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Country Report

Lebanon

Generated on August 5th 2013

Economist Intelligence Unit20 Cabot SquareLondon E14 4QWUnited Kingdom

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Lebanon

ForecastHighlights

Outlook for 2013-17 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth

Inflation

Exchange rates

External sector

Forecast summary

Data and charts Annual data and forecast

Quarterly data

Monthly data

Annual trends charts

Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

Recent analysisPolitics Forecast updates

Analysis

Economy Forecast updates

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Lebanon 1

Country Report July 2013 www.eiu.com © Economist Intelligence Unit Limited 2013

#EconomyAnalysis

HighlightsEditor: Edward Bell

Forecast Closing Date: July 15, 2013

Outlook for 2013-17

Tammam Salam has been appointed prime minister following the resignation of his predecessor, Najib Mikati,in March. Mr Salam is attempting to form a cabinet, a process that could take months.Lebanon will continue to suffer from political violence so long as the civil war in Syria continues. The directinvolvement of Hizbullah, an armed Shia group, will make sites in Lebanon targets for retaliation by Syrianrebels.The economy, which is dependent on services, such as tourism, that are sensitive to political risk, willunderperform as the unrest in Syria continues. Growth is expected to be 1.6% in 2013, and to average 4.6% in2014-17.Fiscal reform will be a low priority, as Lebanon's policymakers are preoccupied with the potential for politicalunrest. The fiscal deficit is expected to decline from 8.3% of GDP in 2013 to 4.1% of GDP in 2017.Banque du Liban (the central bank) will maintain the Lebanese pound's peg to the US dollar during theforecast period. It will hold a high level of foreign reserves to meet any downward pressure on the currency.Lebanon's external balances will be highly sensitive to changes in international energy prices. The current-account deficit is expected to fall from 12.4% of GDP in 2013 to around 8% of GDP by the end of the forecastperiod.

Review

Gebran Bassil, the caretaker energy and water minister, announced that an emergency cabinet session wasneeded to pass laws related to the development of Lebanon's potential hydrocarbons resources.The military has carried out operations against an outspoken Sunni cleric, Ahmed al-Assir, and his followers.Mr Assir has loudly protested against the involvement of Hizbullah, a Lebanese Shia group, in the Syrian civilwar.Meetings of parliament were suspended for two weeks owing to a dispute over extending the term of JeanKhawaji, the head of the army. Michel Aoun, a prominent Christian politician and perennial aspirant to theLebanese presidency, had criticised the proposal to extend General Khawaji's term.Data from the UN show that foreign direct investment (FDI) into Lebanon rose by nearly 9% in 2012, despitelocal indicators suggesting weakness in the economy and a general downward trend in global FDI flows.Constitutional challenges to the extension of parliament's term failed, despite being spearheaded by thepresident, Michel Suleiman. The chamber will keep its present composition until November 2014.The state statistics agency has been authorised to resume the publication of inflation statistics. It is unclearwhy it had stopped in the first place.

Lebanon 2


Outlook for 2013-17

Political stabilityTammam Salam, an independent Sunni member of parliament, is struggling to balance the competing demands ofLebanon's political factions in his efforts to form a cabinet. His predecessor, Najib Mikati, resigned at the end ofMarch in a stand-off with Hizbullah, a powerful Shia armed political group, over the appointment of a security official.Hizbullah, which is a prominent member of the pro-Syrian "March 8th" political alliance, has demanded that it have thepower of veto in any future cabinet. However, this point is being fiercely resisted by the nationalist (and broadly pro-Western) "March 14th" bloc, under the leadership of a former prime minister, Saad Hariri. The Economist IntelligenceUnit expects the impasse over the formation of a government to continue in the short term, as the pre-existingdivisions between the political blocs have widened owing to their opposing stances on the civil war in Syria.Parliament was suspended for two weeks in July owing to a dispute over extending the head of the army's termbeyond the legal retirement age, contributing to further political instability.

Mr Mikati's resignation was a symptom of the spillover of Syria's civil war into Lebanon, and we now expect that thecountry will experience heightened episodes of violence as long as the uprising against the regime of the Syrianpresident, Bashar al-Assad, continues. The unrest in Syria is hardening tensions between supporters and opponentsof the Syrian president across the country, and clashes have flared up repeatedly in the religiously mixed flashpointcity of Tripoli in northern Lebanon. The army has engaged in conflict with an outspoken Sunni cleric in the southerncity of Sidon, raising the risk of becoming involved in sectarian disputes despite being one of the most neutralinstitutions in the country. The presence of armed groups and Lebanon's recent history of violence means that anydispute can escalate quickly and severely.

Sectarian tensions are built into Lebanese politics. By an unwritten national pact, the post of president is reserved fora Maronite Christian, that of prime minister for a Sunni Muslim and that of parliamentary speaker for a Shia Muslim.Parliament is divided along confessional lines, with 64 seats each for the Christian and Muslim communities, and splitfurther by sect. The division between March 8th and March 14th has replaced, to a degree, the largely Christian-Sunni-Shia split that predominated during the civil war; the largest Christian party in parliament, the Free PatrioticMovement, is currently allied with Hizbullah, a Shia group, in March 8th. The spillover of violence from Syria willexacerbate sectarian tensions, particularly between Lebanon's Muslim communities, with the Christian groupsincreasingly marginalised.

With its external patrons—Syria and Iran—preoccupied with domestic political instability and international pressure,Hizbullah will be forced to engage more directly in Lebanese domestic politics to safeguard its position. It retains aconsiderable military force and would win an outright conflict with any of the other political factions. The threat of arenewed conflict with Israel remains high, as the government there will not accept the flow of any heavy weaponsfrom Syria to Hizbullah, which is mainly based in southern Lebanon.

Election watchA parliamentary election had been expected to take place in June, but at the start of the month parliament voted toextend its term until 2014. Given the roughly even balance between March 14th and March 8th in the chamber, no sidewas prepared to risk losing ground as a result of an election. Challenges to the legality of the extension by thepresident, Michel Suleiman, failed, as the supervisory body did not meet the necessary quorum to debate the issue.A new electoral law will need to be approved prior to the vote, with Hizbullah favouring a proposal that would divideLebanon into fewer, larger constituencies with voters restricted to selecting candidates from their own sect.

Lebanon 3


International relationsLebanon is firmly embroiled in the Syrian civil war, as political tensions in the country have been exacerbated bydifferences over Syria. Hizbullah has now become an active participant in the war, supporting the Syrian military'sefforts to capture the border town of Al Qusayr in May. The group's involvement will threaten to disrupt Lebanonfurther if Syrian rebel groups retaliate by attacking Hizbullah's positions within Lebanon itself. The caretakergovernment has tried to avoid making any direct condemnation of the Syrian regime, but this policy has increaseddomestic sectarian and political tensions. It remains unclear what policy direction over Syria the government ofMr Salam will take.

Lebanon will be at risk of losing the support of its Arab allies—mainly Saudi Arabia and Qatar—if it maintains arelatively neutral policy towards Syria. However, the government, regardless of its character, will strive to maintainconstructive relationships with Gulf nations, as their tourists are a key determinant of Lebanon's economicperformance.

Hizbullah rearmed following the 2006 conflict with Israel and is now assumed to have medium-range ballistic missiles.Israeli attacks on targets inside Syria that are believed to have links with Hizbullah have raised the prospect of arenewed clash with Israel. We do not yet expect the reignition of a conflict similar to the 2006 war, but occasionalskirmishes or air strikes are possible. A conflict between Iran and the US or Israel could draw in Hizbullah as a proxyof the Islamic Republic.

Policy trendsPolicymakers will not make much progress on economic reform, as they will be preoccupied with the risk of politicalunrest. Fiscal reform, particularly the expansion of revenue collection, is vital to the reduction of the structural deficit(a result largely of the high cost of servicing the massive public debt incurred after the 1975-90 civil war). Patronagenetworks permeate the political system and many politicians have their own interests in maintaining a bloated publicsector, meaning that fiscal reform will be politically sensitive. The development of Lebanon's potential hydrocarbonsresources is one point of unity across the political scene, as it would help to reduce dramatically Lebanon's relianceon imports of expensive energy products. The government has pre-approved firms to carry out the operation andfinancing of exploration work, and the first licence is to be awarded in early 2014. An emergency session of the cabinetmay be convened to pass the necessary legal and operational regulations to allow an exploration round to take place.Move to boost the electricity supply, another relatively politically neutral issue, will benefit from a US$5bn investmentpro gramme to expand capacity and the establishment of a new regulatory authority.

In January, in an attempt to revive the economy, Banque du Liban (BdL, the cen tral bank) launched a US$1.3bnstimulus programme through the provision of cheap loans to banks that they can then extend to customers (at interestrates capped at 6%). These have begun to trickle into the economy, most notably through increased automotiveloans. Lebanon retains a relatively open economy for foreign investment; according to UN data, inflows of foreigndirect investment rose by nearly 9% in 2012, despite other indicators showing weakness in the economy. Regardlessof the nature of the next government, we do not expect this policy to change, as these inflows are necessary to help tobalance Lebanon's currentaccount deficit. The BdL maintains a policy of holding high levels of foreign reserves—US$37bn in the first quarter of 2013, or around 19 months of import cover—to compensate for any flight to quality andto maintain the currency's peg. The large stock of reserves will also be held as insurance against any deterioration indomestic security.

Lebanon 4


Fiscal policyThe finance minister submitted a revised 2013 budget to the cabinet prior to its dissolution, with spending forecast atUS$14.1bn, down from the original plan of US$15.3bn. The level of spending would be broadly unchanged from a yearearlier, and revenue is forecast at around US$11bn, leaving a deficit of US$3.1bn. However, given the current politicalsituation, the budget is likely to be delayed by several months, if it is indeed debated at all. Total spending in the firstquarter was relatively unchanged from a year earlier, but revenue was 5% lower year on year; value-added tax (VAT)receipts were down by more than 8% year on year. We expect another wide deficit of more than 8% of GDP in 2013 asrevenue is affected by the economic weakness caused by political uncertainty.

Thereafter, the shortfall is expected to decline gradually as the economy improves (assuming the security situationcalms down). An eventual resolution of the civil war in Syria could be a boon for Lebanon's ports, supportingcustoms payments. Spending on electricity sector reforms, funded by borrowing, will be a major component of capitalexpenditure in 2013-17. A precedent has been set for the politicisation of revenue streams after the Ministry ofTelecommunications, which normally provides a large portion of non-tax revenue to the government from theoperation of Lebanon's mobile-phone networks, withheld revenue for much of 2010 because the telecoms and financeministers were from rival political groups. With the potential for hydrocarbons production to alter Lebanon's fiscalposition dramatically, control over the Ministry of Energy and Water will be fiercely contested by the rival politicalfactions. In 2012 Lebanon recorded its first sizeable primary fiscal deficit (not including debt payments) in over adecade. (In 2006 the government recorded a very small primary deficit, although the country was attacked by Israelthat year.)

Much of the government's foreign-currency debt is held by local banks, and debt servicing is in effect a form ofgovernment support for the banks. The total debt stock rose in 2012, to around L£87trn (US$57.7bn), or 128% ofestimated GDP. However, the government's heavy debt burden soaks up a considerable portion of banks' domesticclaims, depriving the economy of a large share of financing.

Monetary policyThe economy's high level of dollarisation and the currency's peg to the US dollar mean that Lebanese pound interestrates tend to track US rates, but with a large positive differential. We expect the central bank to follow the FederalReserve, its US counterpart. Riad Salameh's ongoing governorship of the BdL will help to preserve confidence in theLebanese banking system. Moreover, uncertainty over political stability and the still-weak economy may limit demandfor the central bank's supply of cheaper stimulus loans.

International assumptions 2012 2013 2014 2015 2016 2017

Economic growth (%)

US GDP 2.2 2.1 2.5 2.3 2.3 2.4

OECD GDP 1.4 1.3 2.1 2.2 2.1 2.2

World GDP 2.1 2.1 2.7 2.8 2.8 2.9

World trade 2.4 3.7 5.2 5.4 5.5 5.6

Inflation indicators (% unless otherwise indicated)

US CPI 2.1 1.7 2.2 2.2 2.3 2.3

OECD CPI 2.2 1.7 2.1 2.2 2.3 2.2

Manufactures (measured in US$) -0.6 -3.1 0.6 0.9 1.6 1.9

Oil (Brent; US$/b) 112.0 106.6 104.8 107.3 110.0 115.0

Non-oil commodities (measured in US$) -10.9 -3.7 0.6 -0.2 0.6 2.2

Financial variables

US$ 3-month commercial paper rate (av; %) 0.2 0.1 0.2 0.3 1.2 2.2

US$:€ (av) 1.29 1.31 1.29 1.27 1.26 1.27

¥:US$ 79.79 98.29 102.00 103.00 102.00 101.00

Lebanon 5


Economic growthEconomic growth in 2013 will be weak, at 1.6%, as domestic political uncertainty is heightened by the debate overforming a new government and as the civil war in Syria, which shows no signs of ending, continues to have anegative impact on Lebanon's economy. Growth prospects also depend heavily on perceptions of political risk andregional performance, as Arab states are the principal consumers of Lebanon's services. As the unrest in Syriacontinues and spreads into Lebanon, tourism and related investment in property will suffer, dragging down growth.We now expect the civil war in Syria to continue until at least the middle of 2014, and we expect the Lebaneseeconomy to grow by 2.5% in real terms next year (from more than 3.5% previously). Growth will pick up substantiallythereafter, averaging 5.3% in 2015-17. Growth will be driven by strong private consumption, as well as a robustrecovery in services export volumes. We expect fixed investment to increase its share of GDP in 2014 17 asinternational firms are tempted by the potential of sizeable offshore natural gas reserves. However, this is a relativelybenign scenario, and there are significant downside risks that have the potential to drag down Lebanon's economy.A further escalation of inter-communal violence could lead to a sharp economic contraction and see investors pulltheir money out of Lebanon.

Weak performance in tourism and construction in 2012 have demonstrated how quickly Lebanon's economy can fallvictim to political uncertainty. Tourism indirectly supports around one-quarter of jobs and generates much of thedemand that supports construction. Tourist arrivals are mainly from the Arab world, but Arab visitors may prefer morepolitically stable destinations such as Turkey or Morocco. Tourism has continued to underperform this year, withlevels down by 13.8% year on year in the first four months of 2013. Banking is vital to the economy and continues tobenefit from strong inflows of deposits and interest income from government debt. Lebanon could derive someunreported benefits from the unrest in Syria, as it serves as a channel for smuggling goods into the country and someSyrians may deposit money in Lebanese banks. There are questions about the quality of official GDP data, and timelyeconomic indicators outside the three key sectors are in short supply.

Economic growth% 2012a 2013b 2014b 2015b 2016b 2017b

GDP 1.7 1.6 2.5 4.9 5.2 5.8

Private consumption 5.0 3.0 4.0 8.7 9.2 8.0

Government consumption 5.8 3.3 4.5 4.2 4.5 4.6

Gross fixed investment 1.5 -2.3 5.0 8.2 10.0 10.6

Exports of goods & services 3.5 2.5 4.5 10.0 11.0 12.3

Imports of goods & services 9.0 4.5 8.0 13.4 15.2 13.5

Domestic demand 4.6 2.8 4.8 8.1 9.2 8.7

Agriculture 1.8 1.5 3.5 4.0 4.5 4.5

Industry 2.1 3.0 4.5 5.5 6.2 6.8

Services 2.2 2.5 6.0 6.2 6.2 7.0a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

InflationInflation will be manageable in 2013-14, dropping from 5.5% in 2013 to 4.5% in 2014 as commodity prices ease. Inflationis expected to pick up towards the end of the forecast period as global commodity prices rise, reaching an average of6.8% in 2017. The Central Administration for Statistics was barred from publishing inflation data for much of the firsthalf of 2013 and will resume from July, casting doubt on the accuracy of inflation reporting in Lebanon. Higherminimum wages for public- and private-sector workers will lead to some inflation as merchants pass on costs toconsumers.

Exchange ratesThe Lebanese pound is expected to remain pegged to the US dollar within a band of L£1,501 1,514:US$1. The BdL'sfirm commitment to defending the peg is aided by its ability to influence interest rates, high levels of assets and strongsupport from local commercial banks. Were Lebanon to experience serious capital flight, it would need to draw downits foreign reserves to support the pound. Lebanon's reserves provide it with an ample 19 months of import cover. Arisk to the currency, however, is the high proportion of Lebanon's reserves that is held in gold (which the BdL marksto market), the price of which has fallen markedly in recent months.

Lebanon 6


External sectorLebanon will continue to record wide current-account deficits in 2013-17, at an average of 10.3% of GDP. Export levelshave proved surprisingly resilient in 2013, in spite of the political uncertainty. Nevertheless, Lebanon will still record asizeable trade deficit, of US$15.3bn, as it relies on imports of energy, industrial raw materials and food. The tradebalance will continue to be in deficit during the forecast period as the expected investment in offshore hydrocarbonsprojects draws in capital inputs, particularly in the later years. Lebanon's services balance is expected to strengthensignificantly in 2014, assuming the civil war in Syria cools down around the middle of the year. Tourism from thediaspora has tended not to be particularly risk-averse and inflows into Lebanon's banking system continue to grow.Remittances will help to offset the trade deficit (although they may decline, as the UAE has hardened its visa policytowards Lebanese nationals). Low returns on Lebanon's stock of foreign reserves and high external debt paymentswill keep the income balance in deficit. The current-account deficit is normally covered by capital inflows (directinvestment from other Arab countries and purchases of foreign-currency government bonds), although many of theseinflows are unrecorded.

Forecast summaryForecast summary(% unless otherwise indicated)

2012a 2013b 2014b 2015b 2016b 2017b

Real GDP growth 1.7 1.6 2.5 4.9 5.2 5.8

Consumer price inflation (av) 6.4c 5.5 4.5 4.0 5.1 6.8

Consumer price inflation (end-period) 10.1c 3.0 3.8 5.0 3.0 6.1

2-year Treasury bill rate 5.9c 5.9 6.4 6.5 6.5 6.8

Government balance (% of GDP) -8.7 -8.3 -7.5 -5.6 -4.8 -4.1

Exports of goods fob (US$ bn) 5.7 5.8 5.9 6.0 6.2 6.5

Imports of goods fob (US$ bn) 20.4 21.0 22.8 25.1 28.4 31.9

Current-account balance (US$ bn) -6.6 -6.1 -6.0 -6.3 -6.3 -6.1

Current-account balance (% of GDP) -14.7 -12.4 -11.3 -10.7 -9.4 -7.9

External debt (year-end; US$ bn) 25.2 26.8 28.9 31.2 32.1 29.7

Exchange rate L£:US$ (av) 1,508c 1,508c 1,508 1,508 1,508 1,508

Exchange rate L£:€ (av) 1,945c 1,975c 1,945 1,915 1,899 1,915

Exchange rate L£:€ (endperiod) 1,975c 1,975c 1,945 1,899 1,899 1,915

Exchange rate L£:¥100 (av) 1,889c 1,889c 1,534 1,478 1,478 1,493a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Lebanon 7


Data and charts

Annual data and forecast 2008a 2009a 2010a 2011a 2012b 2013c 2014c

GDP

Nominal GDP (US$ m) 29,684 34,650 37,124 40,031b 45,254 48,781 52,609

Nominal GDP (L£ bn) 44,748 52,235 55,965 60,347b 68,221 73,537 79,307

Real GDP growth (%) 9.3 8.5 7.0 1.5b 1.7 1.6 2.5

Expenditure on GDP (% real change)

Private consumption 10.2 8.3 5.3 6.0b 5.0 3.0 4.0

Government consumption 6.6 8.6 6.4 8.0b 5.8 3.3 4.5

Gross fixed investment 18.5 32.9 6.8 4.0b 1.5 -2.3 5.0

Exports of goods & services 13.7 1.7 12.8 2.8b 3.5 2.5 4.5

Imports of goods & services 16.9 20.7 3.1 12.3b 9.0 4.5 8.0

Population and income

Population (m) 4.2 4.2 4.2 4.3b 4.3 4.3 4.4

GDP per head (US$ at PPP) 11,969b 13,009b 14,001b 14,410b 14,806 15,154 15,711

Fiscal indicators (% of GDP)

Central government revenue 23.7 24.3 22.7 23.3b 20.8 19.5 20.5

Central government expenditure 33.4 32.9 30.5 29.2b 29.4 27.8 28.0

Central government balance -9.7 -8.5 -7.8 -5.8b -8.7 -8.3 -7.5

Net public debt 156.6 145.6 140.7 133.2b 119.6 119.3 118.1

Prices and financial indicators

Exchange rate L£:US$ (endperiod) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5a 1,507.5 1,507.5

Exchange rate ¥:L£ (endperiod) 0.060 0.062 0.055 0.052 0.058a 0.068 0.068

Consumer prices (end-period; %) 5.5 3.4 4.6 3.1 10.1a 3.0 3.8

Stock of money M1 (% change) 19.3 13.4 18.4 7.2 15.7a 5.0 12.0

Stock of money M2 (% change) 50.3 37.9 15.4 -1.3 11.0a 9.5 14.7

Lending interest rate (av; %) 10.0 9.6 8.3 7.5 7.2a 7.3 7.5

Current account (US$ m)

Trade balance -11,077 -11,207 -12,499 -13,919 -14,718 -15,275 -16,931

Goods: exports fob 4,454 4,187 4,689 5,386 5,662 5,761 5,876

Goods: imports fob -15,531 -15,394 -17,188 -19,305 -20,380 -21,036 -22,808

Services balance 4,177 2,867 2,820 6,803 6,781 7,359 8,794

Primary income balance 437 -228 -509 -178 -516 -186 -214

Secondary income balance 2,360 1,827 2,601 2,429 1,804 2,046 2,396

Current-account balance -4,103 -6,741 -7,588 -4,866 -6,649 -6,057 -5,955

External debt (US$ m)

Debt stock 24,788 25,092 24,707 24,884 25,173 26,753 28,918

Debt service paid 4,427 4,611 4,152 5,334 5,544 3,961 3,954

Principal repayments 2,905 3,096 2,651 3,789 3,658 2,355 2,135

Interest 1,521 1,516 1,501 1,546 1,886 1,606 1,819

International reserves (US$ m)

Total international reserves 28,276 39,165 44,524 48,141 52,498a 52,718 55,100a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.Source: IMF, International Financial Statistics.

Lebanon 8


Quarterly data 2011 2012 2013

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Central government finance (L£ bn)

Revenue 4,458 3,294 3,590 3,522 4,120 3,193 3,329 3,354

Expenditure 4,108 4,093 5,016 4,531 4,819 4,589 6,143 4,534

Balance 350.4 -798.8 -1,426.4 -1,008.7 -699.0 -1,396.3 -2,813.6 -1,179.8

Output

Coincident Indicator (end-period, 1993=100) 261.8 248.1 265.5 264.8 261.0 243.5 262.5 273.9

Coincident Indicator (% change, year on year) 4.8 8.3 3.9 4.7 -0.3 -1.9 -1.1 3.4

Financial indicators

Exchange rate L£:US$ (av) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

Exchange rate L£:US$ (endperiod) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

Deposit rate (av; %) 5.9 5.8 5.9 5.8 5.8 5.8 5.8 5.8

Discount rate (end-period; %) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 n/a

Lending rate (av; %) 7.7 7.4 7.3 7.1 7.4 7.3 7.2 7.4

Treasury bill rate (av; %) 3.9 3.9 3.9 4.1 4.4 4.4 4.4 4.4

M1 (endperiod; L£ bn) 5,821 5,805 6,138 6,033 6,288 6,319 7,104 7,038

M1 (% change, year on year) 12.0 7.7 7.2 5.7 8.0 8.9 15.7 16.7

M2 (endperiod; L£ bn) 55,197 56,805 58,643 60,357 61,807 63,024 65,077 65,970

M2 (% change, year on year) -3.7 -4.2 -1.3 7.8 12.0 10.9 11.0 9.3

BLOM stockmarket index (end-period; Jan 22 1996=1,000) 1,335 1,234 1,177 1,224 1,139 n/a n/a n/a

BLOM stockmarket index (% change, year on year) -11.7 -14.2 -20.3 -13.8 -14.7 n/a n/a n/a

Sectoral trends

Construction permits (endperiod; ‘000 sq metres) 4,871 3,595 3,996 3,608 3,985 3,228 3,860 n/a

Foreign trade (L£ bn)

Exports fob 1,753 1,678 1,561 1,740 1,535 1,698 1,787 1,797

Imports cif 7,013 7,808 8,674 9,011 7,398 7,766 7,915 8,314

Trade balance -5,259 -6,130 -7,113 -7,271 -5,862 -6,068 -6,128 -6,517

Reserves US$ m)

Reserves excl gold (end-period) 31,066 33,462 33,741 33,939 36,718 36,530 37,186 37,061Source: IMF, International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate L£:US$ (av)2011 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

2012 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

2013 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 n/a n/a n/a n/a n/a n/a n/a

Central government revenue (L£ bn)2011 1,221.4 648.8 857.7 1,101.3 1,533.9 1,822.8 1,350.4 885.3 1,058.8 1,357.2 893.3 1,339.4

2012 1,506.7 926.2 1,089.0 1,242.3 1,407.8 1,469.9 1,377.3 884.7 930.5 884.7 930.5 1,372.3

2013 1,542.7 804.8 1,006.8 n/a n/a n/a n/a n/a n/a n/a n/a n/a

Central government expenditure (L£ bn)2011 1,294.3 1,404.3 1,684.3 1,554.9 1,258.1 1,294.7 1,249.3 1,153.5 1,690.5 1,535.8 1,551.1 1,929.5

2012 1,771.4 1,199.3 1,559.9 1,878.6 1,482.7 1,457.7 1,431.6 1,367.7 1,789.5 1,367.7 1,789.5 2,303.1

2013 1,569.6 1,226.7 1,737.8 n/a n/a n/a n/a n/a n/a n/a n/a n/a

Central government balance (L£ bn)2011 -72.8 -755.5 -826.6 -453.5 275.8 528.2 101.1 -268.2 -631.7 -178.6 -657.8 -590.1

2012 -264.6 -273.1 -470.9 -636.3 -74.9 12.3 -54.3 -482.9 -859.0 -859.0 -930.9 -1,217.6

2013 -26.8 -422.0 -731.0 n/a n/a n/a n/a n/a n/a n/a n/a n/a

Gross domestic debt (L£ trn)2011 47.3 46.9 47.8 47.8 48.1 48.0 48.3 48.4 50.3 50.1 49.7 49.3

2012 49.4 49.7 50.5 50.9 51.2 48.5 48.9 49.1 50.1 51.0 51.3 50.2

2013 50.6 50.6 51.0 49.8 n/a n/a n/a n/a n/a n/a n/a n/a

External public debt (US$ bn)

2011 21.0 21.0 20.9 20.9 20.8 20.7 20.8 21.3 21.0 21.1 21.1 20.9

2012 20.9 21.0 20.6 21.3 21.2 23.1 23.0 23.1 22.9 22.8 23.5 24.4

2013 24.5 24.5 23.9 n/a n/a n/a n/a n/a n/a n/a n/a n/a

Total public debt (L£ trn)2011 78.9 78.5 79.3 79.3 79.5 79.2 79.6 80.5 82.0 81.8 81.5 80.9

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2012 81.0 81.4 81.6 83.0 83.1 83.4 83.6 84.0 84.6 85.4 86.8 87.0

2013 87.5 87.5 87.1 n/a n/a n/a n/a n/a n/a n/a n/a n/a

M1 (% change, year on year)

2011 16.3 17.6 14.8 15.7 12.7 12.0 12.4 10.2 7.7 0.9 7.8 7.2

2012 5.0 1.7 5.7 4.9 5.6 8.0 6.2 9.4 8.9 20.1 13.7 15.7


M2 (% change, year on year)

2011 11.0 9.7 156.0 9.8 9.4 8.4 7.3 6.9 6.0 6.1 5.8 5.5

2012 6.3 6.5 6.5 5.7 6.0 6.5 6.2 6.2 6.2 6.5 6.8 7.0


Deposit rate (av; %)

2011 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.8 5.9 5.8 5.8 5.9

2012 5.9 5.7 5.8 5.7 5.8 5.8 5.8 5.8 5.7 5.8 5.8 5.8


Lending rate (av; %)

2011 7.7 7.7 7.7 7.7 7.7 7.6 7.3 7.5 7.4 7.3 7.3 7.4

2012 7.2 7.1 7.2 7.5 7.3 7.4 7.2 7.3 7.3 7.3 7.1 7.1


BLOM stockmarket index (end-period; Jan 22 1996=1,000)

2011 226.3 216.5 210.7 209.3 196.7 192.9 183.7 160.2 152.6 142.6 129.4 140.8

2012 136.3 136.5 140.4 131.2 117.8 122.6 130.8 117.7 116.7 113.1 n/a n/a

2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

BLOM stockmarket index (% change, year on year)

2011 -16.0 -22.6 -29.5 -27.9 -32.0 -28.9 -23.7 -24.6 -29.7 -33.7 -40.0 -35.2

2012 -39.8 -36.9 -33.3 -37.3 -40.1 -36.4 -28.8 -26.5 -23.5 -20.7 n/a n/a

2013 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Total exports fob (US$ m)

2011 297 304 354 375 377 411 416 363 334 351 347 338

2012 348 429 377 319 355 345 317 339 471 440 364 381

2013 405 381 407 412 364 n/a n/a n/a n/a n/a n/a n/a

Total imports cif (US$ m)

2011 1,730 1,218 1,632 1,501 1,579 1,572 1,679 1,720 1,780 2,509 1,580 1,665

2012 1,454 2,800 1,723 1,548 1,646 1,713 1,739 1,782 1,630 1,774 1,605 1,872

2013 1,647 1,791 2,077 1,850 1,798 n/a n/a n/a n/a n/a n/a n/a

Trade balance fob-cif (US$ m)

2011 -1,433 -914 -1,278 -1,126 -1,202 -1,161 -1,264 -1,357 -1,446 -2,158 -1,233 -1,328

2012 -1,106 -2,370 -1,346 -1,230 -1,291 -1,368 -1,423 -1,443 -1,159 -1,334 -1,241 -1,490

2013 -1,242 -1,411 -1,670 -1,438 -1,434 n/a n/a n/a n/a n/a n/a n/a

Foreign-exchange reserves excl gold (US$ m)

2011 31,478 31,301 31,523 31,617 31,067 31,066 31,657 33,493 33,462 33,383 33,679 33,741

2012 33,673 33,794 33,939 34,556 34,425 36,718 36,431 36,700 36,530 36,588 37,121 37,186

2013 37,432 37,292 37,061 38,733 n/a n/a n/a n/a n/a n/a n/a n/aSources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

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Monthly trends charts

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Comparative economic indicators

Basic data

Land area

10,452 sq km

Population

4.3m (UN estimate, 2012), excluding around 216,000 Palestinians living in refugee camps

Population in '000 by governorate administration (National Survey of Household Living Conditions, 2004)

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Beirut (capital) 391

Mount Lebanon (Beirut environs) 1,502

North Lebanon 769

The Beqaa 471

South Lebanon 401

Nabatiyeh 221

Climate

Subtropical; cool in highlands

Weather in Beirut (altitude 34 metres)

Hottest month, August, 2332°C; coldest month, January, 1117°C (average daily minimum and maximum); driestmonths, July and August, 1 mm average rainfall; wettest month, January, 190 mm average rainfall

Languages

Arabic; English and French are widely spoken

Measures

Metric system

Currency

Lebanese pound (L£)

Time

Two hours ahead of GMT (Lebanese summer time is three hours ahead)

Fiscal year

January 1st-December 31st

Public holidays

The dates of Islamic holidays are based on the lunar calendar and are therefore approximate. New Year's Day (January1st); Orthodox Armenian Christmas (January 6th); St Maroun's Day (February 9th); Prophet's birthday (January 24th2013); Easter (March 29thApril 1st 2013); Orthodox Easter (May 3rd 6th 2013); Labour Day (May 1st); Martyrs' Day(May 6th); Resistance and Liberation Day (May 25th); Assumption Day (August 15th); Eid al-Fitr (August 8th 2013);All Saints Day (November 1st); Eid al Adha (October 15th 2013); Independence Day (November 22nd); Islamic NewYear (November 4th 2013); Ashoura (November 14th 2013); Christmas Day (December 25th)

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Political structure

Official name

Republic of Lebanon

Form of state

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Parliamentary republic

Legal system

Based on the 1926 constitution (with amendments incorporated in 1990) and the Civil Procedure Code, the CriminalProcedure Code and the Penal Code

National legislature

Under the electoral law of July 16th 1992, the unicameral National Assembly has 128 seats, equally divided betweenMuslims and Christians

Electoral system

Universal direct suffrage over the age of 21

National elections

The parliamentary election scheduled for June 2013 has been postponed following an extension of the term ofparliament. The election will now take place in November 2014

Head of state

The president must be a Maronite Christian. Michel Suleiman was elected by parliament on May 25th 2008 for a six-year term

National government

The prime minister must be a Sunni Muslim and is chosen by the president after consultation with parliament. Thecabinet is appointed by the prime minister and the president. Ministers need not be part of the National Assembly, butare responsible to it. Cabinet seats are customarily distributed on a sectarian basis. Following the resignation of thecabinet in March 2013, all ministers are holding their positions on a caretaker basis

Main political organisations

Political parties tend to be weak and organised on a sectarian basis. The "March 14th" alliance is headed by theFuture Movement (Sunni) with the Lebanese Forces (Christian) in loose alliance with the Progressive Socialist Party(Druze) and the Phalange (Christian). The "March 8th" bloc comprises Hizbullah (Shia), Amal (Shia) and the FreePatriotic Movement (Christian)

Prime minister-designate: Tammam Salam (Sunni Muslim)

Deputy prime minister: Samir Mokbel (Greek Orthodox Christian)

Key ministers

Culture: Gaby Layoun (Greek Orthodox Christian)

Defence: Fayez Ghosn (Greek Orthodox Christian)

Economy & trade: Nicolas Nahas (Greek Orthodox Christian)

Education: Hassan Diab (Sunni Muslim)

Energy & water: Gebran Bassil (Maronite Christian)

Environment: Nazem Khoury (Maronite)

Finance: Mohammed Safadi (Sunni Muslim)

Foreign affairs: Adnan Mansour (Shia Muslim)

Health: Ali Hassan Khalil (Shia Muslim)

Industry: Freij Sabounjian (Armenian Christian)

Information: Waleed Daouk (Sunni Muslim)

Interior: Marwan Charbel (Maronite Christian)

Justice: Shakib Kortbawi (Maronite Christian)

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Labour: Salim Jreissati (Maronite Christian)

Public works & transportation: Ghazi Aridi (Druze)

Social affairs: Wael Bou Faour (Druze)

Telecommunications: Nicolas Sehnaoui (Catholic Christian)

Tourism: Fadi Abboud (Maronite Christian)

Parliamentary speaker

Nabih Berri (Shia Muslim)

Central bank governor

Riad Salameh (Maronite Christian)

The following articles have been written in response to events occurring since our most recent forecastwas released, and indicate how we expect these events to affect our next forecast.

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Recent analysis

Politics

Forecast updates

July 18, 2013: Political stability

Attacks increase against Assad allies in Lebanon

Event

An ally of the Syrian president, Bashar al Assad, has been shot and killed in the Lebanese town of Sarafand.

Analysis

Mohammed Darrar Jamo, a member of Syria's Baath party, was killed outside of his house in the southern Lebanesetown on July 17th. Local press reported that two individuals have been arrested as suspects in the assassination. Theattack on Mr Jamo follows on from a roadside bomb that targeted a convoy of Hizbullah vehicles in the Beqaa Valley,near Lebanon's border with Syria, and wounded four of the Shia group's members.

The latest surge in violence against allies of the Syrian regime in Lebanon (a massive car bombing occurred in aHizbullah-dominated area of Beirut in mid July, although with no fatalities) raises the question of what retaliation pro-Assad groups may take. It remains unclear if there is any co-ordination behind the recent attacks and members of theanti-Syrian March 14th political alliance have been quick to denounce the violence, with a former prime minister andprominent Future Movement member of parliament, Fouad Siniora, saying that the group "rejects the use of violenceand weapons against civilians". The most likely perpetrators will be groups linked to the rebels fighting against theSyrian regime, who are carrying their war into Lebanon as a riposte to Hizbullah's active involvement alongside theSyrian army.

Hizbullah may be reluctant to carry out operations in Lebanon itself as it could risk spreading its military capabilitiestoo thinly. Were it to engage in attacks against other groups in the country, it would be very difficult to keep theviolence from escalating and requiring the complete attention of the group on protecting its communities in the south,Beirut's suburbs and the Beqaa Valley. Nevertheless, there will be a limit to what the group is prepared to endure, anda heightened security presence in areas under its control could elevate tensions between Hizbullah and its politicalopponents (some of whom have links to officially banned militias).

Impact on the forecast

The recent wave of violence is in line with our view that Lebanon will suffer from political instability and violence solong as the civil war in Syria continues.

Analysis

July 30, 2013

Hizbullah's overture to its opponents will not ease tensions

Hizbullah, a powerful Lebanese Shia party-cum-militia, has called on the political leader of Lebanon's Sunnicommunity, Saad Hariri, to return to the country from his self imposed exile abroad. The group's overture to itspolitical opposite probably stems from a desire among Hizbullah's leadership to avoid a further destabilisation ofLebanon's political scene. Hizbullah's invitation is unlikely to be accepted by Mr Hariri owing to security fears butsignifies that the organisation is genuinely concerned about domestic political instability. Indeed, the politicaldynamics currently shaping Lebanon, some of which were caused by Hizbullah, may be moving against the group.

Hizbullah extended the invitation to Mr Hariri, who was Lebanon's prime minister in 2009 11 before his unitygovernment collapsed when the Shia group withdrew its support, by way of "diplomatic channels" according to localpress. It is not the only local political actor to call on Mr Hariri to return; the speaker of parliament, Nabih Berri, hasalso called on Mr Hariri to return to Lebanon.

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The former prime minister is the leader of the Future Movement, a Sunni supported party that is the core of theMarch 14th political alliance, a broadly nationalist and anti Syrian bloc that also includes several Christian parties. Hehas been out of Lebanon since his government fell in January 2011 owing to concerns over his safety. The threatagainst politicians of all allegiances in Lebanon is real; in July an ally of Syria's president, Bashar al Assad, was killedoutside his home in southern Lebanon, and another leading figure in March 14th, Samir Geagea, the head of theMaronite Christian-supported Lebanese Forces, has said that he survived an attempted assassination attempt.

STL overhang

Mr Hariri's reluctance to return to Lebanon will also be influenced by the ongoing investigation into the 2005assassination of his father, Rafiq, who was killed in a massive car bomb along with 21 others in his motorcade. TheSpecial Tribunal for Lebanon (STL), a UN body set up to investigate the attack, has issued indictments againstfour Hizbullah operatives, and the Lebanese government's backing for the STL (it is obligated by the UN SecurityCouncil to fund 49% of the tribunal's costs) is a routine point of contention between figures who support Hizbullahand those who oppose it. In 2011 Hizbullah's refusal to support the government's assistance to the STL led to thegovernment's collapse, and there was genuine concern that Mr Hariri could be targeted in retribution for his campaignto support the investigation. However, the events of the Arab Spring and the start of the Syrian civil war across theborder quickly overshadowed Lebanon's domestic political intrigues.

In recent weeks there have been several attacks against Hizbullah targets or allies of the party. A large car bomb in aHizbullah neighbourhood of Beirut in early July was followed by a roadside bomb targeting a Hizbullah convoy in theBeqaa Valley and the assassination of Mr Assad's ally, Mohammed Darrar Jamo. These attacks seem to have been inretaliation for the party's greater involvement in the civil war in Syria—Hizbullah has been fighting openly on behalf ofthe Assad regime in key border towns. Hizbullah was also apparently involved in the Lebanese military's pursuit of anoutspoken Sunni cleric, Ahmed al Assir, in the southern city of Sidon. Mr Hariri's absence from Lebanon has meantthat the Sunni political scene has become increasingly diverse, with hardline Sunnis—who are unwilling to co operatewith Hizbullah—gaining greater prominence. By extending an invitation to Mr Hariri, Hizbullah appears to beinterested in making use of his still strong profile among Lebanon's Sunnis to try to calm political tensions.

Out of Hizbullah's control

However, Mr Hariri's ability to ease political tensions may be limited. Lebanon has become directly involved in Syria'scivil war, with crossborder incursions from Lebanon into Syria by rebels fighting against the Assad regimecommonplace (and with similar incursions into Lebanon by the Syrian military). In addition, Lebanon is estimated tohost 1.2m Syrian refugees displaced by the war, among whom there are likely to be many militants opposed to anylegitimisation of Hizbullah's rule over Lebanon's political institutions by means of opposition parties co operating withthe group.

Hizbullah's participation in the Syrian civil war, which has amplified the conflict along with worsening politicalinstability in Lebanon, means it is now backed into a corner. Sunni figures in Lebanon will resist co operation with theparty for fear of alienating their support base, but Hizbullah cannot expect a stable political environment without someeasing of cross sectarian tensions. Conversely, any attempt by the party to assume power would be resisted bynearly all parties in Lebanon, including Hizbullah's allies, and is unlikely to be a strategic objective of Hizbullah's inany case as it would almost certainly deny the country access to economic and political assistance from the US, whichregards Hizbullah as a terrorist organisation. (The EU has also recently agreed to classify the party's military wing as aterrorist organisation, potentially jeopardising EU assistance to Lebanon.)

Now well aware of the security risks facing its own supporters (the bombing in Beirut was unprecedented in being sodeep within a Hizbullah-controlled neighbourhood), the party may be seeking to engage in dialogue with its politicalopponents in an effort to reduce domestic tensions. However, the scale of violence in Lebanon so far suggests thatthe official channels of political dialogue are disengaged from the sentiments held by various sectarian and politicalcommunities, meaning political instability will continue in as long as the Syrian civil war persists without anyresolution in sight.

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July 31, 2013

EU classifies Hizbullah as a terrorist organisation

The EU has now defined the military wing of Hizbullah, a Lebanese Shia party-cum-militia, as a terroristorganisation. The move is likely to have little direct impact on Hizbullah itself, but could act to further destabiliseLebanon, which is suffering from the spillover effects of the civil war in Syria. The designation could call intoquestion the EU's ability to provide aid to Lebanon or to act as a moderating force between Hizbullah and Israel,which could be empowered by the new listing.

On July 25th the Council of the European Union, an executive body of the EU, added Hizbullah's military wing (adistinction within the group recognised only by Western governments) to the EU's list of groups viewed as terrorist,allowing it to freeze assets and "enhance" police and judicial co-operation. In practical terms, the move will have littledirect effect. It is unlikely, for example, that any Hizbullah financial assets will be identified in the EU and there is anequally limited prospect of EU police forces undertaking any action against the group.

The real implications are political. For many years, there has been a battle within the EU over Hizbullah. Countries thatadvocated a softer stance on the party argued that Hizbullah was part of Lebanon's democratic process, pollingstrongly in elections, and that it would be better to find a way to co-operate. They argued that to label it as a terroristgroup could alienate Shia Muslims in the region, destabilise Lebanon and even encourage more Israeli attacks on thecountry (on the assumption that Israel would expect carte blanche to take on a group that had few proponents inEurope). But hawks in the European Commission, with strong support from the US and UK governments, argued that,by its actions, the party was a threat, and have finally won out. Not long after the EU classification, the US president,Barack Obama, said in a letter to Congress that the party represented an "unusual and extraordinary threat to thenational security and foreign policy of the US", citing what he described as its "increasingly sophisticated weaponssystems".

Not winning any friends

Hizbullah's growing role in Syria's civil war, where it is now openly fighting on behalf of the regime of the presidentBashar al Assad, has shattered the veneer that the party has long used to justify its stock of weapons andparamilitary force (arguing that they were only ever used to fight aggression from Israel). By publicly fighting beyondLebanon's borders, the group in part brought on the European move. The move was also precipitated by a decision byBulgarian authorities to publicly blame the party for a 2012 suicide attack in the country, on a bus carrying Israelitourists, in which six people died. A diplomatic campaign, led by the UK and the Netherlands sinceMay, persuaded EU members that this proved Hizbullah was acting on the European mainland.

Fear of Israeli attack

Hizbullah criticised the EU decision, describing it as an "aggression" and a "terrorist act". Hassan Nasrallah, the headof the party, said that it meant that the EU would "share responsibility for any Israeli attack" against Lebanon or theparty. Even some of Hizbullah's enemies condemned the move, fearing the impact on Lebanon's stability. AminGemayel, a former president and head of the Christian Phalange Party, said: "The decision confused the Lebanesesituation and will constitute negative repercussions on all matters." Recognising these concerns, after the EUannouncement, Angelina Eichhorst, the EU ambassador to Lebanon, said that the move did not justify any Israeliaction against Lebanon. EU officials emphasised that the move would not prevent continued dialogue with "allpolitical parties" in Lebanon, and did not affect the delivery of aid, or prevent "legitimate financial transfers" to thecountry.

Ultimately, the EU's designation may do more damage to the bloc's influence in Lebanon than affect Hizbullah in anysignificant manner. The EU provides Lebanon with around €50m (US$65m) in assistance each year through theEuropean Neighbourhood and Partnership Instrument. Any offers of assistance from the EU for programmes in mainlyHizbullah-supporting areas of Lebanon (such as the south, the suburbs of Beirut or Beqaa valley, which tend to berelatively underdeveloped and could benefit from international aid) may be rebuffed as a consequence of the EU'slisting.

Lebanon 20


Economy

Forecast updates

July 19, 2013: Economic growth

Tourist spending down sharply in first half of 2013

Event

Tourist spending in Lebanon was down by 18% in the second quarter of 2013 compared with the same period of 2012,according to data from Global Blue, a company that provides tax refunds to tourists.

Analysis

The drop-off in tourist spending matches a general decline in Lebanon's vital tourism industry, which indirectlysupports around one third of the economy through consumer spending and construction of hotels and holiday villas.In June tourist arrivals were down by 13.4% year on year; overall in the first half of 2013, tourist arrivals were 12.6%lower than a year earlier.

Lebanon's uncertain political environment, with several bombings occurring recently in urban areas of Beirut andother major cities, as well as the spillover of violence from Syria's civil war, is clearly having a negative impact ontourism, with 2013 shaping up to be another poor year after the already weak 2012 (when tourist arrivals fell by nearly18% compared with 2011 according to figures from the Ministry of Tourism).

Nevertheless, some economic indicators have attested to the resilience of Lebanon's economy to political unrest.Cement deliveries, as an indicator of construction activity, were up by 3.5% in the first four months of 2013 comparedwith the same period a year earlier. New car sales, lubricated by central bank stimulus to banks to increase lending tosupport the economy, have been positive in the first half of 2013; we estimate they grew by 1.5% year on year in thesix months to the end of June (although they did turn sharply negative, falling by 14.6% year on year, that month).


The weak performance in the key tourism sector supports our view that Lebanon's economy will post insipid growthin 2013. We currently forecast real GDP growth of 1.6% but note that risks are to the downside with the potential forflat to slightly negative growth.

Lebanon 21


July 24, 2013: Inflation

Publication of inflation data resumes

Event

Lebanon's data agency, the Central Administration of Statistics (CAS), has resumed publishing inflation figures,showing a near 9% year-on- year increase in prices in June.

Analysis

The CAS did not collect price information for the first five months of 2013 as it did not have the necessarygovernment authorisation to carry out the surveys on the prices of nearly 70,000 goods and services. The agency hasnow received assistance from the IMF to resume collecting inflation data and will presumably continue to publishfigures from July onward.

June's inflation figures show a sharp increase of nearly 9% (we had estimated a 10% rise) in the overall consumer priceindex (CPI) compared with the same month a year earlier. Housing expenses, which account for 16.2% of the CPI, roseby over 44% year on year, while education and alcohol and tobacco (both smaller components of the index) eachincreased by around 14%.

The sharp increase in housing prices has been distorted by two factors. In April 2012 Lebanon's governmentapproved a law that would allow landlords to increase rents agreed prior to 1992 closer to market prices, and weestimate rents edged upward as a result. In addition, the CAS had not collected rent data from 2009-11, and used theJuly 2012 figure as a chance to estimate higher historical rental prices, meaning there was a sizeable spike in pricesthat month that did not accurately reflect market conditions. As the base effect of an artificially low housingcomponent moves out of the data, we would expect to see an easing back in inflation.There are additional doubtsabout the accuracy of the CPI basket weighting in light of changes in Lebanese spending habits. (For example,communications only holds a 4.8% weighting in the index.)

Transportation costs, which make up over 12% of the CPI, fell by 3.2% in year-on-year terms in June, in line withanecdotal reports that petrol prices have been falling in recent months in Lebanon. This is probably a result of softerprices on average for crude oil this year.


We maintain our view that inflation will ease from an average of around 10% in 2012 to below 6% in 2013.

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