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IIF revises Lebanon growth downward to between 1.1 and 3 pct.

Summary: he Institute of International Finance revised downward its real GDP growth forecast for Lebanon from 4 percent last January to between 1.1 and 3 percent for 2011, adding that growth prospects would depend on political developments in the second half of 2011 year.

BEIRUT: The Institute of International Finance revised downward its real GDP growth forecast for Lebanon from 4 percent last January to between 1.1 and 3 percent for 2011, adding that growth prospects would depend on political developments in the second half of 2011 year.

It considered that the extent of economic rebound in the second half of the year would depend on the stance of the international community regarding the degree of cooperation of the current Cabinet with the Special Tribunal for Lebanon, the course of the uprising in Syria, and the improvement of ties with GCC countries, particularly with Saudi Arabia, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The IIF said real GDP growth decelerated sharply in the first half of this year due to domestic political tensions following the collapse of the Hariri government in January, as well as the rise in geopolitical risks in the region, particularly the uprising in Syria. It estimated that real growth decelerated from 9.2 percent in the first half of 2010 to 0.8 percent in the first half of this year, as most proxy indicators of economic activity posted significant declines in the first five months of the year.

It said private investment declined by 4.2 percent, and exports of goods & services decreased by 6.3 percent in constant prices. It estimated that construction fell by 12 percent and tourism by 10 percent in real terms in the first half of 2011 relative to the same period last year. It noted that construction and tourism were the main engines of the strong growth registered in the past four years, accounting for more than half of real GDP growth.

The IIF assigned a 70 percent probability that economic growth will be limited to 1.1 percent this year, based on the assumptions of a difficult relationship between the new Cabinet and the international community, cool relations between Lebanon and the GCC countries, and continued instability in Syria. Under this scenario, it assumed that FDI, construction and the number of tourist arrivals would recover only marginally in the second half the year compared with the same period last year. This would result in real GDP growth of 1.3 percent in the second half of the year.

In parallel, the IIF assigned a 30 percent probability that growth will reach 3 percent this year, assuming the Cabinet reaches an arrangement with the international community about the recent decisions of the U.N.-backed tribunal; ties between the current Cabinet and the Saudi authorities improve; and Syria becomes stable. It considered that FDI, construction and the number of tourist arrivals would grow significantly in the second half of the year under this scenario. As a result, it expected real GDP to grow by 5.1 percent in the second half of the year. The weighted average growth of the two scenarios would result in a real GDP growth forecast of 1.8 percent for the full year.

Further, it anticipated the fiscal deficit to widen this year under both scenarios, and despite the probability of transferring $1.2 billion in telecom receipts to the Treasury. It forecast the primary balance to post a slight surplus of 0.9 percent of GDP and for the fiscal deficit to reach 9.5 percent under the first growth scenario.

It expected public revenues to contract by 2.5 percent, with tax revenues declining by 4.7 percent and non-tax revenues improving by 3 percent due to the transfer of telecom receipts. But it warned that the primary balance would post a deficit of 2.6 percent of GDP and the fiscal deficit would widen to 13 percent of GDP without telecom transfers. Under the second growth scenario, and when including telecom receipts, it projected the primary balance to post a surplus of 1.9 percent of GDP and the fiscal deficit to reach 8.4 percent of GDP. It expected public revenues to grow by 2.2 percent, with tax revenues declining by 0.3 percent and non-tax revenues improving by 8.7 percent in this case. It said the primary balance would post a deficit of 1.7 percent of GDP and the fiscal deficit would widen to 12 percent of GDP without telecom transfers.

The IIF indicated that the political stalemate following the collapse of the Hariri government, and the widening of the fiscal deficit in the first half of this year, have raised Lebanon's risk premium. It noted that this could lead to more challenging conditions for the authorities to finance the large fiscal deficit. It added that Lebanon cannot afford populist policies advocated by some ministers in the new coalition, given the country's debt burden and large fiscal deficit. As such, it urged the various political parties that form the new government to cooperate and support efforts to fight tax evasion, strengthen tax administration, reduce waste in government spending, rehabilitate Electricite du Liban, reform the telecom sector, and strengthen the rule of law.

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:7LEBA
Date:Jul 4, 2011
Words:901
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