5

Bal

ance

of t

rade

in g

oods

and

ser

vice

s, %

of G

DP

[4,1

1]-2

2.8

-20.

5-2

0.1

-18.

7-1

7.7

-16.

8-1

5.2

-14.

5-1

3.7

-13.

2-1

2.6

Cur

rent

acc

ount

bal

ance

, % o

f GD

P [4

,11]

-15.

4-1

2.4

-11.

6-1

0.5

-10.

3-1

0.1

-9.1

-8.8

-8.2

-7.9

-7.4

Not

es: e

BM

I est

imat

es. f

BM

I for

ecas

ts. 1

As

the

CA

S re

base

d in

200

7, y

ear-

on-y

ear r

ates

from

Jan

-Dec

200

8 ar

e ca

lcul

ated

est

imat

es b

y B

MI;

2 R

epo

Rat

e; 3

Tot

al C

ash

Bal

ance

inc.

Tre

asur

y tra

nsac

tions

; 4

Offi

cial

Bal

ance

of P

aym

ents

figu

res

only

ava

ilabl

e fro

m C

AS

for p

erio

d 20

02-2

005:

dat

a th

erea

fter a

re B

MI e

stim

ates

, exc

ept g

oods

bal

ance

(pro

vide

d by

Ban

que

du L

iban

). S

ourc

es: 5

UN

/BM

I; 6

Wor

ld B

ank/

UN

/BM

I; 7

Cen

tral A

dmin

istra

tion

for S

tatis

tics;

8 B

anqu

e du

Lib

an, B

MI F

orec

asts

; 9 B

MI;

10 M

inis

try o

f Fin

ance

, BM

I For

ecas

ts; 1

1 C

entra

l Adm

inis

tratio

n fo

r Sta

tistic

s, B

MI F

orec

asts

.

TAB

LE: S

YR

IA –

MA

CR

OE

CO

NO

MIC

IND

ICA

TOR

S

2012

e 20

13f

2014

f20

15f

2016

f20

17f

2018

f20

19f

2020

f20

21f

2022

f

Nom

inal

GD

P, U

S$b

n [1

]58

.858

.772

.782

.190

.410

1.0

117.

613

6.1

154.

917

1.7

182.

0

GD

P p

er c

apita

, US

$ [1

]2,

784

2,73

33,

331

3,70

04,

007

4,40

55,

045

5,74

46,

432

7,01

87,

322

Rea

l GD

P g

row

th, %

cha

nge

y-o-

y [1

]-6

.5-6

.10.

82.

73.

03.

64.

35.

14.

94.

95.

1

Priv

ate

final

con

sum

ptio

n, %

of G

DP

[1]

61.9

61.4

61.4

61.0

61.2

61.5

62.1

62.7

63.5

64.2

64.8

Gov

ernm

ent fi

nal c

onsu

mpt

ion,

% T

otal

GD

P [1

]16

.116

.817

.017

.217

.417

.517

.517

.617

.417

.317

.3

Pop

ulat

ion,

mn

[2]

21.1

21.5

21.8

22.2

22.6

22.9

23.3

23.7

24.1

24.5

24.9

Con

sum

er p

rice

inde

x, %

y-o

-y, a

ve [3

]38

.028

.014

.04.

04.

05.

05.

05.

05.

04.

03.

0

Lend

ing

rate

, %, a

ve [4

]7.

07.

07.

07.

07.

07.

07.

07.

07.

07.

08.

0

Exc

hang

e ra

te S

YP

/US

$, a

ve [5

]63

.49

77.0

071

.00

67.0

065

.00

63.0

059

.00

56.0

054

.00

53.0

054

.00

Bud

get b

alan

ce, %

of G

DP

[3]

-9.4

-10.

4-6

.6-5

.0-4

.5-4

.3-3

.4-2

.3-1

.10.

51.

9

Goo

ds a

nd s

ervi

ces

expo

rts, U

S$b

n [3

]13

.711

.713

.014

.816

.117

.519

.721

.923

.925

.827

.0

Goo

ds a

nd s

ervi

ces

impo

rts, U

S$b

n [3

]14

.411

.913

.214

.615

.616

.818

.620

.622

.424

.225

.4

Bal

ance

of t

rade

in g

oods

and

ser

vice

s, %

of G

DP

[3]

-1.3

-0.3

-0.3

0.3

0.5

0.7

1.0

1.0

0.9

0.9

0.9

Cur

rent

acc

ount

bal

ance

, % o

f GD

P [3

]-4

.7-2

.7-2

.3-1

.0-0

.40.

00.

40.

40.

30.

30.

1

Not

es: e

BM

I est

imat

es. f

BM

I for

ecas

ts. S

ourc

es: 1

UN

/BM

I; 2

Wor

ld B

ank/

UN

/BM

I; 3

Cen

tral B

ank

of S

yria

/BM

I; 4

IMF;

5 B

MI;

6 IM

F IF

S; 7

IMF

IFS

/BM

I; 8

BP

/BM

I.

3Business Monitor International Ltd www.businessmonitor.com

Contents

BMI Risk Ratings ...................................................................................................................................................... 6BMI Risk Ratings – Lebanon .........................................................................................................................................................6BMI Risk Ratings – Syria ...............................................................................................................................................................7Middle East – Ratings League Tables ..................................................................................................................... 9

Executive Summary – Lebanon .......................................................................................................... 11Core Views ....................................................................................................................................................................................11Major Forecast Changes ..............................................................................................................................................................11Key Risk To Outlook ....................................................................................................................................................................11Lebanon Q2 2012 ..........................................................................................................................................................................14Domestic Politics..................................................................................................................................................... 14Key Risks To Watch .....................................................................................................................................................................14TABLE: POLITICAL OVERVIEW ........................................................................................................................................................................... 14

Long-Term Political Outlook .................................................................................................................................. 16Political Upheaval Inevitable In The Long Term? ......................................................................................................................16

Chapter 1.2: Economic Outlook – Lebanon ......................................................................................... 19 SWOT Analysis .............................................................................................................................................................................19Economic Analysis.................................................................................................................................................. 20 Economic Recovery Not Yet On The Cards ...............................................................................................................................20TABLE: GDP BY EXPENDITURE .......................................................................................................................................................................... 20

Balance Of Payments .............................................................................................................................................. 22 Fiscal Position Increasingly Precarious.....................................................................................................................................22TABLE: FISCAL POLICY .......................................................................................................................................................................................23

Debt Policy ............................................................................................................................................................... 24Debt Ratios Unlikely To Improve ................................................................................................................................................24TABLE: DEBT INDICATORS ................................................................................................................................................................................. 25

Chapter 1.3: 10-Year Forecast – Lebanon ............................................................................................ 27 Long-Term Growth Depends On Structural Reforms ...............................................................................................................27TABLE: LONG-TERM MACROECONOMIC FORECASTS ................................................................................................................................... 27

Chapter 1.4: Business Environment – Lebanon .................................................................................. 29SWOT Analysis .............................................................................................................................................................................29

Executive Summary – Syria................................................................................................................... 31Core Views ....................................................................................................................................................................................31Major Forecast Changes ..............................................................................................................................................................31Key Risk To Outlook ....................................................................................................................................................................31

Chapter 2.1: Political Outlook – Syria................................................................................................... 33SWOT Analysis .............................................................................................................................................................................33Domestic Politics..................................................................................................................................................... 34Set For A Prolonged Civil War ....................................................................................................................................................34TABLE: POLITICAL OVERVIEW ........................................................................................................................................................................... 34


LEBANON AND SYRIA Q2 2012

Long-term Political Outlook ................................................................................................................................... 36 'Post-Assad' Era Likely To Increase Instability .........................................................................................................................36

Chapter 2.2: Economic Outlook – Syria ............................................................................................... 39 SWOT Analysis .............................................................................................................................................................................39Economic Analysis.................................................................................................................................................. 40 Another Bleak Year ......................................................................................................................................................................40TABLE: SYRIAN REFUGEES – POPULATION BREAKDOWN ........................................................................................................................... 40TABLE: ECONOMIC ACTIVITY ............................................................................................................................................................................. 40

Monetary Policy ....................................................................................................................................................... 43 Inflation Accelerating Regime's Fall ...........................................................................................................................................43TABLE: MONETARY POLICY ............................................................................................................................................................................... 43

Chapter 2.3: 10-Year Forecast – Syria .................................................................................................. 45 The Syrian Economy To 2022................................................................................................................................. 45Weak Human Capital To Constrain Growth ...............................................................................................................................45TABLE: LONG-TERM MACROECONOMIC FORECASTS ................................................................................................................................... 45

Chapter 3: Regional Outlook ................................................................................................................. 49Tourism Sector – GCC Over North Africa And The Levant ......................................................................................................49

Lebanon and Syria Q2 2012................................................................................................................... 50SWOT Analysis .............................................................................................................................................................................47

Chapter 4: BMI Global Assumptions .................................................................................................... 53Global Outlook ......................................................................................................................................................... 53Past The Major Obstacles To Recovery .....................................................................................................................................53TABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 53LEBANON AND SYRIA Q2 2012 .......................................................................................................................................................................... 54TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS ................................................................................................................ 54TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%) ......................................................................... 54TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS ............................................................................................................... 55

BMI Ratings – Brief MethodologyComposite RatingThe composite rating is an unweighted geometric mean of the short-term political and short-term economy ratings, allowing a ranking

of all countries in BMI's emerging markets universe.

Political RatingsThe political ratings are an indicator of political stability, seen as a pre-requisite for a stable economy and business environment.

The long-term political rating considers more structural elements such as: Is there a functioning democracy? Are there free and fair

elections? Is there separation between party and state? Have recent governments pursued similar, enlightened policies amid a stable

political environment? The short-term political rating considers more transient influences such as: Have there been recent large-scale

demonstrations or strikes? To what extent have these threatened the political status quo? Is unemployment currently a potential source

of political instability? What is the current position in the political cycle – to what extent is this contributing to political risk? Is the

government having trouble passing legislation?

Economy RatingsThe economy ratings assess the degree to which the country approximates the ideal of non-inflationary growth with contained fiscal

and external deficits and manageable debt ratios. The ratings use as raw material historical data and forecasts fed in from BMI's

country databases: as historical data are revised and forecasts change, so the ratings change. Factors in the long-term rating include

GDP growth, unemployment, inflation, real interest rates, exchange rates, the fiscal balance, the current account balance and external

debt. A number of other structural factors are also thrown into the equation, including dependence on the primary sector, reliance on

commodity imports, reliance on a single export sector and central bank independence. The factors included in the short-term rating

are a subset of those in the long-term rating.

Business Environment RatingThe business environment rating is a broad indicator of the investment climate, for both domestic and foreign players. While areas

such as competitiveness, finance, openness and environment comprise the bulk of the rating, there is also an important feed from the

political and economy ratings. The factors considered include: the state of the national infrastructure, the education system, cronyism/

corruption, red tape, the legal framework, property rights, market access and the corporate tax regime.

Brief Methodology


Lebanon

BMI Risk Ratings – LebanonLatest Rating* Previous Rating** Region Ave Global Mkts Ave

S-T Political 47.7 47.7 59.4 65.4

L-T Political 56.4 56.4 58 63.3

S-T Economy 40.8 40.8 54.9 55.2

L-T Economy 47.4 47.4 52.9 53.9

Business Environment 46.5 46.5 47.9 48.5

Composite 47.6 47.6 53.5 54.5

BMI's ratings rank states in terms of political risk, the economy and the

quality of the business environment. There are four ratings: a composite

rating, a political rating, an economic rating and a business environment

rating. These are reviewed every month and the results posted on BMI's

online service (www.businessmonitor.com). The political and economic

ratings have short- and long-term components. The long-term ratings are

designed to reflect more structural considerations and will not change

greatly in the short term. The short-term ratings will change frequently

in response to more transient influences. All ratings are expressed as a

number between one and 100. A high rating is an indicator of lower risk.

POLITICAL RISK Structural Risks Remain

Lebanon will remain one of the most politically unstable countries in

the region in the foreseeable future owing to the complicated mix of ethnic

communities in a relatively open and democratic environment. The fact that

neighbouring Syria has experienced a complete breakdown in its security

environment does little to inspire confidence in near-term stability. Sectarian

tensions could prove particularly volatile over the coming months, which

will likely result in further legislative gridlock amidst an already fractious

parliament.

ECONOMIC RISK A Tough Year Ahead

The Lebanese economy will post relatively uninspiring growth over

the coming quarters as key sectors such as tourism continue to suffer

from the impact of regional unrest. With the highest current account deficit

in the region, Lebanon is certainly one of the economies most at risk

from the regional unrest and could see a slowdown in domestic demand

should the country experience pronounced capital outflows. That said,

the economy will benefit from its exposure to the faster growing Gulf

Cooperation Council through higher remittance, banking sector deposit,

and foreign direct investment inflows.

BUSINESS ENVIRONMENT Great Potential

In spite of some severe challenges over recent years, Lebanon's

business environment is still well perceived by investors. With a strong

private and financial sector culture and an educated workforce, it has

the potential to be a regional leader over the coming years. However,

it is let down by infrastructural shortfalls, corruption, restricted govern-

ment authority over parts of the country and political risk. In addition, if

the government is to redress its huge budget deficit and pay down the

debt, taxes will have to rise.


BMI Ratings

SyriaBMI's ratings rank states in terms of political risk, the economy and the

quality of the business environment. There are four ratings: a composite

rating, a political rating, an economic rating and a business environment

rating. These are reviewed every month and the results posted on BMI's

online service (www.businessmonitor.com). The political and economic

ratings have short- and long-term components. The long-term ratings are

designed to reflect more structural considerations and will not change

greatly in the short term. The short-term ratings will change frequently

in response to more transient influences. All ratings are expressed as a

number between one and 100. A high rating is an indicator of lower risk.

POLITICAL RISK Regime Under Strain

After more than a year of protests in Syria, the regime continues to

use brute force in attempts to quell the protests. The focal point of the

civil war has shifted to Syria's two major cities, Aleppo and Damascus,

where neither the regime nor the rebels have yet gained the upper hand.

The West has been intensifying economic pressure through sanctions

on the country's energy and banking sectors, and the EU's oil embargo

is having a significant impact. Regional powers, including Saudi Arabia,

Turkey and Qatar have also been increasing pressure on the regime.

ECONOMIC RISK Economic Downturn Certain

Given the prolonged period of unrest in Syria, along with the dis-

placement of thousands of Syrians across borders, we expect that the

economy will contract over the short term, forecasting 2013 real GDP

growth to come in at -6.1%. Not only will private consumption and fixed

investment be hit particularly hard, but exports will suffer, as much of

Syria's exports revolve around tourism and crude oil.

BUSINESS ENVIRONMENT Promoting PPPs

Damascus is allowing greater private investment in specific sectors

through public-private partnerships. Syria's cabinet has authorised the

Ministry of Transport to contract directly with private-sector companies

for the building and operation of new airports, as well as the develop-

ment and operation of existing ones. The country's cabinet also decided

to allow local, Arab and foreign firms to build and operate new power

plants under build-operate-transfer terms. However, as long as the

current status quo continues, instability and international sanctions will

keep away investors.

BMI Risk Ratings – SyriaLatest Rating* Previous Rating** Region Avg Global Mkts Avg

S-T Political 30.8 30.8 59.4 65.4

L-T Political 32.2 47.7 58 63.3

S-T Economy 32.9 32.7 54.9 55.2

L-T Economy 28.7 28.7 52.9 53.9

Business Environment 34.9 34.9 47.9 48.5

Composite 32.4 34.9 53.5 54.5


LEBANON AND SYRIA QX 2012

Middle East – Ratings League Tables

Composite Rank TrendIsrael 70.5 1 -Qatar 70.1 2 =Saudi Arabia 67.1 3 =Oman 66.6 4 =United Arab Emirates 66.1 5 =Kuwait 64.9 6 =Bahrain 63.8 7 =Morocco 54.9 8 =Jordan 52.1 9 =Egypt 50.7 10 -Tunisia 50.2 11 -Algeria 49.5 12 =Lebanon 47.6 13 =Iraq 42.7 14 =Libya 39.4 15 =Iran 39.2 16 =West Bank & Gaza 36.5 17 =Yemen 32.4 18 =Syria 32.4 18 =Regional ave 53.5 / Global ave 54.5 / Emerging markets ave 51.4

Business Environment Rank TrendIsrael 64.9 1 =Qatar 63.7 2 =Bahrain 61.1 3 =United Arab Emirates 60.1 4 =Oman 59.7 5 =Saudi Arabia 57.8 6 =Kuwait 55.8 7 =Tunisia 51.9 8 =Jordan 47.9 9 =Egypt 47.8 10 =Morocco 47.7 11 -Lebanon 46.5 12 =Iran 36.6 13 =Syria 34.9 14 =West Bank & Gaza 33.4 15 =Iraq 32.3 16 =Algeria 32.1 17 =Libya 32.0 18 =Yemen 28.7 19 =Regional ave 47.9 / Global ave 48.5 / Emerging markets ave 45.1

S-T Political Rank TrendQatar 87.1 1 =Oman 81.2 2 =United Arab Emirates 81.0 3 =Saudi Arabia 76.9 4 =Bahrain 72.9 5 =Kuwait 69.0 6 +Morocco 63.1 7 =Algeria 61.2 8 =Jordan 60.8 9 =Israel 60.6 10 +Egypt 58.8 11 +Tunisia 51.9 12 -Lebanon 47.7 13 =Yemen 45.0 14 +Iran 41.7 15 =Libya 41.0 16 =Iraq 38.1 17 =West Bank & Gaza 33.1 18 =Syria 30.8 19 =Regional ave 59.4 / Global ave 65.4 / Emerging markets ave 63.0

L-T Political Rank TrendIsrael 77.3 1 =Oman 75.9 2 =Qatar 71.0 3 =Kuwait 68.4 4 -Morocco 67.9 5 =Jordan 67.6 6 =United Arab Emirates 67.2 7 =Bahrain 63.5 8 =Tunisia 57.6 9 =Algeria 57.2 10 =Saudi Arabia 57.0 11 =Lebanon 56.4 12 =Egypt 55.0 13 =Iran 50.2 14 =Iraq 47.9 15 =Yemen 41.8 16 +Syria 32.2 17 =West Bank & Gaza 32.2 17 =Libya 27.5 19 =Regional ave 58.0 / Global ave 63.3 / Emerging markets ave 59.7

S-T Economy Rank TrendSaudi Arabia 82.1 1 =Israel 77.5 2 =Kuwait 76.9 3 =Qatar 72.9 4 +United Arab Emirates 66.5 5 =Oman 65.6 6 =Bahrain 61.0 7 -Iraq 57.1 8 =Algeria 54.2 9 =Libya 53.5 10 =Morocco 50.4 11 +West Bank & Gaza 48.5 12 =Egypt 44.4 13 =Tunisia 42.3 14 =Jordan 41.0 15 -Lebanon 40.8 16 =Syria 32.9 17 -Yemen 31.2 18 =Iran 29.0 19 =Regional ave 54.9 / Global ave 55.2 / Emerging markets ave 53.4

L-T Economy Rank TrendIsrael 77.9 1 =Saudi Arabia 71.4 2 =Kuwait 63.4 3 +Bahrain 63.2 4 =Qatar 62.4 5 =United Arab Emirates 61.5 6 +Algeria 60.2 7 =Oman 57.6 8 =Morocco 52.9 9 -Egypt 50.6 10 =Libya 50.3 11 =Iraq 48.6 12 =Jordan 47.5 13 -Lebanon 47.4 14 =Tunisia 45.6 15 =Iran 41.4 16 =West Bank & Gaza 38.1 17 =Syria 28.7 18 =Yemen 19.0 19 =Regional ave 52.9 / Global ave 53.9 / Emerging markets ave 51.5


LEBANON AND SYRIA QX 2012

Core Views Regardless of how the civil war in Syria plays out, 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 renewed fears over the economy's gaping external asym-

metries, we do not believe pressures on Lebanon's balance of

payments position is as pronounced as seen elsewhere across the

region. A loyal depositor base in the domestic banking sector, com-

bined with a massive arsenal of foreign exchange reserves, should

help bolster underlying stability through what may turn out to be a

potentially prolonged period of political volatility. This will minimize

the potential for an unexpected devaluation of the pound in 2013.

Major Forecast Changes We have revised our medium-term debt projections, and now forecast

total government debt as a percentage of GDP increasing to 140%

by the end of 2014, from approximately 134% in 2012.

On the back of a more pronounced deterioration to Lebanon's public

finances in 2012 than originally anticipated, we have revised our

fiscal deficit forecasts, and now see the budget shortfall coming in

at 8.8% of GDP in 2013.

Key Risk To Outlook Given Lebanon's reliance on foreign capital to finance domestic

demand (as evidenced through its large current account shortfall),

a marked deterioration in regional or global capital markets over the

coming quarters could slow financial inflows, which would negatively

impact growth.

The collapse of the regime of Syrian President Bashar Assad raises

significant questions surrounding the dynamics of Lebanon's domes-

tic political environment going forward. At the moment, it remains

unclear how Hizbullah will react to the loss of its key financial and

military backer.


Executive Summary – Lebanon

SWOT AnalysisStrengths

Relative to other Arab states, Lebanon enjoys a very free press. In

Reporters Without Borders' 2012 World Press Freedom Ranking,

Lebanon is ranked 107 out of 197 countries, one of the highest in

the region..

Democratic credentials are reasonably good, compared with the rest

of the region.

Religious and ethnic identity plays a large role in determining political

affiliation.

Weaknesses The confessional political system, in which the president must be

a Maronite Christian, the prime minister a Sunni Muslim and the

speaker of parliament a Shi'a Muslim, is unstable.

Widespread corruption is one of the biggest challenges facing the

government.

The largest minority, the Shi'a, say they are under-represented by

the current system, and a census is highly unlikely given the political

ramifications.

Opportunities The collapse of the regime of Syrian President Bashar Assad could,

theoretically, make Lebanon's domestic political environment more

stable over the long term should Hizbullah be forced to temper its

policies as its key financial and military backer is lost.

Threats Tensions between Israel and Hizbullah remain, with ever-present

potential for renewed conflict.

Hizbullah, an Iranian-backed Shi'a militia group and political party,

has shown it has the upper hand militarily, through the coup it enacted

in May 2008.

The government remains under pressure to implement UN Security

Council Resolution 1701, which calls for the disarmament of all

militant organisations in Lebanon - a difficult job, and one for which

nobody is volunteering.


Chapter 1.1: Political Outlook – Lebanon

Domestic PoliticsKey Risks To Watch

BMI VIEWLebanon's political risk profile will remain tenuous through 2013. Some

of the most pertinent risks facing the count ry include the ongoing influx

of Syrian refugees, the potential for Hizbullah to become involved in

a broader regional conflict, in addition to the upcoming parliamentary

elections. All of these risks could inflame sectarian tensions, and desta-

bilise Lebanon's fragile peace in the process.

Lebanon's political stalemate lo oks set to continue through the

first half of 2013. The country has proven relatively resilient

throughout a tumultuous period of regional instability, having

successfully weathered both the Arab Spring and ongoing civil

war in neighbouring Syria. This is not to say that there have

not been large-scale shocks to stability. Indeed, the arrest of

Michel Samaha (a politician allied to Syrian President Bashar

al-Assad) in August 2012 on charges of planning to lead a

bombing campaign throughout the country, in addition to the

October assassination of Brigadier General Wissam al-Hassan,

both threatened to plunge Lebanon back into a renewed period of

conflict. Sectarian tensions have also spiked, resulting in sporadic

outbreaks of violent unrest, particularly in the northern city of

Tripoli. That said, on balance the biggest risks to underlying

stability have not played out, and the country has managed to

navigate these headwinds without major disruption.

Going forward however, risks of this uneasy calm coming undone

will remain elevated. With no end in sight to Syria's civil war,

and the economy stuck in a potentially prolonged period of low

growth, social tensions may soon begin to flare. Our short-term

political risk rating for the country sits at a lowly 47.7 out of

100. Below, we highlight what we believe are the major risks

to Lebanon's political outlook over the coming months:


LEBANON Q2 2012

TABLE: POLITICAL OVERVIEWSystem of Government Democratic Parliamentary Republic, with electoral system divided along sectarian lines. Under the

constitution drawn up after the civil war, the president must be a Maronite Christian, the prime minis-ter a Sunni Muslim and the speaker of the house a Shi'a

Head of State President Michel Sulayman (2008 – present)

Head of Government Prime Minister Najib Mikati (2011 – present)

Last Election Presidential – 2008

Parliamentary – 2009

Composition Of Current Government Formed in June 2011, the current coalition is comprised of representatives from the March 8 coalition, including Michael Aoun's Free Patriotic Movement, Hizbullah, Amal, and Walid Jumblatt's PSP.

Key Figures Michel Sulayman (president), Saad Hariri (former Prime Minister), Hassan Nasrallah (spiritual leader of Hizbullah), Fayiz Ghosn (Minister of Defense), Najib Mikati (Prime Minister), Charbel Nahas (Minister of Labour), Nicolas Sahnawi (Minister of Telecommunications)

Main Political Parties Future Movement, established 2005 following the assassination of former PM Rafik Hariri, and led by his son Saad. Anti-Syria, pro-market, pro-reform, secular in orientation but predominantly Sunni Muslim.

Progressive Socialist Party, founded in 1949, secular in orientation but dominated by Druze, led by Walid Jumblatt.

Amal, founded in 1975 as Shi'a militia in the civil war. Now considered the more moderate of the two Shi'a parties. Secular, pro-Syria

Hizbullah, established 1982-85. Shi'a Islamist party strongly supported by Iran. Considered by US and other states as a terrorist organisation, has on occasion stated that its aim is the destruction of the state of Israel. Led by Hassan Nasrallah

Free Patriotic Movement, founded 2003 by exiled former Prime Minister Michel Aoun. Having fought un-successfully against the Syrians in the civil war, he returned following the Cedar Revolution, but later joined Hizbullah and Amal

Extra-Parliamentary Opposition? Growing Sunni Islamist presence including Fatah al-Islam, al-Jamaa al-Islamiyya, Islamic Action Front, Hizb al-Tahrir, al-Qaeda in Lebanon

Next Election Presidential – 2014

Parliamentary – 2013

Ongoing Disputes Internal dispute between reformist anti-Syrian March 14 and pro-Iran, pro-Syria opposition (known as March 8). Has turned violent on occasion. Both sides officially in dispute with Israel over the Shebaa Farms area on the southern border.

Key Relations/ Treaties Strong relations between March 14 parliamentary majority and US, France, Gulf states. Member of Arab League, World Trade Organisation

BMI Short-Term Political Risk Rating 47.7

BMI Structural Political Risk Rating 56.4

Source: BMI

Risk #1: Refugee InfluxAccording to estimates by the UN, over 300,000 Syrian refugees

have fled to Lebanon since the onset of the civil war, with the UN

High Commissioner for Refugees stating that over 2,500 now

enter on a daily basis. Unofficial estimates by other aid agen-

cies however, put the figure closer to 400,000. For a population

of approximately 4.3mn, this is a consi derable burden, as the

influx of workers and families strains the provision of govern-

ment services. Many Lebanese have also complained that the

arrival of thousand s of Syrians is putting downwards pressure

on wages and resulting in reduced employment opportunities

throughout the country, which is beginning to fuel resentment

among many citizens.

Given Lebanon's fragile sectarian balance, the arrival of hundreds

of thousands of mostly Sunni Syrian refugees threatens to lead

to increasingly hostile social tensions. The Lebanese community

is already deeply split on their views and allegiances towards

Syria, with many Sunnis claiming that the government's slow

response to the refugee crisis was due to the March 8 coalition

(which contains the Shi'a group Hizbullah)'s close ties with the

regime of President Assad. As the Syrian refugees are unlikely

to leave in the near term, the country's aforementioned fragile

sectarian balance could destabilise, and result in further clashes

between the two communities.

Risk #2: Conflict Spills Over BorderRecent reports indicate that fighting on the Lebanese-Syrian

border continues to escalate, raising the spectre that large-scale

violence will eventually spread west. Perhaps of most concern,

Hizbullah is also reported to be actively supporting the regime

of President Assad, and has started shelling rebel-held areas

in Syria, and making frequent cross-border incursions. In late

March, two Hizbullah fighters were killed in fighting near the

Syrian city of Qusayr, leading the anti-Assad rebels to threaten

to directly target the Shi'a group inside Lebanese territory. In this

light, the possibility that the war begins to devolve into a more

widespread regional conflict is certainly rising. Going forward,

an escalation of Hizbullah's support of the Assad regime poses

the largest risk to Lebanon's stability, as it will likely result in

the country being dragged directly into the conflict.

Risk #3: Parliamentary ElectionsAs all of this is occurring in the context of upcoming parliamentary

elections (set to take place in June), the chances that Lebanon's

politicians are able to compromise and forge a coherent policy

response to the Syrian conflict are minimal. At the moment, the

country's main parties are still encountering difficulty in choosing

what type of electoral system to use. Over the coming months,

populist and sectarian-based politicking is only likely to rise

as the vote approaches, which could further inflame social ten-

sions, particularly if certain religious sects are scapegoated for

the economic downturn. Moreover, there is also a certain risk

that an overwhelming victory for either the March 8 or March

14 (which opposes the Syrian regime) coalitions could signifi-

cantly destabilise the political system. Although the fractured

nature of Lebanon's electoral system has come at the expense

of a coherent policy framework in recent years, by preventing

one sect from being completely shut out of the political process,

it has also helped ensure a relative degree of stability.

Macro ImplicationsA significant degree of political risk is already priced into our

baseline forecasts, which underpins our below-consensus projec-

tion for real GDP to expand by only 1.9% in 2013. In particular,

with Syria's civil war appearing unlikely to come to a swift

conclusion, investment patterns across Lebanon will remain

fundamentally depressed over the coming quarters. The outlook

for the tourism sector, which accounts for approximately 10%

of GDP, is particularly bleak, with several governments across

the Gulf maintaining travel warnings, cautioning their nationals

against visiting the country due to the rise in sectarian tensions.

Going forward, the majority of risks to our forecasts lie firmly

to the downside. Indeed, a more pronounced outbreak in vio-

lent unrest, or escalation in cross-border militant activity will

certainly prove negative for the near-term economic outlook.


POLITICAL OUTLOOK

Long-Term Political Outlook

Political Upheaval Inevitable In The Long Term?

BMI VIEWPolitical stability will remain hard to come by in Lebanon over the com-

ing decade. However, despite the range of challenges facing the gov-

ernment, we believe that major political upheaval will not occur without

an external trigger, with a military conflict the most obvious possibility.

Lebanese politics is awash with contradictions. It is a liberal

and Western-oriented country with a thriving entrepreneurial

culture, where one of the most popular parties, even among many

Christians, is an Islamist movement with strict moral values

and a socialist economic programme. The country frequently

appears to veer from political paralysis to the edge of war and

economic meltdown, yet somehow manages to remain relatively

stable and even thrive.

With political alliances and rivalries constantly shifting, divining

the trajectory of Lebanese politics is difficult. In fact, the actual

shape of the political system has changed very little in the past

20 years despite the changing fortunes of various political par-

ties. Here we present the major challenges that will affect the

political scene over the coming decade, and present what we

believe is the most likely scenario for major political change.

Challenges And Threats To Stability

Economic: The Lebanese economy enjoyed a boom heading

into the global financial crisis, particularly in the capital, Beirut.

However, the country's finances remain in a parlous state, with

government debt still estimated at a whopping 130% of GDP

(albeit down from a peak of 180% in 2006). Debt servicing

continues to suck up a large proportion of fiscal spending, mean-

ing fewer resources for welfare spending and state investment.

On all sides of the political game, foreign backers from Saudi

Arabia to Iran to Western Europe and the US have vested in-

terests in Lebanon and try to leverage their financial contribu-

tions to push policy in different directions. Given the size of

Lebanon's economic problems and debt levels, the government

and individual political parties are unable, or unwilling, to move

away from this system of patronage. However, the result is that

Lebanon is often used as a political football with which other

countries fight out their differences.

Social: There are huge wealth discrepancies in Lebanon, and

many areas have not felt the impact of the Beirut-centred boom.

Even within the capital, there are big differences between dis-

tricts, both in terms of wealth and the quality of public services.

In certain areas, other actors – most notably Hizbullah – have

stepped in to fill the gap in public-service provision. In many

ways this has been good for political stability by raising living

standards and quelling unrest among disadvantaged groups.

However, it has also enhanced Hizbullah's position as a 'state

within a state', reducing central government control over poli-

cymaking and implementation in certain regions.

At the other end of the spectrum, Lebanon has a high-quality

education system (particularly its private universities) and

produces a large number of highly qualified professionals.

However, many choose to leave the country, frustrated at the

inefficient economy, low public-sector salaries and the lack of

opportunities for professional advancement. This 'brain drain'

limits Lebanon's economic potential, and its reliance on remit-

tances from Lebanese workers overseas further enhances the

sensation of being hostage to the fortunes of other nations.

Religious: Lebanon's system of sectarian representation becomes

less and less reflective of demographic reality as time passes.

For several decades, the relative size of the Christian commu-

nity has been shrinking, due to emigration and low birth rates,

while the Shi'a population grows. While political parties have

so far resisted any major alterations in the current system, we

believe change will eventually become inevitable. The chal-

lenge then will be to devise a new system that more accurately

reflects Lebanon's demographic make-up without provoking

widespread political unrest.

On a broader level, Lebanese society remains a paradox: its

capital is arguably the most liberal and Western-oriented in the

Middle East, yet a socially conservative Islamist party enjoys

huge popularity. It is not clear whether over time, certain sections

of the population will embrace political Islam more wholeheart-

edly, and if so, what impact this will have on relations between

Lebanon's religious communities.

Political: Lebanon's political system continues to evolve. Tra-

ditional political rifts between pro- and anti-Syrian parties and

between different religious groups are never quite as clear-cut as

they seem, even more so currently. This poses numerous chal-

lenges to the government. First, how to pursue economic policy

when some of the most popular groups object to key government

policy objectives, such as the privatisation of Lebanon's telecom-


LEBANON Q2 2012

munications industry? Second, how to direct Lebanese foreign

and defence policy when Hizbullah retains its own military and

communications infrastructure? This second challenge is all the

more pressing in light of Israel's assertion that with Hizbullah

now in government in Beirut, it will treat any provocation by

the group as an act of official Lebanese aggression (and use it

to justify attacks on key state infrastructure).

Military: Conflict with Israel is the key international risk to

Lebanon's stability. After Israel failed to wipe out Hizbullah's

military capabilities in 2006, the former nation may see itself

as having unfinished business. Hizbullah has since gone from

strength to strength politically and possibly militarily, with the

group widely believed to have restocked and expanded its arms

caches over the past three years. There are also reports that a

significant inflow of weapons have crossed the Lebanese-Syrian

border since mid-2011 as Hizbullah has become increasingly

concerned about the fate of the Assad regime.

At the same time, the Lebanese military continues to face chal-

lenges from Palestinian militant groups in refugee camps around

Lebanon, and from organised crime cartels (most notably in the

Bekaa Valley, the centre of Lebanon's illegal drug production).

While the army eventually quelled a violent uprising by Pal-

estinian militants in the Nahr el-Bared refugee camp in Tripoli

in 2007, groups thought to be linked to al-Qaeda have since

carried out car bombings and other attacks around the country.

Scenarios For Political ChangeWar With Israel: While Lebanon's political stability faces

myriad challenges, the country has remained remarkably sta-

ble since the end of the civil war, with many political parties

seemingly unwilling to disturb the delicate balance of power.

We believe the most likely conduit for major political upheaval

is a military conflict, with Israel the obvious opponent. In light

of Israel's determination to interpret any actions by Hizbullah

as official Lebanese government policy, any conflict is likely

to entail large-scale destruction of physical infrastructure, un-

doubtedly causing enormous amounts of anger and resentment

throughout Lebanese society. How this anger feeds through into

the political system will depend on the perceived winners and

losers of the conflict.

Hizbullah Victory: A 'victory' for Hizbullah, such as the one

achieved in 2006 when Israel failed to achieve its stated objec-

tive of disarming the group despite the former's far superior

military capabilities, would be yet another political coup for the

Islamist party. In particular, it would enhance its reputation as

the party of 'resistance' to the Israeli aggressor and defender of

the Lebanese state (in contrast to the weak Lebanese army),

increasing its popularity among non-Shi'a communities. This

would likely translate into electoral success, further boosting its

influence over government decision-making, while Hizbullah

would also be able to claim greater justification for maintaining

its military structures and parallel communications network in

the name of national security.

However, an emboldened Hizbullah would certainly not be

welcomed by all. Any moves to try and implement its Islamist

agenda could damage sectarian relations and hasten Christian

emigration, with negative economic consequences for Lebanon

given the relative wealth of the Christian population and its Eu-

ropean ties. Likewise, a stronger Hizbullah would mean greater

influence for its international allies (most notably Iran) and

over Middle Eastern affairs in general, which could see rivals

such as Saudi Arabia (the leading financial backer of Lebanon's

Sunni parties) withdraw some of their support and investment.

Hizbullah/Lebanese Defeat: Defeat at the hands of Israel

would weaken Hizbullah, both militarily and in terms of its

reputation and popularity. Outside its core support base, there

would likely be widespread resentment towards the group for

dragging Lebanon into a war at huge economic and human cost.

Under these circumstances, we would expect a resurgence in

the popularity of the March 14 coalition and its more Western-

oriented foreign policy, meaning a distancing from Iran and

Syria. Economically, a weakening of Hizbullah influence (and

possibly even the withdrawal of its veto power) would mean a

more liberal trajectory for economic policy.

Hizbullah would not move aside without a fight, however. As

the group has demonstrated in the past through its occupation of

central Beirut, it is quite willing to paralyse government busi-

ness indefinitely in order to maintain or enhance its power. Such

scenes could well be repeated, with uncertain consequences.

Civil War: Unfortunately, a final scenario for Lebanon is civil

war. If Israel does not deal with Hizbullah, it will be more than

capable and sufficiently equipped to take on the Lebanese armed

forces, as the events of May 2008 showed. March 14 would be

supported militarily and financially by Saudi Arabia and possibly

the West (and even Israel), but would still put up a spirited and

prolonged defence. Under such a scenario, the fighting could

be prolonged, and, as with the Taif Agreement which ended

the country's civil war, the political spoils would likely go to

the winners. In such a case, the scenarios above (simplified as


POLITICAL OUTLOOK

Hizbullah defeat or victory) would apply. However, this is not

our core scenario.


LEBANON Q2 2012


Lebanon has a strong tradition of commerce and enterprise, centred

around Beirut as an important trading hub.

Decades of emigration have established extensive trade networks

of Lebanese communities around the world.

The 2006 war and subsequent political turmoil has demonstrated

that the banking sector is resilient enough to withstand even severe

crises, adding to our view that the country is not in danger of default,

in spite of its heavy debt burden.

Weaknesses Lebanon's large public debt load means that a significant share of

fiscal spending goes into debt servicing rather than more productive

capital expenditure.

The country runs a large trade deficit, and the currency peg means

there is little flexibility to adjust this.

Opportunities The political will to implement much-needed economic reforms is in

place (albeit struggling against the political tide).

Further external debt relief may be offered in view of international

goodwill towards the government.

Threats Tourism, a hugely important sector to the economy, is particularly

sensitive to perceptions of risk, and the recovery could easily be

derailed in the event of any further violence.

Lower long-term trend growth in the UAE will mean job opportunities

for Lebanese may be limited, hurting remittances, tourism and the

property market.


Chapter 1.2: Economic Outlook – Lebanon

Economic Activity

Economic Recovery Not Yet On The Cards

BMI VIEWOur baseline scenario sees the Lebanese economy continuing to 'mud-

dle through' 2013, with consumption and investment set to remain fun-

damentally depressed. While we hold a relatively cautious outlook on

the tourism sector, we expect strong remittance inflows will continue to

support household consumption. We project real GDP growth of 1.9%

in 2013, following an estimated 1.0% in 2012.

The near-term outlook for the Lebanese economy remains

relatively weak, with consumption and investment patterns

continuing to suffer largely as a result of the ongoing civil war

in neighbouring Syria. Our baseline scenario sees real GDP

growth of 1.9% in 2013, following on from an estimated 1.0%

in 2012, and 1.5% in 2011. Compared to the average 8.3% rate

of expansion posted between 2007-2010, it is clear the country

remains stuck in a prolonged downturn. This is not to suggest

that the economy is completely defenceless against these ex-

ternal headwinds. However, with parliamentary elections set to

take place in 2013, we expect policy inertia to continue, which

dampens the likelihood of both short-term fiscal stimulus, and

more pronounced structural reforms.

Looking at a host of recently released data, it is clear that

Lebanon's downturn remains broad based, with consumption,

investment and trade indicators all continuing to struggle. The

economic coincident indicator released by the central bank,

which can be used as a very rough gauge for business activity,

is highlighting how the downturn appeared to have gathered

pace in the second half of 2012, with the headline reading

contracting for five consecutive months in year-on-year terms,

beginning in July.

The ong oing lack of investment in the underlying energy infra-

structure network has also been laid bare in 2012, with electricity


LEBANON Q2 2012

Not A Pretty Picture Economic Coincident Indicator

Source: Banque du Liban, BMI

0

50

100

150

200

250

300

-30

-20

-10

0

10

20

30

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Indicator (RHS) % y-o-y (3mmavg)

TABLE: GDP BY EXPENDITURE2011 2012e 2013f 2014f 2015f 2016f 2017f 2018f

Real GDP growth, % chg y-o-y [1] 1.5 1.0 1.9 3.8 5.3 6.2 4.6 4.3

Private final consumption, LBPbn [1] 51,759 55,951 63,784 71,120 79,654 90,009 99,910 110,401

Private final consumption, US$bn [1] 34.4 37.2 42.4 47.5 53.5 61.4 70.1 78.9

Private final consumption, real growth % chg y-o-y [1] 11.8 2.0 4.0 5.0 6.0 7.0 5.0 5.0

Government final consumption, LBPbn [1] 7,444 8,047 9,013 10,050 11,055 12,049 13,134 14,250

Government final consumption, US$bn [1] 4.9 5.4 6.0 6.7 7.4 8.2 9.2 10.2

Government final consumption, real growth % chg y-o-y [1] -10.2 2.0 2.0 5.0 4.0 3.0 3.0 3.0

Fixed capital formation, LBPbn [1] 18,611 20,118 22,492 25,304 28,088 31,458 34,919 38,236

Fixed capital formation, US$bn [1] 12.4 13.4 15.0 16.9 18.9 21.5 24.5 27.3

Fixed capital formation, real growth % chg y-o-y [1] -6.1 2.0 1.8 6.0 5.0 6.0 5.0 4.0

Exports of goods and services, LBPbn [1] 12,752 13,785 15,370 17,138 19,023 20,925 23,018 25,205

Exports of goods and services, US$bn [1] 8.5 9.2 10.2 11.4 12.8 14.3 16.2 18.0

Exports of goods and services, real growth % y-o-y [1] -0.8 2.0 1.5 5.0 5.0 4.0 4.0 4.0

Imports of goods and services, LBPbn [1] 30,002 33,332 38,499 44,081 49,371 55,295 61,378 67,823

Imports of goods and services, US$bn [1] 19.9 22.2 25.6 29.4 33.2 37.7 43.1 48.4

Imports of goods and services, real growth % chg y-o-y [1] 3.1 5.0 5.5 8.0 6.0 6.0 5.0 5.0

Net exports of goods & services, LBPbn [1] -17,250 -19,547 -23,128 -26,943 -30,348 -34,370 -38,360 -42,618

Net exports of goods & services, US$bn [1] -11.5 -13.0 -15.4 -18.0 -20.4 -23.5 -26.9 -30.4

Net exports of goods & services, real growth % chg y-o-y [1] 6.2 7.2 8.4 10.0 6.6 7.3 5.6 5.6

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN/BMI.

production collapsing in the latter months of the year. Indeed,

according to official figures, electricity production contracted

by an average 13.2% y-o-y through the first ten months of 2012,

with the peak decline coming in Augu st when output fell 23.3%

y-o-y (part of this was also due to a series of strikes at the state

energy firm). Given the increasingly unreliable supply of energy

throughout the country, investment is likely to remain muted

over the coming quarters.

One of the biggest casualties of the regional instability has been

Lebanon's tourism industry. Directly accounting for approxi-

mately 1 0% of GDP, the downturn in the sector has played a

key role in depressing broader business activity.

According to the Central Administration of Statistics, the number

of tourist arrivals fell to 7.8mn in 2012, down from 8.1mn in

2011 and 9.6mn in 2010. This is similarly reflected in the latest

Ernst & Young Middle East Hotel Benchmark Survey, which

shows occupancy rates and average room rental rates remaining

at multi-year lows through late 2012. With GCC states having

issued frequent travel warnings advising their nationals to avoid

visiting Lebanon, the civil war in Syria showing no signs of

abating, and sectarian tensions across the region still acute, we

do not expect to see a more fundamental recovery in the tour-

ism sector in 2013.

To be sure, we concede that given the large share of Lebanese

expatriates that makes up total tourist arrivals, the industry will

not experience a more acute collapse given the diaspora 's firmer

commitment to the country.

Private Consumption OutlookWe do not expect any significant changes to household con-

sumption patterns in 2013, and are projecting growth of 4.0%,


ECONOMIC OUTLOOK

In Need Of An Energy Boost Electricity Production


0

200

400

600

800

1,000

1,200

1,400

-25

-20

-15

-10

-5

0

5

10

15

20

25

Jan-

05Ju

n-05

Nov

-05

Apr-

06Se

p-06

Feb-

07Ju

l-07

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug-

09Ja

n-10

Jun-

10N

ov-1

0Ap

r-11

Sep-

11Fe

b-12

Jul-1

2

kWhmn (RHS) % y-o-y (3mmavg)

A Holiday Not So Hot Spot Tourist Arrivals

Source: Central Administration of Statistics, BMI

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2

2010: 9,666,4872011: 8,158,3922012: 7,857,975

Rooms Available Hotel Occupancy Rates, %

Source: Ernst & Young Middle East Hotel Benchmark Survey

0

10

20

30

40

50

60

70

80

90

100

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Sentiment Set To Improve? Business Confidence Survey


-40

-30

-20

-10

0

10

20

30

40

Q40

7Q

108

Q20

8Q

308

Q40

8Q

109

Q20

9Q

309

Q40

9Q

110

Q21

0Q

310

Q41

0Q

111

Q21

1Q

311

Q41

1Q

112

Q21

2

Production Demand

compared to an estimated 2.0% in 2012. On one hand, the latest

Business Sentiment Survey from the central bank (for Q212)

shows a marked improvement in the private sector's outlook

compared to earlier in 2012; however, the headline reading

would still seem to indicate that overall, confidence is negative.

Moreover, although credit growth still appears relatively healthy,

expanding 11.2% y-o-y in November, the trend is undoubtedly

pointing to a slowdown. On the other hand however, we expect

remittance inflows to continue apace, which should help support

private spending. At approximately 20% of GDP, remittances

play a massive role in the broader Lebanese economy, and have

rarely fallen in year-on-year terms.

Government Consumption OutlookWe see little prospect of an aggressive ramp up in government

spending in 2013, particularly given the fractious nature of the

political system. With parliamentary elections set to take place

later this year, there is even less of a chance of new expendi-

ture measures being pushed through, in our view. Indeed, our

baseline scenario does not see the current wage bill that is set

to be discussed by parliament – which would see public sector

salaries account for 54% of total spending, while the wages-

to-GDP ratio would hit 15% – being passed. As a result, we

are only projecting marginal growth in government consump-

tion of 2.0% in 2013, unchanged on 2012 levels, but still an

improvement on the 10.2% and 8.4% declines posted in 2011

and 2010 respectively.

Fixed Investment OutlookIt is clear to us that Lebanon's construction boom has come to

an aggressive halt, and is unlikely to rebound in the near term.

Latest data from the central bank highlights how fixed investment

has come off the boil recently, with total cement deliveries and

the number of construction permits issued steadily declining

through the latter months of 2012. There are a host of reasons for

the relatively poor performance of gross fixed capital formation,

including ongoing policy uncertainty surrounding upcoming

elections, the regional instability stemming from Syria's civil

war, and the majority of reconstruction efforts following the

2006 war having come to an end (most of which was focused

on Beirut and the real estate sector). In this climate, we are

projecting growth in GFCF of 1.8% in 2013.

Net Export OutlookLebanon's net export position will remain a major drag on

headline GDP growth through 2013, with the expansion in

imports set to outpace that of exports. In terms of the latter,

supply chains and trade routes have been disrupted due to the

conflict in Syria, and are unlikely to be restored over the coming

months. Moreover, although the picture for the global economy

has improved slightly since mid-2012, the external environment

is by no means conducive to fostering a more pronounced uptick

in exports, which we forecast to expand 1.5% this year.

In contrast, we are forecasting an acceleration in import growth

to 5.5% in 2013, compared to an estimated 5.0% in 2012. Some

of this has to do with the greater throughput traffic seen at the

Port of Beirut in recent months, which is attracting increased

trade flows on account of the closure of Syria's main ports.

According to Lebanon's Association of Car Importers moreo-

ver, newly registered car sales were up 9.3% in 2012, with

December alone seeing growth of 24.9%. Overall, we project

the country's net export position to subtract 2.3% of headline

GDP growth in 2013.

Fiscal PolicyFiscal Position Increasingly Precarious

BMI VIEWLebanon's fiscal position is likely to remain precarious through 2013,

and we forecast the budget deficit narrowing only slightly to 8.8% of

GDP, from an estimated 10.0% in 2012. With parliamentary elections

likely to take place at some point in mid-2013, we do not believe the Fi-

nance Ministry's recently proposed budget amendments, which would

see large-scale spending cuts, will be approved. Given the broad-

based economic slowdown, tax inflows will also remain anaemic over

the coming months.


LEBANON Q2 2012

Credit Growth Slowing Claims on Private Sector, % chg y-o-y


-15

-10

-5

0

5

10

15

20

25

30

Jan-

05Ju

n-05

Nov

-05

Apr-

06Se

p-06

Feb-

07Ju

l-07

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug-

09Ja

n-10

Jun-

10N

ov-1

0Ap

r-11

Sep-

11Fe

b-12

Jul-1

2

On the back of slower tax inflows and higher wage payments,

Lebanon's budget experienced one of its worst years in recent

memory in 2012. Recently released figures from the Ministry

of Finance show the budget deficit expanding to LBP5.9trn

(US$3.9bn) last year, compared to LBP3.5trn in 2011.

In percentage of GDP terms the deterioration to the country's

public finances is even more alarming, with the fiscal shortfall

increasing to 10.0%, from 5.9% the year prior. More importantly

perhaps, particularly given Lebanon's massive stock of public

debt (approximately 135% of GDP), there was also a sharp

weakening in the primary budget balance, which fell into deficit

to the tune of LBP166bn (0.3% of GDP), compared to a surplus

of LBP2.5trn (4.3% of GDP) in 2011. This marked the first time

since 2006 that a primary budget deficit was posted, and brings

into doubt the government's ability to improve its debt ratios in

the near term. Given our view that the macroeconomic backdrop

will remain weak through 2013 on the back of the ongoing civil

war in Syria (see our online service, 19 February, 'Economic

Recovery Not Yet On The Cards'), we do not believe a more

fundamental improvement to Lebanon's budget position is on

the cards this year.

With the economy stuck in a soft patch, it is not surprising that

tax inflows have been relatively anaemic in recent months. The

latest breakdown from the Ministry of Finance goes up until

November, and shows total tax revenues expanding 4.2% y-o-y.

Customs and VAT revenues increased by a marginal 0.7%

y-o-y and 3.5% respectively through this time period, while

'miscellaneous' tax receipts expanded 7.2%. Including treasury

transactions, the total amount of cash flowing into government

coffers is estimated to have reached LBP14.5trn in 2012, up

only marginally from LBP14.0trn posted in 2011. For 2013,

we are projecting a roughly similar increase in total revenues

of only 3.9% y-o-y. Indeed, with little hope of a sharp rebound

in economic activity, tax revenues will remain fundamentally

depressed.

Austerity Difficult To ImplementDespite tax inflows having slowed, government spending picked


ECONOMIC OUTLOOK

TABLE: FISCAL POLICY2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Fiscal revenue, LBPbn [1,3] 12,684.30 14,070.40 14,518.40 15,086.50 16,274.10 17,087.80 17,942.20 18,839.30

Revenue, % of GDP [1,3] 21.4 23.9 22.5 21.0 20.5 19.4 18.1 17.2

Fiscal expenditure, LBPbn [1,3] 17,046.90 17,600.00 20,447.20 21,405.20 22,453.90 23,409.60 24,442.20 25,555.30

Expenditure, % of GDP [1,3] 28.8 29.9 31.7 29.7 28.3 26.5 24.7 23.4

Budget balance, LBPbn [1,3] -4,362.60 -3,529.60 -5,928.80 -6,318.70 -6,179.80 -6,321.80 -6,500.00 -6,716.00

Budget balance, % of GDP [1,3] -7.4 -6.0 -9.2 -8.8 -7.8 -7.2 -6.6 -6.1

Primary balance LBPbn [2,3] 1,855.10 2,504.60 -166.2 -446.9 130.6 388.4 560.2 728.5

Primary balance % of GDP [2,3] 3.1 4.3 -0.3 -0.6 0.2 0.4 0.6 0.7

Notes: e BMI estimates. f BMI forecasts. 1 Total Cash Balance inc. Treasury transactions; 2 Fiscal balance stripping out interest payments on government debt. Sources: 3 Ministry of Finance, BMI Forecasts.

Deeper Into The Red Fiscal Balance

Source: BMI, Ministry of Finance

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

-16

-14

-12

-10

-8

-6

-4

-2

0

2004

2005

2006

2007

2008

2009

2010

2011

2012eLBPbn (RHS) % of GDP

A Concerning Shortfall Primary Fiscal Balance


-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

-1

0

1

2

3

4

5

6

7

8

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

LBPmn (RHS)% of GDP

up considerably over the course of 2012, coming in at an estimated

LBP20.4trn, marking an increase of 16.2% y-o-y. According to

the Ministry of Finance's latest monthly report (October 2012),

a pronounced increase in public sector salaries was the main

culprit, which increased by a massive 24.0% y-o-y. Through the

first ten months of 2012, salaries accounted for approximately

22% of total government spending, compared to 20% through

the same time period in 2011. Despite Lebanon's stretched public

finances, demands for further public sector wage increases have

gathered pace in recent months. Indeed, beginning on February

19, many civil servants and teachers (represented by the Union

Coordination Committee) launched an open ended strike in a

bid to pressure the government to introduce a new salary scale.

The other main culprit that pushed Lebanon's budget further

into the red was state energy firm Electricite du Liban (EDL),

which continues to receive significant fiscal transfers from the

government. In the first ten months of 2012, total transfers to

EDL came to LBP2.8trn, marking an increase of 31.2% y-o-y.

When compared to 2010, when the energy firm received only

LBP1.5trn in state transfers, it becomes clear that without either

a prolonged downturn in global oil prices or a more fundamental

restructuring of the company and wider industry, EDL will re-

main a heavy burden on government spending over the coming

years. Taken together, the increase in public sector salaries and

higher transfers to EDL accounted for 64.5% of the increase in

budget expenditures through October.

With parliamentary elections set to take place in mid -2013,

we do not believe a more fundamental package of government

spending cuts is on the table over the coming months. In early

March, the Finance Ministry forwarded an amended 2013 budget

proposal that would see LBP2.0trn in spending cuts this year.

Given the looming vote, there is little likelihood of the budget

passing through parliament, in our view. Indeed, Lebanon's

perennial failure to pass a budget is unlikely to change at this

juncture, particularly one which attempts to cut spending during

a broad-based economic downturn and ahead of an election.

As a result, our baseline scenario sees Lebanon's budget deficit

narrowing only slightly in 2013, falling to 8.8% of GDP, from

an estimated 10.0% last year.

Debt PolicyDebt Ratios Unlikely To Improve

BMI VIEWLebanon's debt ratios are unlikely to improve in the near term, as eco-

nomic growth remains weak and pressures to ramp up spending ahead

of parliamentary elections in mid-2013 steadily build. We project total

government debt-to-GDP increasing to 137% in 2013, from 134% in

2012, before ticking up to 140% in 2014.

The sharp narrowing seen in Lebanon's debt ratios since 2006

appears to have stalled, and is unlikely to gather momentum

through 2014 at a time when economic growth remains fun-

damentally depressed and pressures to increase spending are

gradually building. According to latest data from the central

bank, total government debt came in at a record high US$57.7bn

at the end of 2012, marking an increase of 7.6% y-o-y, which is

the fastest pace of accumulation seen in four years.


LEBANON Q2 2012

Spending Expanding At Rapid Clip Total Revenue & Expenditure, LBPbn


0

5,000

10,000

15,000

20,000

25,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

ExpendituresRevenues

Only A Gradual Narrowing Fiscal Balance Projections


-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

-14

-12

-10

-8

-6

-4

-2

0

2008

2009

2010

2011

2012e

2013f

2014f

2015f

2016f

LBPbn (RHS) % of GDP

The main culprit behind the sharp uptick in Lebanon's debt

load last year was a larger-than-expected increase in external

debt, which expanded to US$24.4bn from US$20.9bn in 2011.

In year-on-year terms, the external debt pile jumped 16.6%,

which was the fastest pace since 2004. In contrast, government

domestic debt grew at a more marginal pace of only 1.9% y-o-y

to come in at US$50.2bn, and now accounts for 57.8% of the

country's total stock of public liabilities.

Despite the slight uptick in Lebanon's nominal debt load, in

percentage of GDP terms, total public liabilities fell to ap-

proximately 134% from 137% in 2011 (and broadly unchanged

from 2010 levels). In terms of exports, total debt now stands

at 218%, compared to 208% in 2011.

In our view, we believe a more fundamental improvement in

the country's debt ratios is off the cards in the near term. Indeed,

having fallen from a high of 180% in 2006, our baseline scenario


ECONOMIC OUTLOOK

TABLE: DEBT INDICATORS2011 2012e 2013f 2014f 2015f 2016f 2017f

Total external debt stock, US$mn [2] 20,920 21,338 22,405 23,525 24,701 25,689 26,717

Total external debt stock, % of GDP [2] 53.5 49.8 46.8 44.4 41.6 38.0 34.8

Total external debt stock % of XGS [2] 81.2 80.9 74.1 70.9 67.8 65.0 63.1

Total external debt stock % of reserves [2] 67.9 66.0 66.0 66.0 66.0 65.3 64.7

Public and publicly guaranteed external debt stock, US$mn [1,3] 20,910 24,380 27,061 29,768 31,256 32,819 33,803

Public and publicly guaranteed external debt stock, % of GDP [1,3] 53.5 56.9 56.5 56.2 52.7 48.6 44.0

Public and publicly guaranteed external debt stock, % of XGS [1,3] 81.2 92.4 89.5 89.7 85.8 83.0 79.8

Public and publicly guaranteed external debt stock, % of Reserves [1,3] 67.9 75.4 79.7 83.5 83.5 83.5 81.9

Private non-guaranteed external debt, US$mn [2] 1,296.50 1,426.10 1,568.70 1,725.60 1,898.10 2,088.00 2,296.80

Private non-guaranteed external debt, % of GDP [2] 3.3 3.3 3.3 3.3 3.2 3.1 3.0

Private non-guaranteed external debt, % of XGS [2] 50.3 54.1 51.9 52.0 52.1 52.8 54.2

Private non-guaranteed external debt, % of reserves [2] 42.1 44.1 46.2 48.4 50.7 53.1 55.6

Government domestic debt, LBPbn [3] 32,746.6 33,371.0 38,479.0 44,398.8 51,127.7 58,969.6 68,404.7

Government domestic debt, US$bn [3] 21.7 22.2 25.6 29.6 34.4 40.3 48.0

Government domestic debt, % of GDP [3] 55.6 51.8 53.4 56 57.9 59.6 62.5

Total government debt, US$bn [3] 53.7 57.8 65.5 74.2 82.4 91.8 102.2

Total government debt, % of GDP [3] 137.3 134.9 136.9 140 138.9 135.9 133.1

Foreign reserves ex gold, US$bn [3] 30.8 32.4 34.0 35.7 37.5 39.3 41.3

Foreign reserves ex gold, US$bn, % change y-o-y [3] 7.8 5.0 5.0 5.0 5.0 5.0 5.0

Import cover, months [3] 12.9 12.9 12.3 12.0 11.7 11.8 12.0

Notes: e BMI estimates. f BMI forecasts. 1 Data from local not WB series: Include government short-term external debt. Sources: 2 World Bank, BMI Forecasts; 3 Banque du Liban, BMI Forecasts.

Debt Pile Heading Higher Government External Debt

Source: BMI, Banque du Liban

-5

0

5

10

15

20

25

30

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

US$bn % chg y-o-y

Domestic Debt Accumulation Slowing Government Domestic Debt


-5

0

5

10

15

20

25

30

35

40

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

US$bn % chg y-o-y

now sees total public debt stabilising in the 130% of GDP area

over the coming years. With one of the highest debt-to-GDP

ratios in the world, this is certainly a concerning development

in the context of renewed investor focus on public finances

across the EM sphere.

As we recently highlighted, the economic downturn in Lebanon

has had a pronounced impact on the country's public finances,

with the budget deficit surging to an estimated 10.0% of GDP

in 2012, from 5.9% in 2011. Of more concern however, was the

deterioration in the primary budget balance, which flipped into

deficit to the tune of LBP166bn (0.3% of GDP) from a surplus

of LBP2.5trn (4.3% of GDP) the year prior. Going forward, our

baseline scenario sees the primary budget remaining in deficit

through the end of 2013, and actually expanding to 0.6% of

GDP by the end of the year. As a result, we are forecasting an

uptick in Lebanon's debt-to-GDP ratio to 137% in 2013, and

up to 140% by the end of 2014.

For the time being, however, we do not believe Lebanon will

encounter any refinancing difficulties. A large share of the coun-

try's debt continues to be held by the domestic banking sector

(banks are estimated to hold approximately 75% of domestic

debt), which has hitherto proved resilient in the face of internal

and external shocks. Indeed, the loyal depositor base should

ensure that Lebanese banks have little difficulty in absorbing

any new issuance through end year, which will help prevent a

sudden spike in interest rates.


LEBANON Q2 2012

Debt Ratios Stabilising Total Government Debt, % of GDP


100

110

120

130

140

150

160

170

180

190

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

The Lebanese Economy To 2022

Long-Term Growth Depends On Structural Reforms

BMI VIEWLebanon's economy will face a host of structural challenges in attempt-

ing to meet its long-term growth potential, with a massive infrastructure

deficit, elevated public debt load and ongoing political risk weighing on

our outlook through 2022. That said, a robust banking sector, significant

potential to develop the tourism industry and increased investor inter-

est from the Gulf Cooperation Council should all help support growth.

Real GDP growth is projected to expand by an average 4.1% between

2013 and 2022, with GDP per capita forecast to hit US$27,182 by the

end of our forecast period.

Following several years of booming growth, in which real GDP

expanded by an estimated 8.3% between 2007 and 2010, we

expect the Lebanese economy to expand at a slower clip over

the long term as the narrowing of the output gap forces growth

onto a lower trajectory. It is important to keep in mind that

despite our broadly optimistic outlook on Lebanon's long-term

growth potential, the majority of convergence gains seen in

recent years have been due in large measure to reconstruction

efforts following the 2006 war with Israel (the majority of

which has been channelled to Beirut at the expense of the rest

of the country). We forecast real GDP growth averaging 4.3%

over our 10-year forecast period. This will help bring GDP per

capita up to US$26,920 by 2022.

Our core view sees the service sector remaining the mainstay

of the Lebanese economy over the long term, with tourism in

particular likely to continue acting as a chief source of growth

and employment throughout the country. Despite perennial

political risk which may keep some visitors at bay, the country's

strategic location at the nexus of North Africa, the Middle East

and Europe should bode well for efforts at attracting increasing

numbers of tourists over the long term. The Gulf Cooperation

Council (GCC) will most likely play a particularly important

role in this regard, as both households and investors seek to

take advantage of Lebanon's significantly lower costs. More

broadly, Lebanon's exposure to the faster growing GCC helps

offset problems associated with periods of elevated oil prices,

as the economy benefits from an influx in remittances, tourists,

banking sector deposits and foreign direct investment.

Remittances Crucial For Long-Term GrowthIn terms of GDP by expenditure, private consumption will

continue to be the main driver of economic activity through

2022, contributing an average of 5.4 percentage points (pp) to

real GDP growth over the long term (compared with an aver-

age of 0.6pp and 0.7pp for public consumption and gross fixed

capital formation respectively). With remittances accounting

for approximately 22% of GDP, the Lebanese expatriate com-

munity will be a crucial source of external capital and will help

to buoy household spending in the event that the economy faces

an unexpected shock (which would most likely be sparked by

Chapter 1.3: 10-Year Forecast – Lebanon


TABLE: LONG-TERM MACROECONOMIC FORECASTS2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f

Nominal GDP, US$bn [3] 59.3 67.5 76.8 85.7 93.5 102.0 111.1 122.8

Real GDP growth, % change y-o-y [3] 5.3 6.2 4.6 4.3 4.1 4.0 4.0 5.0

Population, mn [4] 4.4 4.4 4.4 4.5 4.5 4.5 4.5 4.6

GDP per capita, US$ [3] 13,530 15,302 17,286 19,196 20,822 22,576 24,482 26,920

Consumer price index, % y-o-y, ave [1,5] 6.0 6.0 6.0 5.5 5.0 5.0 5.0 5.5

Current account balance, % of GDP [2,6] -10.5 -10.3 -10.1 -9.1 -8.8 -8.2 -7.9 -7.4

Exchange rate LBP/US$, ave [7] 1,487.50 1,465.00 1,425.00 1,400.00 1,400.00 1,400.00 1,400.00 1,400.00

Notes: f BMI forecasts. 1 As the CAS rebased in 2007, year-on-year rates from Jan-Dec 2008 are calculated estimates by BMI; 2 Official Balance of Pay-ments figures only available from CAS for period 2002-2005: data thereafter are BMI estimates, except goods balance (provided by Banque du Liban). Sources: 3 UN/BMI; 4 World Bank/UN/BMI; 5 Central Administration for Statistics; 6 Central Administration for Statistics, BMI Forecasts; 7 BMI.

a renewed political crisis – a scenario which cannot be ruled

out). Given that remittance inflows have only contracted in two

separate years (in year-on-year terms) since 1990, we see this

source of capital as relatively stable over the long term.

That said, the ongoing reliance on remittance inflows to support

private consumption is reflective of a more fundamental chal-

lenge confronting the Lebanese economy. According to data

from the World Bank, 38.6% of all Lebanese citizens with at

least a tertiary education have emigrated. This compares starkly

with other states throughout the region, where the vast majority

of those with higher education levels have decided to remain in

the country and seek employment domestically. Not only does

the loss of critical skills associated with this 'brain drain' weaken

the economy's growth potential, but we are also concerned that

this highlights a fundamental lack of confidence in the country's

long-term prospects.

Business Environment In Need Of ReformsTo retain its brightest citizens, Lebanon's government will need

to pursue significant reforms aimed at stimulating the private

sector (such as proceeding with the privatisation process and

reducing the public debt load), which would theoretically help

filter through to increased employment opportunities in the pri-

vate sector, lessening the need to move abroad for work. To this

end, at the moment the long-term prospects that a host of busi-

ness environment reforms can be implemented remain relatively

slim. Ranked 115 out of 183 economies under the World Bank's

2013 Doing Business Report (which ranks countries in terms of

the ease of doing business), and with a business environment

score of only 46.5 out of 100 in BMI's proprietary rankings, it

is apparent that significant shortfalls still exist in Beirut's ability

to attract foreign investment. With a massive current account

deficit (we see this shortfall narrowing considerably over the

decade in tandem with greater service exports), Lebanon's on-

going reliance on external capital is certainly a major threat to

underlying economic stability.

The lack of a stable government is also holding back the devel-

opment of the underlying infrastructure network, as the peren-

nial failure to agree to a budget continues to constrain much

needed capital expenditures. According to the IMF, low levels

of investment have created significant infrastructure gaps and

bottlenecks in the electricity, telecommunications, water and

transportation networks. That said, with one of the highest debt-

to-GDP ratios in the world, which came in at an estimated 134%

in 2012, Lebanon's ability to significantly ramp up spending

will be inherently constrained over the coming years. The key

challenge confronting incoming governments will therefore be

to balance the need for much-needed investment projects with

attempts at continuing to rein in the country's debt load.


LEBANON Q2 2012


Lebanon has a high proportion of skilled labour relative to other

countries in the region.

There are few restrictions on foreign investment.

Lebanon has an established and buoyant banking sector.

Weaknesses Red tape and bureaucracy add greatly to the cost of doing business.

In Transparency International's 2012 Corruption Perceptions Index,

Lebanon places joint 128th worldwide, highlight ongoing problems

with graft.

Opportunities The anti-Syrian protests that followed the assassination of Rafic

Hariri also reflected frustration with other elements of the status

quo, including corruption.

The political will to privatise failing state-owned enterprises is in

place, and if this materialises then confidence should improve.

Lebanon has adopted a new law to combat money laundering.

Threats Ongoing security risks pose downside risks to investor confidence

and economic activity.

The urgent need for fiscal consolidation to reduce the debt burden

could precipitate tax rises.

Political tensions mean the government's planned reform process

will not be easy.

The export of Lebanese goods by road is dependent on Syrian

border policy, which, in the context of recent political tensions, is

unpredictable.


Chapter 1.4: Business Environment – Lebanon

Core Views Syrian President Bashar al-Assad's hold on power appears less

tenable in the short-to-medium-term. However, the opposition is

unlikely to gain full control of the country anytime soon, with areas

in the west and the south set to remain under the control of Assad's

loyalists even under a scenario whereby Damascus falls. Our core

scenario is a continuation of the civil war over the coming years.

Among all the sanctions imposed by foreign governments, EU oil-

related sanctions are having the biggest detrimental effect on the

country. The EU oil embargo has significantly reduced oil revenues,

which comprise 25-30% of fiscal revenues, and additional sanctions

on the energy and banking sector would cause further harm.

The short-sighted political and financial reforms enacted by the re-

gime to mitigate protests will have a negative impact on the country's

long-term economic potential, and we do not expect the country to

reinstate its economic liberalisation plans over the medium term.

Major Forecast Changes We have revised down our 2013 real GDP growth forecasts, and now

project a contraction of 6.1%, compared to our previous forecasts

of a contraction of 3.4%. As a result of the ongoing civil war and

of economic sanctions, private consumption, fixed investment and

exports will be hit particularly hard.

Key Risk To Outlook Although the top ranks of Syria's military have been largely loyal

to the regime, because of their ethnic and religious connections, a

mutiny within the higher echelons of the security apparatus could

accelerate the fall of the regime.

Assad's regime has proven more durable than expected in 2012,

and it could well succeed in retaining Damascus and large areas

of the country in 2013 and 2014. Levels of violence would increase

as a result, ensuring that the economic contraction continues over

the coming years.


Executive Summary – Syria


The recent recognition by major Western government of the National

Coalition for Syrian Revolutionary and Opposition Forces, a body

which was formed by exiled Syrian officials in Qatar in November,

raises the probability that a managed transition will succeed, should

one occur.

Weaknesses Owing to the continuation of the regime's use of brutal force to

maintain order, both the Syrian public and international observers

have ruled out the possibility of political reform.

The diversity of Syria's population suggests that a managed transi-

tion could be difficult, should one occur.

The National Coalition for Syrian Revolutionary and Opposition

Forces is not recognised by several militant opposition groups within

the country.

Opportunities A successful transition could lead the way to a representative gov-

ernment and political stability.

Threats A new strongman could come in to replace the current regime, lead-

ing to another authoritarian government.

Radical Islamist groups could gain increasing powers into the country

if the current regime falls.

A breakdown of the security apparatus could lead to the collapse of

the state and general disorder.


Chapter 2.1: Political Outlook – Syria

Domestic PoliticsSet For A Prolonged Civil War

BMI VIEWThe regime of Syria's President Bashar al-Assad has continued to lose

pockets of territory over recent months. However, the opposition is un-

likely to gain full control of the country anytime soon, with areas in the

West and the South of the country set to remain under the control of

Assad's loyalists even under a scenario whereby Damascus falls. The

scene is set for a prolonged sectarian civil war.

From the beginning of the conflict in Syria, the regime of Presi-

dent Bashar al-Assad has maintained a much higher proportion

of military forces in Homs, Damascus, the West and the south

than in Syria's northern or eastern provinces. This force disparity

has resulted in the regime's contraction, as the opposition has

seized vast territories across Syria, a trend which has acceler-

ated over recent months.

As of March 10th, the situation on the ground is as follows:

• Damascus and its province: A map recovered from Syrian

Republican Guard troops in late 2012 showed that half of

the capital's suburbs are under opposition control, mainly

those to the south and the east of the capital. However, the

army is sending in daily reinforcements to crush rebels in the

suburb of Daraya, Southwest of Damascus, and few radical

groups are active in the province. Although our core view

sees insurgents eventually taking over the capital before

end-2013, which would mark the de facto fall of the regime,

we cannot exclude that the regime will hold for longer.

• North: Rebels in the north, particularly hardline Islamists

groups, have better access to weapons and rear bases than

those farther inland. Insurgents currently control about half

of Aleppo and much of the countryside around the city.

In Raqa, hardline Islamist groups captured the provincial

capital on March 6, although regime warplanes still bombard

rebel targets in the city. Large swathes of Idlib province

are controlled by insurgents, which successfully concluded

a months-long siege of the Taftanaz Airbase in January,

overrunning the key logistical hub and further isolating


SYRIA Q2 2012

TABLE: POLITICAL OVERVIEWSystem of Government Parliamentary Republic: President Elected By Referendum for seven year terms, with two-terms limit (not

valid retroactively). Parliament (the 250-seat People's Council of Syria) elected for four year terms.

Head of State President Bashar al-Assad (approved by referendum in 2000 and again in 2007)

Head of Government President Bashar al-Assad (de facto), Prime Minister Wael al-Halki

Last Election Constitutional Referendum – 2012

People's Council of Syria – May 7 2012

Composition Of Current Government Council of Ministers composed of and dominated by Baath Party members

Key Figures Prime Minister Wael al-Halki, Minister of Interior Mohammad Ibrahim al-Shaar, Minister of Economy Muhammad Zafir Mahabik

Main Political Parties

Arab Nationalist Baath Party

Arab Socialist Union

Socialist Unionists

Communist Party of Syria

Democratic Socialist Unionist Party

Extra-Parliamentary Opposition? The Free Syrian Army(FSA), headquartered in Turkey, functions as an umbrella organisation linking some of the major militias. The Syrian National Coalition is a coalition of Syrian opposition groups, which was founded in Qatar in November 2012.

Next Election Parliamentary – 2016

Presidential – May 2014

Ongoing Disputes Israel (currently occupying the Golan Heights, accuses Syria of supporting anti-Israeli terrorist groups including Hamas and Hizbullah); Lebanon (Government accuses Syria of being behind several political assassinations including that of Rafik al-Hariri in 2005 and prolonging the domestic unrest); US (Removed its ambassador in 2005, imposed sanctions relating to Hariri assassination and other Syrian policies, removed ambassador again in 2011); Historically hostile relations with Saudi Arabia, hostile relations with most Gulf states (especially Qatar and Saudi Arabia) and with most western countries since the beginning of the crisis.

Key Relations/ Treaties Strong relations with Iran and Russia, good relations with China.

BMI Short-Term Political Risk Rating 30.8

BMI Structural Political Risk Rating 32.2

Source: BMI

regime forces in the north. That said, the provincial capital

remains in army hands.

• East: Rebels have seized large swathes of Deir Ezzor prov-

ince, although the army still controls much of the provincial

capital. Radical Islamist militants have seized large areas

of the Kurd-majority province of Hasakeh.

• Centre: After a nine-month siege on rebel districts and

towns in Homs province, the army recently launched a new

operation using pro-regime National Defence Forces fight-

ers and warplanes aimed at crushing insurgent strongholds.

Reclaiming rebel enclaves in Homs would be an important

symbolic victory for the regime, as the city is home to a

sizable Alawite community. Though insurgent groups fre-

quently stage hit-and-run operations across Hama, the region

and the provincial capital are mostly under army control.

• West: The heartland of the Alawite sect, the West remains

firmly under army control.

• South: In Sweida, where most of Syria's Druze community

live, community leaders have called for neutrality in the

conflict, and the province remains mostly peaceful. In Daraa,

the so-called cradle of the revolt, rebels have seized several

villages, but most of the province remains in army hands.

Regime's Loyalists Set To Resist Despite ContractionThe regime's inability to control all of Syria originates from

Assad's strategy to deploy only the most trusted military units in

combat, largely composed of members of his Alawite minority

sect, in order to hedge against defection from the mostly Sunni

rank-and-file. While the Syrian Army had an estimated 220,000

soldiers in 2011, the regime has reportedly been able to rely on

only approximately 65,000 to 75,000 troops. That said, pro-

Assad militias, which comprise the Shabiha, mostly composed

of Alawite militants, and local Popular Committees, which have

drawn their ranks from minorities who have armed themselves

to protect their communities against opposition fighters, have

become a significant source of reinforcement for the regime.

What remains of the Syrian army is comprised entirely of com-

mitted regime supporters. Given their fears that, under a scenario

whereby the regime falls, their survival would be at risk, such

units are unlikely to surrender to the enemy. Moreover, the

army and the militia receive direct support from Iran's Islamic

Revolutionary Guards Corps (IRGC) and Lebanese Hezbollah.

Given Tehran's key interest in maintaining influence in Syria,

we believe that the Islamic Republic will continue to support

pro-Assad militias. As a result, we believe that the government

is unlikely to lose control of key areas in the West and South

of the country anytime soon, and a strong counterinsurgency

would develop if Damascus falls. Indeed, as we highlighted

in our latest research note on the conflict, there is currently

speculation that the Alawite regime could consolidate power

in Syria's north-western coastal region around Latakia, from

which to make a last stand.

Rebels Not Strong Enough To Fully Control The CountryAlthough direct international military intervention appears

off the cards at this stage, indirect support to the opposition

has increased significantly in recent months. The EU revised

in February its sanctions against the regime, leaving the door

open to providing technical assistance, including training and


POLITICAL OUTLOOK

Ripe With Risks MENA - BMI Short-Term Political Risk Rating, Scores out of 100.

Source: BMI

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non-lethal military equipment, to the opposition Syrian National

Coalition. In March, the British Foreign Secretary William Hague

declared that the United Kingdom has begun sending equipment

such as body armour and armoured vehicles, along with advice

and assistance. The US said for the first time in March that it

would provide direct, non-lethal aid to rebel fighters battling

Assad, and US$60mn in extra assistance. Moreover, according

to reports, US, French and British officials were training rebel

fighters in Jordan, in an effort to strengthen secular elements over

Islamist hardliners in the rebel ranks. Importantly, Britain and

France declared in March that they are prepared to arm Syrian

rebels even without unanimous EU support, a move which could

significantly increase the opposition's firepower.

However, we are sceptical that the opposition will take control of

the entire country anytime soon. Barring a dramatic increase in

the inflows of offensive weapons to the insurgents, their firepower

will likely remain inferior to that of the regular army. While the

Syrian Air Force's capability is gradually degrading, the regime

in December 2012 began using its Surface-to-Surface Ballistic

Missile inventory, inflicting significant blows to the rebels.

Moreover, divisions among the opposition remain deep-seated.

The influence of Jihadists fighters, which seek to establish an

Islamic caliphate through violent means and reject the legitimacy

of the modern state, is on the rise. Competition for resources

among different opposition groups is increasing, which will

hinder the militants' ability to undertake coordinated efforts to

fight the regime. Even if the rebels take over Damascus, areas

in the south and the west of the country will likely remain under

the control of Assad's loyalists.

A Prolonged Civil War Is On The CardsWe reaffirm our core view that political violence will continue

over the coming years. Indeed, the power vacuum created by the

regime's withdrawal from the capital would trigger intensified

conflict between Syria's ethnic groups, especially if weapons

continue to flow into the hands of competing organisations. In

the worst-case scenario, Syria could slide into a prolonged

sectarian conflict, similar to Lebanon in the 1980s.

Long-Term Political Outlook

'Post-Assad' Era Likely To Increase Instability

BMI VIEWSyrian President Bashar al-Assad and his regime are fighting for their

survival, but regardless of whether it endures or is overthrown, the

country's leadership will struggle to improve governance and deliver

robust economic growth. Consequently, Syria is likely to be unstable

for many years to come.

As of March 2013, Syrian President Bashar al-Assad and his

Ba'ath party regime are fighting for their survival after two years

of public unrest, which has resulted in more than 20,000 deaths.

Even if Assad manage to cling on power beyond 2013, we be-

lieve the regime will have been substantially weakened, paving

the way for its removal at a later date. Regardless of whether

a new government emerges, Syria faces colossal threats to its

stability. These include a rapidly expanding population, high

unemployment, an underground Islamist movement, growing

water shortages and an increasingly challenging geopolitical

environment.

Challenges And Threats To StabilityOne-Party/One-Sect Rule: Syria has been led by the Ba'ath

party since 1963 and by the Assad family (Hafez from 1970-2000,

and by his son Bashar thereafter) for 42 years. This long period

of one-family rule has been characterised by the suppression

of virtually all dissent, and by a high degree of cronyism and

corruption. The regime lacks popular legitimacy, since there

are no meaningful elections, and must therefore rely on the

security services and a sense of nationalism to maintain control.

The media, meanwhile, is government-controlled, leaving very

little room for legitimate criticism of the regime. BMI generally

believes that regimes such as Syria's will eventually be forced

to liberalise, leading to significant instability. An additional

source of risk is that the Assads and their core supporters hail

from the Alawite minority, which accounts for less than 20%

of Syria's total population. Although the Alawites have the

backing of other minorities, this system of minority rule could

lead to pent-up resentment from the Sunni majority (74%) being

unleashed, leading to sectarian violence.

Rapid Population Growth: Syria's population is growing

rapidly, with a total fertility rate (TFR) of 3.1 children per

woman over 2005-10, according to the UN. While the TFR is


SYRIA Q2 2012

declining, the average masks the fact that births are much higher

in rural areas and less wealthy urban areas. Consequently, the

UN forecasts Syria's population rising from 20.4mn in 2010 to

24.1mn in 2020, and to 27.9mn in 2030. This rapid increase

means that there will be ever greater pressure placed on public

services such as education and infrastructure, and on natural

resources. This will be a formidable challenge for any govern-

ment, but especially for one as politically rigid as Syria's, and

could increase the scope for social unrest. Another characteristic

of the population is its youthfulness, with 55% younger than 25.

Although this percentage is falling, it is still very high (young

people are considered more likely to participate in unrest or

resort to political radicalism). That said, urbanisation rates are

forecast by the UN to keep increasing, from 56% in 2010 to

60% in 2020, which should eventually lead to slower popula-

tion growth.

High Unemployment: A rapidly expanding population also

increases the pressure on the government to create sufficient jobs

to absorb the growing labour force, or at least create a favourable

business environment so that the private sector can create these

jobs. In Syria's case, the economy is largely state-dominated,

meaning that the public sector will have to bear the brunt of

employment creation. Prior to the onset of unrest in early 2011,

the official unemployment rate was 10%, but the true figure was

estimated at 25%; it is certainly much higher now that Syria

has been rocked by years of instability. The large proportion

of jobless workers naturally increases the pool of people who

are likely to be dissatisfied with the regime.

Islamist Forces: As with many secular authoritarian regimes in

the Middle East and North Africa, one of the most potent sources

of opposition is Islamist organisations. In Syria's case, In Syria's

case, radical Islamist militias represents the main challenge to

the government. Groups such as the Al-Nusra front have gained

prominence in the fight against the regime, and could play a key

role in the event of the fall of the regime.

Water Shortages: Syria is experiencing greater water short-

ages, especially after a drought in 2008 that took a heavy toll

on agriculture (which generates 20% of GDP and provides

the livelihood of half the population). The UN has estimated

that around 60% of Syria's land and 1.3mn people have been

affected by drought. An estimated 200,000-250,000 people

have been forced to move from their homes between 2007 and

2010, with most heading to Syria's main cities – Damascus,

Aleppo and Hama. This migration in turn places greater strain

on urban infrastructure. Droughts could become worse if current

concerns about global climate change prove correct. However,

there may be little that Syria can do about this, given that it is a

downstream state, with the waters of the Euphrates controlled

by upstream Turkey.

Complex Geopolitical Balancing Act: Syria's complex geo-

political environment poses a further risk. Syria was officially

branded a state sponsor of terrorism by the US State Department

in December 1979 and is currently one of only four countries

on that list (along with Cuba, Iran and Sudan), but it has had

diplomatic channels with the US despite its status because of

its importance to Middle Eastern peace initiatives. Syria is an

archenemy of Israel and ally of Iran. It is also highly influential

in Lebanon's politics, even after withdrawing its troops from the

country in 2005 after a 29-year deployment. A change of regime

in Damascus could thus be a real game-changer for the region.

Scenarios For Political ChangeAs of March 2013, after two years of unrest, it is difficult to

envisage Assad remaining in office for many more years. Even

if he will keep control of Damascus in 2013, the uprising has

exposed the vulnerability of the regime, and Assad is highly

unlikely to regain full control of the country. Below, we outline

the main scenarios for political change. (Note: when we refer to

'regime', this need not necessarily entail Assad as president. It

could be led by a transitional figure with the bulk of the state's

other top officials remaining in situ.)

Regime Collapse, Followed By Chaos Or Civil War: Our

core scenario sees the regime collapse following a long period

of instability (during which Syria's rebels are armed and trained

by the West and other Arab countries) or as a result of a coup

attempt. The experience of neighbouring Iraq showed that when

a highly repressive regime in power for 35 years collapses (albeit

under foreign invasion), anarchy and near-civil war follow suit,

with the latter triggered by sectarian violence. Syria is more

homogenous than Iraq but has sizeable minorities that could

turn on each other if central authority broke down. Thus, the

country could experience years of instability before a form of

centralised government is restored. Were this to be the case, we

would expect Syria's neighbours to become indirectly involved

in a proxy war, potentially exacerbating the domestic conflict.

Regime Continuity, With Minimal Reforms: This is an un-

realistic scenario, given the extent to which the Assad regime

has been shaken. The brutality of the crackdown to restore the

status quo has been condemned by major countries, leading to

Syria becoming isolated along the lines of Iraq under Saddam


POLITICAL OUTLOOK

Hussein in the 1990s. Isolation would almost certainly weaken

the regime over the longer term through economic deterioration.

Turbulent Decade AheadOverall, we reiterate that even if the Assad regime is replaced,

Syria will remain highly unstable for many years to come. The

challenges of establishing a democracy after decades of one-party

or one-family rule are immense, as is evident from the experience

of neighbouring Iraq, post-Saddam Hussein. Democratisation

will be further complicated by Syria's sectarian divisions and

hostile geopolitical environment.


SYRIA Q2 2012


The country lies in a geostrategic position, with access to the Medi-

terranean Sea trade routes and energy corridors which connect the

Middle East to Europe.

The population is the largest in the Levant.

Weaknesses Ongoing political violence will ensure that economic growth remains

below potential over the medium term.

The economy is heavily dependent on oil production, but oil supplies

could be exhausted by the end of our forecast period.

With 60% of the population younger than 25, the workforce is pro-

jected to expand at a rapid rate of 4% a year, increasing already

high levels of unemployment.

Opportunities Many sectors of the Syrian economy are underdeveloped, and the

development of those sectors could help drive long-term growth.

High levels of unemployment suggest strong opportunities for labour-

intensive industries.

Threats Political unrest has drastically reduced demand for the country's

tourism sector.

Short-sighted reforms enacted in response to public unrest threaten

to derail Syria's long-term economic potential.


Chapter 2.2: Economic Outlook – Syria

Economic ActivityAnother Bleak Year

BMI VIEWWe forecast real GDP in Syria to contract 6.1% in 2013 and expand

by a marginal 0.8% in 2014. Although growth will return, a protracted

civil war will keep the expansion below potential over the medium term,

while risks to the economic outlook remain firmly to the downside.

Although the regime of Syria's President Bashar al-Assad has

continued to lose pockets of territory over recent months, the

opposition is unlikely to gain full control of the country anytime

soon, with areas in the West and the South of the country set to

remain under the control of Assad's loyalists. (see our online

service, March 12 2013, 'Set For A Prolonged Civil War'). As

a result, violence will remain elevated in 2013, and private con-

sumption, fixed investment and exports will contract severely.

Indeed, only a sharp drop in imports will avoid a steeper fall in

the headline GDP figure. We forecast the economy to contract

6.1% in real terms in 2013, before returning to growth of 0.8%

in 2014.

Private Consumption OutlookPrivate consumption at all income levels will remain severely

constrained over the coming quarters. The number of regis-

tered refugees and individuals awaiting registration outside of

the country was 1,096,469 as of March 10, a situation which

the United Nations said to be "dramatic beyond description".

Moreover, the UN estimated 2mn internally displaced persons

and 4mn people who needed humanitarian assistance inside

Syria as of the end of February.

According to António Guterres, the head of the United Nations

High Commissioner for Refugees (UNHCR), the current situa-

tion is set to overwhelm the international response capacity. In

addition, logistical difficulties associated with helping internally

displaced persons will make it increasingly difficult to provide

aid inside the country. As a result, the humanitarian situation

is set to worsen going forward, which will certainly depress

private consumption.

Moreover, consumer price inflation (CPI) in Syria came in at

48.1% y-o-y in September 2012, according to official figures


SYRIA Q2 2012

TABLE: SYRIAN REFUGEES – POPULATION BREAKDOWN Registered In Process Total

Jordan 282,430 57,037 339,467

Lebanon 213,415 123,582 336,997

Turkey 227,200 31,000 258,200

Iraq na na 109,800

Egypt 20,743 23,000 43,743

North Africa na na 8,262

Total na na 1,096,469

Notes: na = not available/applicable. Source: UN

TABLE: ECONOMIC ACTIVITY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Nominal GDP, SYPbn [1] 2,520.70 2,791.80 3,046.30 3,731.90 4,518.00 5,160.80 5,499.90 5,873.10 6,362.70

Nominal GDP, US$bn [1] 54.1 59.8 63.2 58.8 58.7 72.7 82.1 90.4 101.0

Real GDP growth, % change y-o-y [1] 5.9 3.4 -2.0 -6.5 -6.1 0.8 2.7 3.0 3.6

GDP per capita, US$ [1] 2,697 2,931 3,041 2,784 2,733 3,331 3,700 4,007 4,405

Population, mn [2] 20.1 20.4 20.8 21.1 21.5 21.8 22.2 22.6 22.9

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN/BMI; 2 World Bank/UN/BMI.

A Bleak Outlook Components of GDP (SYPtrn) & Real GDP Growth, % chg y-o-y

Source: BMI, UN

-8

-6

-4

-2

0

2

4

6

8

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

2008

2009

2010

2011

2012

e

2013

f

2014

f

2015

f

2016

f

2017

f

ImportsExportsGross Fixed Capital FormationGovernment Consumption Private ConsumptionReal GDP Growth (RHS)

from the Central Bureau of Statistics, mostly as a result of spiking

food and housing prices. Given our view that the civil war will

drag on through 2013, supply line disruptions and difficulties

associated with importing food items will continue. As a result,

inflation will likely remain in double digits over the course of

2013, eroding Syrians' purchasing power further.

Finally, the agriculture sector, which comprised approximately

18.0% of GDP in 2012 and employed between a fifth and a

quarter of the country's labour force in 2010, has been hit hard.

According to the Food and Agriculture Organisation of the

United Nations, wheat and barley production dropped to less

than 2mn tons last year, from 4-4.5mn tons in previous years,

while only 45.0% of farmers were able to fully harvest cereal

crops. As the civil war drags on, agricultural production will

continue to decline, contributing to already elevated levels of

poverty and unemployment. We forecast private consumption

contracting 8.0% in 2013, before growing 0.8% in 2014.

Government Spending Outlook Syria's education and health sectors have been hit hard in 2012.

Christopher Stokes, head of international aid group Doctors

Without Borders, said in March that Syria's healthcare system

has collapsed, with the most basic level of healthcare no longer

available in vast areas of the country. Challenges include the

looting of hospitals and clinics, the lack of supplies of medicines

and pharmaceutical, supply-line interruptions, and restrictions on

trade. In terms of the education sector, according to the United

Nations Children's Fund (UNICEF), more than 2,400 schools

have been damaged or destroyed in the last two years, while

1,500 schools are being used as shelters for displaced persons.

The government is undertaking some efforts to improve the situ-

ation. For instance, it announced in December that it will build a

new university faculty in the town of Salamieh in central Syria,

having constructed around 12 faculties in rural areas over the

last 2 years. Although we believe the government will be unable

to improve the health and education sectors significantly as its

funds are being drained by military expenditure, government

consumption will fare better than the other components of the

economy. We see government consumption contracting 2.0%

in 2013, before increasing 2.0% in 2014.

Fixed Investment OutlookAccording to the Syrian Investment Agency (SIA), the number


ECONOMIC OUTLOOK

Food Prices Set To Spike Further Consumer Price Inflation by Component, % chg y-o-y

Source: BMI, Syria Central Bureau of Statistics

-5

5

15

25

35

45

55

65

Jan-

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Mar

-11

Apr-

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Jul-1

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Sep-

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Feb-

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May

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Jun-

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Aug-

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All commoditiesFood & non - Alcoholic BeveragesClothes & ShoesHousing ,Water,Electricity,Gas and other fuel oilsHealthTransportation

In The Red Exports & Imports, % chg y-o-y

Source: BMI, UN

-40

-20

0

20

40

60

80

100

120

140

-25

-5

15

35

55

75

2008

2009

2010

2011

2012

e

2013

f

2014

f

2015

f

2016

f

2017

f

Net Exports, US$bn (LHS)ExportsImports

Violence Will Continue BMI Short-Term Political Risk Ratings Breakdown, Scores out of 100.

Source: BMI

0

10

20

30

40

50

60

Polic

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Soci

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of projects licensed last year declined 75.0%, from a 50.0%

decline the year before, with the total value of projects coming

in at SYP37.6bn (US$530.5mn) in 2012 from SYP96.0bn in

2011. Given rising levels of political violence, supply lines and

industrial production will continue to be disrupted. For instance,

the intensification of violence in recent months around Damascus

has seen the destruction of various factories, including a paper

factory managed by Syria's Vimpex in November 2012 and

a factory owned by Swiss multinational Nestlé in February,

where production stopped entirely.

Indeed, Syrian investors are increasingly relocating around the

Arab world. Egypt's General Authority for Investment and Free

Zones reported in December 2012 that Syrians ranked first among

foreign investors with licensed projects in the first ten months

of 2012. Egyptian business support organization International

Business and Investment Association said that Syrian investors

are planning to invest up to US$2bn in the manufacturing sector

and the textile industry in 2013. Moreover, the head of Jordan

Investment Board, Aouni Al-Rashoud, said in January that ap-

proximately US$1bn in Syrian investments is expected this year.

That said, some investment is taking place. Syria's state-owned

Commercial Bank of Syria and Iran's state-owned Export De-

velopment Bank of Iran signed a credit facility worth US$1bn

in January, which was accompanied by the signing of seven

power contracts for the construction of a 650MW power plant

on the Syrian coast. However, we expect only a few Russian,

Chinese and Iranian companies will enter the country this year.

We see gross fixed capital formation declining 8.0% in 2013

and 0.2% in 2014.

Net Exports Syria's net export position will continue to weigh heavily on

headline growth in 2013. Exports have collapsed in 2012, with

Syrian exports to Turkey, one of the county's main trade partners

before the beginning of the uprising, having dropped 82.0%

to US$62mn according to the Turkish official statistics body

Turkstats. Oil exports (which comprised 35.8% of total exports

in 2009) dropped dramatically due to international sanctions on

the hydrocarbon sector, with latest data from the International

Energy Agency indicating that oil production fell 51.5% in 2012.

Finally, according to Qassem Darwish, the head of planning at

the tourism ministry, income from the hospitality and tourism

industry fell to only SYP17bn in 2012, from SYP107bn in 2011

and SYP297bn in 2010. The combination of international sanc-

tions and elevated levels of political violence will ensure that

total exports remain low, which we forecast to contract 7.0%

in 2013 before increasing 3.0% in 2014.

Total imports fell at a rapid pace as well last year, with imports

from Turkey having declined 68.0% to US$502mn. We expect

the decline to accelerate in 2013, as a result of more stringent

international sanctions, decreasing levels of domestic consump-

tion and investment, and the ongoing weakness of the Syrian

pound. Indeed, the unit was trading at SYP100/US$ in black

market transactions on March 8, compared to approximately

SYP47/US$ one year before. As a result, although the official

exchange rate has remained stable at approximately SYP70/US$

over the past few months, authorities have sought to narrow

the differential between the black market and official exchange

rates, with licensed exchange dealers having been authorised

to sell dollars at SYP79.5/US$ in March. Given our view that

opposition fighters will take over increasing pockets of terri-

tory this year, downside pressure on the unit will accelerate,

ensuring that imports continue to plummet. We forecast total

imports declining 9.0% in 2013 and increasing 2.0% in 2014.

Medium-Term OutlookOur core view sees the opposition taking over Damascus before

end-2013 and Assad's loyalists withdrawing into the west and

south of the country. Under such a scenario, base effects, a re-

laxation of sanctions and increased international aid inflows will

ensure that growth returns in 2014. However, as we believe that

the civil war will continue over the coming years, the economy

will grow below potential, and we forecast real GDP growth

averaging 0.8% over the 2013-17 period.

We also caution that risks to the country's economic outlook

lie firmly to the downside. The Assad regime has proved more

durable than expected, and it could well succeed in retaining

Damascus and large areas of the country in 2013 and 2014.

Levels of violence would continue to increase as a result, while

the international sanctions' regime will be intensified, ensuring

that the economic contraction continues over the coming years.


SYRIA Q2 2012

Monetary PolicyInflation Accelerating Regime's Fall

BMI VIEWWe forecast consumer price inflation in Syria to average 28.0% and

14.0% in 2013 and 2014, respectively, compared to our estimate of

38.0% in 2012. Food and housing prices will remain elevated as the

conflict drags on, which will accelerate the fall of President Bashar al-

Assad's regime.

Consumer price inflation (CPI) in Syria came in at 48.1% y-o-y

in September 2012, according to official figures from the Cen-

tral Bureau of Statistics. Food prices (making up 41.8% of the

consumer price basket) increased 46.9%, while housing prices

(comprising 22.0% of the basket) spiked 61.1%. Given our view

that the civil war will drag on through 2013, we believe that

the headline print will increase further, which will contribute to

accelerating the fall of President Bashar al-Assad's regime. We

project CPI averaging 28.0% in 2013 and 14.0% in 2014, from

our estimate of 38.0% in 2012, with the deceleration largely

resulting from base effects.

Food Shortages To Continue...BMI's Agribusiness team expects grain supply in the Syrian

market to tighten significantly beyond sustainable levels, as the

2012/13 harvest disappoints while stocks are being depleted

(see our online service, January 31, 'Food Shortages Could Ac-

celerate Regime's Fall'). Moreover, the country's import needs

of food staples will be met with increasing difficulty as traders

find it hard to work around sanctions, while the government's

current fiscal situation does not allow it to offer premiums to

exporters in a tight global market. As a result, food shortages will

continue, ensuring that prices remain elevated going forward.

...While Housing Prices Will Remain ElevatedDue to the ongoing conflict, large areas of the country have been

abandoned, and a significant portion of the housing stock has

been damaged. Indeed, according to the UN, the total number

of registered Syrian refugees and individuals awaiting registra-

tion outside of the country was 821,829 on 12 February, while

the government estimated that over three million Syrians were

internally displaced in November 2012. Given our view that

the civil war will drag on through 2013, housing prices will

continue to increase apace.


ECONOMIC OUTLOOK

TABLE: MONETARY POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Consumer price index, % y-o-y, eop [2] 2.2 6.2 11.0 50.0 26.0 11.0 4.0 4.0 5.0

Consumer price index, % y-o-y, ave [2] 2.8 4.5 4.8 38.0 28.0 14.0 4.0 4.0 5.0

Wholesale price index, % y-o-y, ave [3] 26.1 - - - - - - - -

M1, SYPbn [2] 916.0 1,063.5 1,180.5 1,770.7 2,231.1 2,476.6 2,575.6 2,678.7 2,812.6

M1, % change y-o-y [2] 10.7 16.1 11.0 50.0 26.0 11.0 4.0 4.0 5.0

M2, SYPbn [2] 1,810.7 2,041.0 2,265.6 3,398.3 4,281.9 4,752.9 4,943.0 5,140.7 5,397.8

M2, % change y-o-y [2] 9.3 12.7 11.0 50.0 26.0 11.0 4.0 4.0 5.0

Lending rate, %, ave [3] 10.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0

Real lending rate, %, ave [1,4] 7.2 2.5 2.2 -31.0 -21.0 -7.0 3.0 3.0 2.0

Notes: e BMI estimates. f BMI forecasts. 1 Real rate strips out the effects of inflation. Sources: 2 Central Bank of Syria/BMI; 3 IMF; 4 IMF/BMI.

Spiking Further Consumer Price Inflation By Component, % change y-o-y

Source: BMI, Central Bureau of Statistics

-5

5

15

25

35

45

55

65

Jan-

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b-11

Mar

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Apr-

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Sep-

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Feb-

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May

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Jun-

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All commoditiesFood & non - Alcoholic BeveragesClothes & ShoesHousing ,Water,Electricity,Gas and other fuel oilsHealthTransportation

The Syrian Economy To 2022

Weak Human Capital To Constrain Growth

BMI VIEWPrivate consumption, exports and infrastructure development will drive

growth in Syria over the coming decade, though we note that the effec-

tiveness of these drivers depends in part on the success of structural

reforms. A lack of reform momentum, a weak business environment

and elevated political risk weigh on our outlook.

We project real GDP growth in Syria to average 2.8% between

2013 and 2022, below the 4.2% average rate of growth posted

over 2001-2009. Private consumption will continue to be a key

growth driver (it accounted for 59.7% of output in 2011), with a

rise in incomes (GDP per capita forecast to rise from US$3,041

in 2011 to US$7,322 in 2022), supporting household spending.

Exports and gross fixed capital formation, which comprised

30.0% and 21.5% of economic output respectively in 2011,

will also help to boost growth over the long term if the regime

of President Bashar al-Assad ends, as that would lead to the

lifting of international sanctions on Syria.

Syria appears to be lagging the region in terms of structural

changes that will help to maximise growth potential, and the

recent unrest has pushed back the reform agenda significantly.

While the government had been gradually decreasing subsidies

prior to 2011, Damascus has increased subsidies for public sector

employees on a wide range of goods and services. Furthermore,

other fiscal spending programmes designed to appease the public

are expected to lead to sizeable fiscal deficits over the medium

term. The government's plans to transition its financing from

central bank borrowing to the issuance of treasury securities also

appears to be falling through. Importantly, the ongoing civil war

has significantly undermine long-term projects, And it remains

to be seen whether a future government will undertake steps to

liberalise the economy.

From a sectoral perspective, agriculture will continue to be a

significant component of the economy through 2021 (it accounted

for nearly 17% of GDP in 2010). The mining, manufacturing

and utilities sectors contributed approximately 25% to GDP

in 2010, and that figure has fallen gradually since 1999 when

it accounted for 33% of GDP, in part due to a decline in oil

production. That said, a push towards private infrastructure

investment will help to boost those sectors over the long term

once the political situation stabilises. Wholesale and retail trade

has grown to 21% of GDP from 14.9% in 2000, and we believe

the sector has the potential to outperform.

Minding The GapDamascus's attempts to deepen economic relations with a

number of countries, including regional economic powers

outside the Middle East, had been a wise strategy in the past

(particularly as the eurozone's medium-term growth prospects

appear anaemic). On November 30 2010, the Syrian-Brazilian

Business Council was launched, with the aim of encouraging

foreign trade and investment. Around the same time, officials

from India and Syria signed a memorandum of understanding to

outline the establishment of the India-Syria Business Council.

They announced a goal of doubling bilateral trade within the next

Chapter 2.3: 10-Year Forecast – Syria


TABLE: LONG-TERM MACROECONOMIC FORECASTS2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f

Nominal GDP, US$bn [1] 82.1 90.4 101.0 117.6 136.1 154.9 171.7 182.0

Real GDP growth, % change y-o-y [1] 2.7 3.0 3.6 4.3 5.1 4.9 4.9 5.1

Population, mn [2] 22.2 22.6 22.9 23.3 23.7 24.1 24.5 24.9

GDP per capita, US$ [1] 3,700 4,007 4,405 5,045 5,744 6,432 7,018 7,322

Consumer price index, % y-o-y, ave [3] 4.0 4.0 5.0 5.0 5.0 5.0 4.0 3.0

Current account balance, % of GDP [3] -1.0 -0.4 0.0 0.4 0.4 0.3 0.3 0.1

Exchange rate SYP/US$, ave [4] 67.00 65.00 63.00 59.00 56.00 54.00 53.00 54.00

Notes: f BMI forecasts. Sources: 1 UN/BMI; 2 World Bank/UN/BMI; 3 Central Bank of Syria/BMI; 4 BMI.

three years, and Syrian Minister for Economy and Trade Lamia

Mari Assi stated his desire to see greater foreign investment.

Senior Syrian officials are also in the process of discussing, or

have recently agreed to, economic cooperation initiatives with

Russia, Italy, Turkey and Iran.

Although fledgling relationships such as these are being ham-

pered severely in light of Damascus's growing isolation, at least

some of those could be rebuilt under a scenario whereby political

change takes place in the country. Importantly, Turkey – which

had once been a strategic economic partner – turned its back on

Syria in light of the harsh crackdowns imposed by Assad. Ankara

had been instrumental in providing Syria with credit to boost the

latter's infrastructure, and Turkey had been deepening its trade

and investment linkages with Syria until 2011. Furthermore, the

massive influx of Turkish tourists into Syria was also a boon to

the latter's economy. The free trade agreement between the two

countries has been suspended, and it will not likely be restored

until the current political status quo continues.

Structural ReformsIn May 2010, the World Trade Organization (WTO) granted

observer status to Syria after the US decided to end its opposition

to the move in 2009, and the group's General Council agreed

to establish a working party to examine Damascus's request for

membership. While we had expected the membership process to

encourage market-oriented reforms and improve the country's at-

tractiveness as an investment hub, the reform process has stalled.

According to BMI's business environment ratings, Syria's busi-

ness environment ranks among the lowest in the region, which

will hinder foreign investment if not addressed in our view. The

country scores 35.2/100 and 29.0/100 in the 'market orientation'

and 'institutions' categories respectively. Indeed, there are high

levels of red tape, limited confidence in contracts and a weak

domestic banking sector, which reduce the country's attractive-

ness as a destination for investment.

Furthermore, Syria ranked 144th out of 185 countries in the

World Bank's Ease of Doing Business rankings for 2013.

Damascus has stated that it intends to improve the business

environment as part of its 11th Five-Year Plan, which would

increase its attractiveness as an investment location and its bid

for WTO membership if successful. For the time being, however,

we stress that the business environment remains weak and will

likely continue deterring foreign investors.

Syria shows mixed results in terms of human capital devel-

opment, which will impede growth over the long term if not

properly addressed. According to the United Nations Develop-

ment Programme's 2011 Human Development Index (which

scores countries on the basis of health, education and income

statistics), Syria ranks among the lowest in the Middle East and

North Africa region in terms of education, ranking only above

Yemen, Iraq and Morocco.

By contrast, Syria's score in the overall health indicator is

relatively high, ranking below only Qatar and the United Arab

Emirates. That said, while Syria's 11th Five-Year Plan has

prioritised health and education, the government is looking

to short-term survival rather than long-term stability, and the

indicators will likely worsen.

Prime Real Estate – For Better or WorseAn additional factor that holds significant potential is Syria's

strategic location. It lies adjacent to one of the region's economic

powerhouses – Turkey – and has access to the eastern Mediter-

ranean Sea. Furthermore, the country's border with Iraq raises

the potential for oil and gas transport from the Middle East to

Europe by way of pipelines and tankers. These geographical

advantages have the potential to drive growth in sectors such

as freight transport and energy.

That said, Syria's location could also have detrimental effects

on its growth prospects, as regional instability will likely have

spillover effects in the country. Lebanon, which shares a border

with Syria, is facing a period of heightened political instability

in the midst of a very fragile coalition government. Addition-

ally, any flare-up between Iran and Israel will likely involve

Syria, which has deep ties with the Islamic republic. Tensions

between Israel and Syria could escalate into armed conflict, as

the issue of the Golan Heights continues to be a thorn in the

bilateral relationship. A return to widespread violence in Iraq

also has the potential to impact Syria. Each of these scenarios

will likely hinder the country's economic potential.

Political RiskOn the political front, Assad is fighting for the survival of his

regime, and, while we expect the regime to fall sometimes to-

wards the end of 2013, we expect the country to face a period

of prolonged instability. We believe the chances of a managed

transition to a new government are minimal at the moment, and

our expectation of a protracted civil conflict will likely have a

substantial, lasting impression on the minds of foreign inves-

tors and tourists, two keys that had bolstered Syria's growth

momentum prior to 2011.


SYRIA Q2 2012


Chapter 2.4: Business Environment – Syria


The regime has enacted several reforms to liberalise the economy

over the past few years, a path which could be followed by a new

government.

Weaknesses Ongoing political violence will continue to drastically reduce oppor-

tunities for foreign and domestic companies.

Despite the legalisation of private banking in 2001, the sector is still

dominated by inefficient, state-run banks. Access to credit, while

improving, remains restricted.

Opportunities The Central Bank of Syria begun efforts to address shortcomings

in the banking sector, most notably the supervision of state-owned

banks before the beginning of the civil war.

Threats The rate of illiteracy rose from 17% in 2003 to 19% in 2005, while

university enrolment, under 17% in 2004-2005, is declining. As these

trends are unlikely to be reversed anytime soon, a lack of skilled

labour could become a key problem.

A report by the United Nations Development Programme and the

Syrian State Planning Commission before the beginning of the conflict

estimated that 25% of students do not finish their primary education,

while 67% do not complete their secondary-level studies.

Regional

Tourism Sector – GCC Over North Africa And The Levant

BMI VIEWWhile we expect tourism activity in the MENA region to accelerate in

2013, the sector will become increasingly polarised. Gulf Cooperation

Council countries will receive increasing foreign visitors and invest-

ment from international hospitality companies, while modest industry

growth in countries in North Africa and the Levant will have a detrimen-

tal impact on the economy.

According to data from the World Travel and Tourism Council,

the total value of the travel and tourism sector was US$75.5bn

in North Africa and US$180.8bn in the Middle East in 2011,

equivalent to a total contribution to GDP of 12.4% and 8.1%

respectively. In terms of the entire Middle East and North Af-

rica (MENA) region, tourism activity declined significantly in

the same year, mostly owing to the uptick in political instabil-

ity resulting from the Arab Spring.

We expect tourism activity to have rebounded, albeit moderately,

in 2012, and the sector's expansion will accelerate this year.

That said, the industry will become increasingly polarised. On

the one hand, Gulf Cooperation Council (GCC) countries (with

the exception of Bahrain) will continue to benefit from political

instability elsewhere in the region as well as robust investment in

the domestic tourism sector. On the other hand, several countries

in North Africa and the Levant will see the industry expanding

slowly, if not contracting, in 2013, as elevated political risk

continues to dampen visitor inflows.

Underperformers: Political Instability Is KeyLebanon: Tourism activity in Lebanon, which accounts for ap-

proximately 10.0% of GDP, is largely dependent on perceptions

of political stability in the country. Hotel occupancy rates in the

capital Beirut fell 46.6% in October 2012 compared with the

same month in 2010, as political risk increased steadily because

of the civil war in neighbouring Syria. As the Syrian conflict

continues in 2013, political instability in Lebanon will remain

elevated. As a result, tourism activity is unlikely expand at a

rapid clip this year, compounding our view that the economy

will grow only 1.9% in real terms in 2013.

Tunisia: Tunisia's tourism sector was hit hard by the 2011 Jas-

mine Revolution, with non-resident entries declining 30.7% that


Chapter 3: Regional Outlook

Tourism Activity In North Africa Declining MENA – Foreign Tourist Arrivals, mn

Source: World Travel & Tourism Council

0

10

20

30

40

50

60

70

80

90

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Foreign Tourist Arrivals, MENAForeign Tourist Arrivals, North AfricaForeign Tourist Arrivals, Middle East

GCC High On The List MENA – BMI Short-Term Political Risk Rating, Scores Out Of 100

Source: BMI

0

10

20

30

40

50

60

70

80

90Le

bano

n

Tuni

sia

Egyp

t

Jord

an

Mor

occo

Bahr

ain

Saud

i Ara

bia

Uni

ted

Arab

Em

irate

s

year. While tourism activity rebounded in 2012, monthly entries

remained 9.7% lower over the first nine months of the year than

their average in 2010. As political instability in the country is

on the rise (see our online service, February 7, 'Political Assas-

sination Undermining Transition'), we expect tourism activity

to remain modest in 2013.

Egypt: Elevated political instability following the overthrow of

former ruler Hosni Mubarak in February 2011 is hitting Egypt's

tourism industry hard. However, while hotel occupancy rates

in the capital Cairo fell 41.1% in October 2012 compared with

October 2010, rates in the coastal resort of Sharm El Shaikh fell

only 8.7%, with occupancy rates coming in at 84.0% in the same

month. While civil unrest in the capital will remain elevated,

a dramatic uptick in political violence along the Red Sea is

unlikely, in our view, and the divergence in performance will

persist. That said, the overall picture remains bleak, especially

given that average room rates, which have declined significantly

in the entire country, will continue to trend lower.

Bahrain: With the popular uprising that began in 2011 show-

ing no signs of abating (see 'No Quick Resolution To Political

Deadlock', February 12), Bahrain's tourism sector is being hit

hard. Hotel occupancy rates declined 24.2% year-on-year in

October 2012, and the cancellation of the Formula 1 Grand Prix

in 2011 owing to political violence in the country triggered a

double-figure decline in air passengers in the same year. Bahrain

Air announced on February 12 that it will file for voluntary

liquidation and suspend activities because of the slowdown

in visitor arrivals. As the emirate's reputation for stability will

deteriorate further over the coming quarters, the tourism sector

will continue to suffer.

Overperformers: GCC Leading The PackUAE: Ongoing political instability across the MENA region

has greatly benefited destinations that are considered 'safe

havens' for both leisure travellers and investors, such as the

UAE. Dubai's international airport reached 50.9mn passenger

movements in 2011, an increase of more than 25.0% compared

with 2009, and it is expected to rank among the top-three busi-

est international airports by 2015. Hotel occupancy rates have

remained robust, coming in at 79.0% and 87.0% in Dubai and

Abu Dhabi respectively in October 2012. Given the UAE's

relatively stable political risk profile and its strategic position

between Europe and Asia, the federation will continue to attract

significant inflows of visitors. In particular, the development

of large-scale projects, such as a US$600bn theme park called

Dubai Adventure Studio and the Dubai Art Museum, as well as

the planned opening over the next three years of the Guggenheim

Museum and the Louvre in Abu Dhabi, will ensure that leisure

tourism increases at a rapid clip. BMI forecasts foreign tour-

ist arrivals to the UAE to increase 10.0% in 2013, from 8.5%

in 2012 (see 'Industry Forecast – United Arab Emirates – Q1

2013', January 3).

Qatar: Qatar is expected to increase room numbers by 5,635

this year, the strongest y-o-y growth in the Middle East, with

occupancy rates having come in at a robust 70.0% in October

2012. Although the majority of visitors are currently corporate,

the country appears well placed to grow significantly in the

leisure segment. Qatar is positioning itself strategically in the

global sporting arena, as it will host the 2022 world cup as well

as the Formula 1 Grand Prix and the HSBC Golf Champion-

ship, while the government will continue to invest in ambitious

projects such as a semi-submerged resort called amphibious

1000 and the enlargement of the Doha Exhibition Centre. Given

the relative underdevelopment of the tourism sector vis-á-vis

neighbouring UAE, the industry will see elevated growth rates

over the coming quarters.

Saudi Arabia: A combination of leisure, business and religious

visitors underpin elevated hotel occupancy rates in Saudi Arabia,

which averaged 72.0% and 63.0% in Jeddah and Riyadh, respec-

tively in 2011. The majority of visitors to Saudi Arabia come

from the GCC, especially the UAE and Kuwait, and, given solid

projected economic growth rates in the Gulf, inflows of tourists

to the kingdom will remain robust. Moreover, the government

plans to invest US$80mn in tourism-related facilities over the

next few years, particularly hotels and airports. Although tourism

and travel contributed to only 3.2% of total GDP growth in 2011,



Unlikely To Spike In 2013 Tunisia – Non-Resident Entries, mn

* First nine months. Source: Central Bank of Tunisia

0

1

2

3

4

5

6

7

8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

*

they accounted for 7.1% of non-oil GDP and 11.8% of private

sector GDP. The bright outlook for the sector bodes well for

the government's efforts to reduce the economy's dependence

on hydrocarbons exports.

Tourism Industry Outlook Compounding Economic View...The growing polarisation in the tourism industry in MENA

compounds our view that GCC countries will broadly outperform

countries in the Levant and North Africa in terms of real GDP

growth in 2013. The economic implications of slow industry

growth will be important in Egypt and Tunisia. Tourism ac-

counted for approximately 7.0% of GDP in Tunisia and 11.4%

of GDP in Egypt in 2010, and low revenues from the sector

will contribute to increasing public discontent. Conversely, the

UAE will be the major beneficiary of political instability in the

region. The total contribution of travel and tourism to GDP in

the country was equivalent to 13.5% of GDP in 2011, and the

positive outlook for the tourism industry reinforces our relatively

bullish view on the economy in 2013.

...While Foreign Investment Will Focus On The GulfForeign direct investment in the tourism industry will grow sig-

nificantly in the MENA region over the coming years. According

to HVS Global Hospitality Services' 2012 Middle East Hotel

Survey, 84,000 new hotel rooms will be brought online over the

next four to five years. Hilton Hotels & Resorts dominates the

development pipeline with more than 15,800 rooms planned over

the next four years, while Marriott International and Rotana Hotel Management Corporation follow with approximately

12,000 and 9,300 rooms respectively. Not surprisingly, most of

the developments will take place in the GCC. As long as politi-

cal instability in North Africa and the Levant does not decline

significantly, we expect international companies looking to

expand in the region to continue focusing primarily on the Gulf.


REGIONAL OUTLOOK

Global Outlook

Past The Major Obstacles To RecoveryOur global real GDP growth estimates have changed little since

our last Global Assumptions update, at 2.9% for 2013 and 3.3%

for 2014 (down a notch from 3.4% previously). The most notable

forecast changes include a downgrade of our 2013 eurozone

growth forecast to 0.0% (from 0.1% previously), which incor-

porates a downward revision to our Spanish projections. Our

projection for 2.3% real GDP growth in the US in 2013 is above

the Bloomberg consensus of 1.8%, while our China forecast of

7.5% is below the 8.1% average of analysts' forecasts.

We continue to believe that the biggest obstacles to a continued

recovery (eg, the US fiscal cliff) have been mostly avoided, but

expect headwinds to come into force in the second half of 2013

– chiefly, a renewed slowdown in Chinese economic activity.

For the time being, loose monetary policy and the removal of

some major tail risks mean that the risks to global growth are

more tilted to the upside than they were in 2012, but we see

enough headwinds to prevent us from becoming too exuberant

on the growth outlook.

We have revised our 2013 average US$/EUR forecast to US$1.34/

EUR from US$1.25/EUR previously to account for the H113

rally, while also assuming a sell-off later in the year. We have

also nudged up our 2014 average US$/EUR forecast to US$1.27/

EUR from US$1.20/EUR previously. Our broad outlook for the

euro has not changed significantly – we are still bearish euro

over the medium term from a fundamental perspective. However,

we believe that a confluence of positive policy developments

favours a stronger euro in the first half of 2013.

Chapter 4: BMI Global Assumptions


TABLE: GLOBAL ASSUMPTIONS2012e 2013f 2014f 2015f 2016f 2017f

Real GDP Growth (%)

US 2.2 2.3 2.5 2.5 2.4 2.4

Eurozone -0.6 0.0 1.2 1.5 1.7 1.8

Japan 0.5 0.9 1.1 1.1 1.0 1.1

China 7.7 7.5 6.7 6.0 5.8 5.8

World 2.6 2.9 3.3 3.4 3.4 3.5

Consumer Inflation (ave)

US 2.1 2.1 2.1 2.1 2.1 2.1

Eurozone 2.1 1.7 1.8 1.9 2.1 2.2

Japan 0.0 0.0 0.6 1.3 1.8 2.3

China 2.7 2.8 2.9 2.8 2.7 2.7

World 3.5 3.4 3.3 3.2 3.3 3.3

Interest Rates (eop)

Fed Funds Rate 0.00 0.00 0.00 0.00 1.00 2.25

ECB Refinancing Rate 0.75 0.75 0.75 0.75 1.00 1.50

Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.25 0.50

Exchange Rates (ave)

US$/EUR 1.27 1.34 1.27 1.23 1.20 1.20

JPY/US$ 79.85 91.00 94.00 97.00 98.50 100.50

CNY/US$ 6.31 6.27 6.38 6.45 6.55 6.60

Oil Prices (ave)

OPEC Basket (US$/bbl) 109.5 104.4 101.0 95.2 93.3 93.3

Brent Crude (US$/bbl) 111.7 110.0 105.0 98.0 96.0 96.0

e/f = estimate/forecast. Source: BMI

Developed StatesOur developed state aggregate growth forecast for 2013 remains

1.3%, while we project an improvement in 2014 to 1.8%. Our

downgrade for the eurozone growth outlook stems mainly from

a revision of our Spanish forecasts on the back of poor Q412

data. With the Spanish economy contracting by 1.8% y-o-y in

real GDP terms in Q412, we have revised our real GDP growth

forecast to -1.7% in 2013 and 0.3% in 2014, from -0.5% and

0.5% previously. We expect weak domestic demand, sluggish

fixed capital formation and the country's perilous fiscal position

to weigh on growth over the next few quarters.

Our 2.3% real GDP growth forecast for the US in 2013 faces

downside risks from the base effects of an unexpectedly poor

Q412 (in which a 0.1% quarter-on-quarter annualised figure was

recorded). We will wait until at least the second estimate of the US

GDP figures before altering our 2013 forecast. Nonetheless, our core

view remains the same: US economic activity is likely to pick up

as the year progresses, led by business and residential investment.

Emerging MarketsWe forecast emerging market real GDP growth of 5.0% in 2013,

with a slight acceleration in growth in 2014 to 5.1%. Our aggregate

regional forecasts remain relatively steady since our last update,

with the major downward revisions confined to Poland (with 1.9%

real GDP growth now forecast in 2013, versus our previous 2.3%

growth projection, and 3.0% in 2014, down from 3.7%) and Egypt

(2.6% in 2013, down from the previous projection of 3.0%, and



TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS2012e 2013f 2014f 2015f

Developed States Aggregate Growth 1.0 1.3 1.8 2.0

G7 1.2 1.5 1.9 2.0

Eurozone -0.6 0.0 1.2 1.5

EU-27 -0.4 0.3 1.4 1.8

Selected Developed States

Australia 3.2 2.1 1.8 2.5

Austria 0.4 0.9 1.5 1.9

Belgium -0.5 0.4 1.6 1.9

Canada 2.0 1.9 2.5 2.5

Denmark -0.1 1.2 1.4 1.6

Finland -0.4 0.8 1.5 1.9

France 0.0 0.4 1.0 1.6

Germany 0.7 0.8 1.9 1.8

Ireland -0.5 0.3 1.4 2.0

Italy -2.3 -0.8 0.7 1.0

Japan 0.5 0.9 1.1 1.1

Netherlands -1.1 0.2 0.9 1.5

Norway 3.2 2.8 2.5 2.5

Portugal -3.4 -1.9 0.1 0.7

Spain -1.4 -1.7 0.3 1.1

Sweden 0.6 1.2 2.6 3.4

Switzerland 0.7 1.5 1.8 1.6

UK 0.0 1.1 1.4 2.0

US 2.2 2.3 2.5 2.5

e/f = estimate/forecast. Source: BMI

TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%)US Eurozone Japan Brazil China Russia India

2013 Bloomberg Consensus 1.8 -0.1 1.0 3.5 8.1 3.3 5.6

BMI 2.3 0.0 0.9 3.5 7.5 3.4 6.1

2014 Bloomberg Consensus 2.7 1.1 1.2 4.0 8.0 3.8 6.5

BMI 2.5 1.2 1.1 3.7 6.7 3.6 6.7

Source: BMI, Bloomberg

3.7% in 2014, down from 5.2%).

We continue to see emerging Asia being an outperformer,

with real GDP growth of 6.3% in 2013 reflective of a strong

but temporary bounce in Chinese activity in H113 (the 2014

and 2015 projections for emerging Asia mark a deceleration to

6.1% and 5.6%, respectively). Growth in Latin America, Sub-

Saharan Africa and emerging Europe is also set to pick up the

pace in 2013, with reasonably steady growth going into 2014.

BMI is below consensus on growth in China in 2013 and 2014

(compared with the Bloomberg survey of analysts). However,

we are more optimistic on the growth prospects of India, the

US for 2013 and, by a small margin, the eurozone.


BMI GLOBAL ASSUMPTIONS

TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS2012e 2013f 2014f 2015f

Emerging Markets Aggregate Growth 4.7 5.0 5.1 5.0

Latin America 2.9 3.5 3.7 3.9

Argentina 2.0 1.6 2.6 3.9

Brazil 1.0 3.5 3.7 4.0

Mexico 4.0 3.6 3.7 3.5

Middle East And North Africa 4.8 3.9 4.6 4.1

Saudi Arabia 6.8 4.1 3.7 2.3

UAE 3.9 3.7 3.8 3.8

Egypt 2.2 2.6 3.7 5.6

Sub-Saharan Africa 4.4 6.0 5.9 6.1

South Africa 2.3 2.8 3.4 3.5

Nigeria 6.6 6.8 7.2 7.3

Emerging Asia 6.0 6.3 6.1 5.6

China 7.7 7.5 6.7 6.0

Hong Kong 1.8 2.5 3.6 3.6

India* 5.5 6.1 6.7 6.5

Indonesia 6.2 6.1 6.5 6.5

Malaysia 4.2 4.5 4.3 4.2

Singapore 1.2 2.5 3.4 3.3

South Korea 2.1 3.0 4.6 4.6

Taiwan 0.9 3.0 4.0 4.1

Thailand 4.3 4.4 4.4 4.3

Emerging Europe 2.6 3.1 3.9 4.3

Russia 3.6 3.4 3.6 4.1

Turkey 3.0 4.4 5.0 5.2

Czech Republic -1.2 0.5 1.9 2.4

Hungary -1.2 -0.4 2.0 2.7

Poland 2.0 1.9 3.0 4.1

e/f = estimate/forecast; *Fiscal years ending March 31 (2012 = 2011/12). Source: BMI

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BMI Lebanon and Syria Business Forecast Report Q2 2013

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