lessons from the eu crisis for the lebanese economy

Lessons from the Eurozone Crisis for the Lebanese Economy

June 11, 2014

Nassib Ghobril Chief Economist

Head of Economic Research & Analysis Department

I.  Eurozone

II.  Lebanon

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3

Evolution of economic activity in Eurozone

Source: International Monetary Fund, Byblos Research

Real GDP Growth in Eurozone (% of GDP)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20144

Public debt level on upward trend in Eurozone


Public Debt Level in in Eurozone (% of GDP)

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%2006 2007 2008 2009 2010 2011 2012 2013

Greece Portugal Spain5

Deteriorating public finances


Fiscal Balance (% of GDP)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2006 2007 2008 2009 2010 2011 2012 2013Greece Portugal Spain 6

Rising public debt level


Public Debt Level (% of GDP)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Italy France Greece Spain7

Heavy public pension burden

Source: OECD, Byblos Research

Public Pension Spending (% of GDP)

50

55

60

65

70

75

80

85

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Greece Ireland Portugal Spain 8

Deteriorating economic freedom

Source: Heritage Foundation, Byblos Research

Index of Economic Freedom

3.8

4

4.2

4.4

4.6

4.8

5

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14


Deteriorating competitiveness

Source: World Economic Forum, Byblos Research

Global Competitiveness Index (score)

20

30

40

50

60

70

80

90

100

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14


… and relative to other countries


Global Competitiveness Index (rank)

0%

5%

10%

15%

20%

25%

30%

2006 2007 2008 2009 2010 2011 2012 2013


Rising unemployment


Unemployment Level (% of total labor force)

12

The ECB’s response to the global financial crisis

II.  Lebanon

-2

-1

0

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013

14

Balance of payments in deficit since 2011

US$bn

Source: Central Bank of Lebanon

0

2,000

4,000

6,000

8,000

10,000

12,000

2009 2010 2011 2012 2013 15

Net private capital inflows down 30% to $4.9bn in 2013

Source: Institute of International Finance, Byblos Research

Net Private Capital Inflows to Lebanon (US$m)

0

10

20

30

40

50

60

70

80

90

100

Q1-2010

Q2-2010

Q3-2010

Q4-2010

Q1-2011

Q2-2011

Q3-2011

Q4-2011

Q1-2012

Q2-2012

Q3-2012

Q4-2012

Q1-2013

Q2-2013

Q3-2013

Q4-2013 16

Consumer confidence on a downward trend since end-2010

Byblos Bank/AUB Consumer Confidence Index

Source: Byblos Research

Consumer confidence significantly affected by political events

Byblos Bank/AUB Consumer Confidence Index

MP Ghanem assassination

Gen.Hajj assassination

Lt. Eid assassination

Doha Agreement

Cabinet formation

Parliamentary elections

Municipal elections

Najib Mikati designated as PM

0

20

40

60

80

100

120

140

160

Jul-0

7A

ug-0

7Se

p-07

Oct-

07N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8A

ug-0

8Se

p-08

Oct-

08N

ov-0

8D

ec-0

8Ja

n-09

Feb-

09M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9Se

p-09

Oct-

09N

ov-0

9D

ec-0

9Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0Se

p-10

Oct-

10N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1Se

p-11

Oct-

11N

ov-1

1D

ec-1

1Ja

n-12

Feb-

12M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2Se

p-12

Oct-

12N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3Se

p-13

Oct-

13N

ov-1

3D

ec-1

3

STL issues four arrest warrants

Bourj Abi Haidar clashes

Cabinetformation

Start of presidential vacuum

Begining of dispute over

Increase in minimum wage

Border clashes with Israeli soldiers

Start of Syrian crisis

Cabinet formation

Deterioration of security

conditions in the North and Beirut

Deal on raising salaries &

minimum wage

Cost of livingadjustment for public sector employees

Major Gen. al-Hassan assassination

National Dialogue sessions

Tammam Salam designated as

PM

Kidnapping wave

Cabinetresignation

Attacks on Lebanese

Army

Arrest of ex-minister Samaha on terrorism charges

Saida Clashes

Carbombings in Beirut

and Tripoli

Minister Chatah

assassination

Suicide Attacks on Lebanese

Army

Threats of U.S.military strikes on

Syrian targets

9.1%

10.3%

8%

2%

1.2% 0.9%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

2008 2009 2010 2011 2012e 2013e 2014f 18

Economy stagnating since 2011

Source: Institute of International Finance

Real GDP Growth (%)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013f

19

Political shocks resulted in economic opportunity costs

Source: Institute of International Finance, Byblos Research

Real GDP Growth (%) Government Collapse

Output loss at ~$9.7bn

40

45

50

55

May-2013

Jun-2013

Jul-2013

Aug-2013

Sep-2013

Oct-2013

Nov-2013

Dec-2013

Jan-2014

Feb-2014

Mar-2014

Apr-2014

May-2014

20

PMI reflecting ongoing stagnation

Source: Markit

Purchasing Managers’ Index

Increasing rate of growth

Increasing rate of contraction

50= no change from previous

month

21

Inflation rate in line with economic activity

Source: International Monetary Fund Byblos Research

Average Inflation Rate (%)

0.6%

4.1%

10.8%

1.2%

5.1%

7.2%

5.9%

3.2%

2%

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009 2010 2011 2012 2013 2014f

22

Lebanon is 11th most competitive Arab economy


Global Rank 13

19

20

33

36

43

68

77

83

100

103

108

118

141

0 1 2 3 4 5 6

Yemen

Mauritania

Egypt

Libya

Lebanon

Algeria

Tunisia

Morocco

Jordan

Bahrain

Kuwait

Oman

Saudi Arabia

UAE

Qatar

145

23

Deterioration in Lebanon's global competitiveness


103

91

89

92

80 85 90 95 100 105

2013-14

2012-13

2011-12

2010-11

24

Global Competitiveness Index in detail 2013-14


IndicatorGlobal Rank

Intellectual property protection 136

Public trust in politicians 148

Irregular payments and bribes 138

Judicial independence 135

Favoritism in decisions of officials 147

Wastefulness of government spending 144

Transparency of government policymaking 139

Quality of overall infrastructure 142

Quality of electricity supply 148

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Restrictive labor regulations

Inflation

Poor work ethic in national labor force

Inadequately educated workforce

Access to financing

Policy instability

Government instability/coups

Corruption

Inefficient government bureaucracy

Inadequate supply of infrastructure

Most problematic factors for doing business in Lebanon

25 Source: World Economic Forum, Byblos Research

Lebanon has least competitive cellular market…

26 Source: Arab Advisors Group, Byblos Research

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

LebanonSyria

Libya Qatar

UAEKuwait Yemen Algeria

Mauritania Sudan

Tunisia Bahrain

Morocco Oman

Iraq Egypt

Palestine Jordan

Saudi Arabia

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%

Morocco

Lebanon

Egypt

Jordan

Tunisia

Saudi Arabia

UAE

Bahrain

Qatar

… and the second highest cost of mobile broadband services

27 Source: International Telecommunication Union, Byblos Research

(Cost as % of GNI per Capita)

Indicator Arab Rank

Global Rank

Change in Global Rank

Starting a business 11 120 -4

Dealing with construction permits 18 179 -3

Getting Electricity 6 51 -3

Registering property 15 112 4

Getting credit 5 109 -4

Protecting investors 5 98 -3

Paying taxes 8 39 -3

Trading across borders 11 97 +1

Enforcing contracts 11 126 -1

Resolving insolvency 8 93 -5

Indicator Arab Rank Global Rank UAE 1 23

Saudi Arabia 2 26

Bahrain 3 46

Oman 4 47

Qatar 5 48

Tunisia 6 51

Morocco 7 87

Kuwait 8 104

Lebanon 9 111

Jordan 10 119

Egypt 11 128

Yemen 12 133

West Bank & Gaza 13 138

Sudan 14 149

Iraq 15 151

Algeria 16 153

Comoro Islands 17 158

Djibouti 18 160

Syria 19 165

Mauritania 20 173

Libya 21 187 28

Ease of Doing Business Index in detail 2014

Source: World Bank, Byblos Research

29

Lebanon’s Governance Indicators

Indicator Global Rank Arab Rank Change in Rank

Voice & Accountability 139 2 +2

Political Stability 199 15 +2 Government Effectiveness 120 10 -5

Regulatory Quality 111 10 -9 Rule of Law 154 12 -5 Control of Corruption 165 15 +6

Source: World Bank Governance Indicators 2012

Government response?

30

-12%

-10%

-8%

-6%

-4%

-2%

0%2009 2010 2011 2012 2013 2014

31

Wide budget deficit is factor for large debt market

Source: International Monetary Fund, Ministry of Finance

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 32

Ongoing increase in public debt stock

Source: Ministry of Finance, Byblos Research

Public Debt (US$bn)

$2.5bn

$10bn

130%

140%

150%

160%

170%

180%

2006 2007 2008 2009 2010 2011 2012 2013 2014 33

Public debt dynamics have reversed


Public Debt-to-GDP Ratio (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013Debt in FC Debt in LBP 34

Public debt stock increasingly in Lebanese pounds

Source: Central Bank, Byblos Research

Breakdown of the Public Debt Stock

-16%

-15%

-14%

-13%

-12%

-11%

-10%

2009 2010 2011 2012 2013 201435

Sustained widening of the current account deficit in past years


Current Account Balance (% of GDP)

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Ratings placed on CreditWatch with negative implications

36

Lebanon: S&P Ratings Trend line

Source: Standard & Poor's, Byblos Research

BBB-

BBB

BB+

BB-

BB

B+ B

CCC+

CCC-

CCC

CC

B-

C

SD

CreditWatch/Outlook Action

Downgrade on public debt

concerns

Downgrade on insufficient

measures to reduce fiscal deficit

Downgrade due to increasing fiscal challenges

Outlook revised to ‘negative’

Downgrade on political impasse

Outlook ‘stable’

Outlook revised to ‘stable’ on

political uncertainties

Outlook raised to ‘positive’ on

banking sector resilience and political stability

Rating upgraded on ease of political tensions Outlook kept at ‘stable’

Outlook revised to ‘negative’ on

increased geopolitical risks

Rating downgraded on Deteriorating economic

fundamentals and worsening public finances

1,400

1,500

1,600

1,700

1,800

1,900

1992 1995 1998 2001 2004 2007 2010 2013

Exchange rate stability is cornerstone of confidence and financial stability

37

US$

/LB

P

Source: Central Bank, Byblos Research

0%

1%

2%

3%

4%

5%

6%

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13

USD LBP

Stable deposit rates

38

Average Monthly Deposit Rates

Source: Association of Banks in Lebanon, Byblos Research

0%

1%

1%

2%

2%

3%

3%

4%

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13

Average deposit rate in US dollar US Federal Funds Rate

Average deposit rates in US dollar VS US Federal Funds Rate

39

Average Monthly Deposit Rates

10.6

10.8

10.3

10.8

11.1

11.4

11.611.5

9.5

10

10.5

11

11.5

12

2009 2010 2011 2012 2013f 2014f 2015f 2016f

High level of foreign currency reserves

40

BDL Reserves Gross Reserves (in months of next year imports)

Source: Central Bank, Byblos Research Source: International Monetary Fund

10.2 9.8

17.1

25.7 28.6 30.8 30.0 31.7

5.8 7.6

8.0

10.1

13.014.4 15.3 11.1

0

5

10

15

20

25

30

35

40

45

50

2006 2007 2008 2009 2010 2011 2012 2013

4.5

5.0

5.5

6.0

6.5

7.0

7.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Remittances are a major source of capital inflows to Lebanon

41

Remittance Inflows (US$bn)


0 10 20 30 40 50 60 70

ThailandMorocco

Sri LankaLebanon

IndonesiaUkraineVietnam

BangladeshPakistan

EgyptNigeriaMexico

PhilippinesChinaIndia

Lebanon is 12th largest recipient among developing countries

42

Remittance Inflows (US$bn)


0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

LebanonKosovo

Guyana Honduras

El Salvador Liberia

Haiti The Gambia

Samoa Lesotho

Armenia Moldova

Nepal Kyrgyz Rep.

Tajikistan

Lebanon is 15th largest recipient as % of GDP

43

Remittance Inflows (% of GDP)

Source: World Bank, International Monetary Fund, Byblos Research

0 500 1,000 1,500 2,000 2,500 3,000

Bosnia & Herz.Moldova

JordanMontenegro

TongaGuyana

LithuaniaEl Salvador

ArmeniaSt. Kitts & Nevis

JamaicaSamoa

BelgiumLebanon

Luxembourg

Lebanon is second largest recipient on per capita basis

44

Remittance Inflows (US$ per capita)

Source: World Bank, International Monetary Fund, Byblos Research

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

…but inflows have stagnated in past three years

45

Change in Remittance Inflows (%)


0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014*

46

Deposit growth is key indicator for market stability Private Sector Deposit Growth (% Change)

*First four months of 2014


0

300

600

900

1,200

1,500

2008 2009 2010 2011 2012 2013 2014*47

Deposit growth is key indicator for market stability Average monthly nominal growth of Deposits at Banks in Lebanon (US$ million)



48

Lebanon: deposits are main funding source

82.2%

Low Leverage (end-April 2014)

1.8% 3.2%

Total Deposits = 87.2% of Liabilities of the Banking Sector

Private Sector Deposits

Public Sector Deposits

Non-Resident Bank

Deposits

8.8%

Capital Base Bonds

0.2%

Unclassified Liabilities

3.8%


48

50

52

54

56

58

60

62

50556065707580859095

100105110115120125130135

2005 2006 2007 2008 2009 2010 2011 2012 2013

US$

bn

Private Sector Deposits PRS

Chronic instability did not reverse deposit growth

49

Political Risk Index

Bank deposits

Source: Association of Banks in Lebanon, PRS Group, Byblos Research

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014*

50

Slowdown in lending growth but still acceptable

Private Sector Lending Growth (% Change)



Number of ministers in EU Cabinets if Lebanon ratio is applied

51

32

32

50

63

66

67

99

272

360

376

483

0 50 100 150 200 250 300 350 400 450 500

Slovak Republic

Finland

Austria

Portugal

Belgium

Greece

Netherlands

Spain

Italy

France

Germany

Current Government

lessons from the eu crisis for the lebanese economy

Economy & Finance

eurozone source

byblos research fiscal

bn source

economic freedom source

greece portugal spain

countries source

greece ireland portugal

international monetary