Lebanon is a primarily service-based economy, which contribute almost 80% of the GDP. The banking sector is highly developed and historically represents the strong point of the country's economy. The millions of Lebanese living abroad then fuel a substantial travel and tourism business. As reported by Intesa Sanpaolo Study Centre, before the current phase of geopolitical instability began, the country also saw substantial real estate development, both residential and tourist-hotel. Manufacturing production, on the other hand, is modest (8,0% of GDP), with the demand for capital goods and durable consumption mainly directed abroad, resulting in a substantial trade deficit (32% of GDP on average in the decade 2004-13). This deficit is only partially offset by the surplus of remittances from abroad e in the last 10 years the balance of payments has recorded a current deficit averaging 12,1% of GDP. On the other side, the consistent financial flows from abroad for deposits and FDI allowed the accumulation of significant foreign exchange reserves, which at the end of 2014 amounted to 39,2 billion dollars, exceeding the external debt by one and a half times. The Central Bank also holds gold reserves which in the same period reached 11 billion. Lebanon holds a sizeable public debt, amounting to 134,2% of GDP in 2014almost all of which is however held by residents, especially commercial banks. Foreign exchange reserves, including gold.
The most recent official statistics on the dynamics of the economy refer to 2013 and indicate GDP growth of 3%, from 2,8% recorded in 2012. This limited acceleration reflected the better performance of commercial, financial and transport services, manufacturing production and construction. Indications regarding the economic trend in 2014 can be obtained from some indicators of both a real and financial nature provided by the Central Bank on the basis of eight variables (production of electricity, imports of petroleum products, flow of passengers at the airport, demand for cement derivatives, imports and exports, cashed checks and money supply): the variable obtained recorded an average increase of 3,2% in 2014, the same variation shown in the previous year. In the recent past, during the phases of sustained growth, the construction sector had been a driving force for the country's economy. Building permits rose 5,2%, after a 12% drop in 2013, while cement deliveries fell 5,7%. These data indicate a decline in construction activity in 2014, following the reduction of building permits requested the year before, but at the same time a probable recovery in 2015. Foreign trade showed a significant drop in both exports (-15,8%) and imports (-3,5%). The collapse of exports mainly concerns trade with Syria, in the past the country's main trading partner, and with South Africa, the second counterpart thanks to trade in precious minerals. The flow of deposits recorded an ever sustained expansion rate in 2014 (+7,2%) albeit slightly lower than the +8,4% of the previous year. The part in currency, equal to 65% of the total, increased by 7,7%. According to the estimates reported by Intesa Sanpaolo, around 40% of the stock of deposits is held by non-residents. These data suggest that political uncertainty has not affected the confidence in the solidity of the financial system on the part of millions of Lebanese residing abroad and investors mainly from Gulf countries. The 3,3% increase in electricity generation suggests strong performance last year for both manufacturing and mining. In this context, the good performance of services, the increase in generation and manufacturing production, even in the face of the collapse of exports and the decline in construction activity, lead to estimate GDP growth of between 2014 and 2% in 2,5.
During 2015 the economy will benefit from the drop in hydrocarbon prices (in 2013 imports of hydrocarbons amounted to 5,1 billion, 11% of GDP), with the consequent reduction of costs for businesses and consumers, and the support to purchasing power that comes from low inflation. A boost is also expected from the Central Bank's generous liquidity policy, the demand for refugees hosted in the country and aid from the international community. The possible contribution from external flows, especially as regards FDI, tourism and exports, remains uncertain and dependent on political developments in the region. In February 2015, the price index was down by 2,8% compared to a year earlier thanks to the lower costs of services linked to hydrocarbons and the decrease in the prices of food products. If domestic demand does not accelerate, the disinflation process looks set to continue this year.
Since 1999, the Lebanese pound is kept within a narrow fluctuation band (LBP 1.501-1.514 per USD) against the US dollar. The link is ensured by the large reserves in foreign currency, with currency stability also supported by the commercial banks which would be put in serious difficulty by a possible fall in the exchange rate since they hold a large share of the country's debt in local currency, while on the liability side they have a large share of funding in foreign currency. In the last year, the peg to the dollar led to a substantial appreciation of the real effective exchange rate (+12% from January 2014 to January 2015). The Central Bank maintains a high positive differential between internal rates and rates on the dollar, with the dual objective of encouraging the flow of funds from abroad to credit institutions, which then go on to finance the high public debt, and the accumulation of foreign exchange reserves. The deposit rate was 5,95% last January.
According to data reported by Intesa Sanpaolo, in 2014 the public deficit fell to 8% of GDP, up from 9,3% in the previous year. Last year the State accounts benefited from an increase in revenues thanks to the recovery of previous taxes, in a scenario the debt burden commits almost 40% of revenues and makes public finances extremely vulnerable to interest rate dynamics. Personnel costs absorb another third, while subsidies to the state-owned electric company EDL amount to about 5% of GDP. Thanks to sustained economic growth and, to a lesser extent, several years of primary budget surplus, the public debt ratio fell from 180% in 2006 to 123% in 2012, before recovering to 134,2% of GDP in 2014. As of September 2014, 40% of the debt was in foreign currency. Domestic investors (especially commercial banks, followed by the Central Bank and state-controlled companies) hold almost all public debt in local currency and 80% of that in foreign currency. However, it should be emphasized that the commercial banks support their purchases of securities with deposits which for a significant portion are from non-residents, with risks for the refinancing of the public debt and the stock of reserves.
The balance of payments records a substantial current deficit (average equal to 18,4% of GDP in the five-year period 2009-13) due to the commercial part (average deficit 32,9% of GDP in the same period), while the "services" and "transfers" accounts show significant surpluses thanks respectively to income from tourism and remittances from migrant workers. The financial account surplus derives mainly from FDI and foreign currency deposits from banks, fueled by the millions of Lebanese residing abroad. In the first nine months of 2014, the current account deficit fell to 7,8 billion. The increase in the trade deficit, which rose to 11,6 billion from 11,3 billion, was more than offset by the services account (equal to 2 billion), thanks to refugee demand, and transfers, following the increase in the net positive of the remittance account. In the same period, the financial account surplus reached 6,5 billion, from €4,3bn in the same period of 2013. The growth in net FDI (from €0,5bn to €0,9bn) offset the decline in net portfolio investment (from €0,9bn to €0,3bn). Banks' deposits in foreign currency rose to 1,6 billion, from 1 billion in the same period of 2013. Furthermore, foreign currency loans started to rise again (0,4 billion). Overall balance of payments surplus rose to $3,9bn from $2,4bn, while foreign exchange reserves totaled $39,2bn. This value compares with an estimated foreign financial requirement in 2015 equal to 12 billion, per a reserve cover ratio of 3,3. External debt at the end of 2014 was estimated at 66,3% of GDP and the trade deficit is expected to decrease significantly in 2015, thanks to the lower energy and trade deficit, going from 17,2 billion (32,5% of GDP , provisional data) to around 14 billion (26% of nominal GDP forecast in 2015).
Despite the new sovereign debt rating cut (last December Moody's downgraded its rating from B1 to B2 with a negative outlook, following similar decisions taken by S&P's and Fitch at the end of 2013), the still uncertain geopolitical framework and internal tensions do not represent difficulties in financing the public deficit. The demand from banks, Lebanese living abroad and investors looking for yield remains high, so much so that in February the Government raised 2,2 billion on the Euromarket with a mixed ten-year and fifteen-year issue at rates between 6,20% and 6,65%. Despite this, public deficit, current deficit and related stocks of public and external debt are all high in relation to GDP and constitute factors of vulnerability for the country's economy. However, the public debt is largely intermediated by the domestic banking system which, even in periods of greater instability, has seen funding from both residents and foreign investors grow. At the same time, the Central Bank, thanks to the large surpluses of the financial part of the Balance of Payments, has accumulated substantial foreign exchange reserves which ensure adequate coverage of external financial needs and imports. Abundant reserves, however vulnerable to non-resident deposit flows, then offer a decisive contribution to the credibility of the currency regime pegged to the dollar, which remains crucial for the stability of the financial system given the significant degree of dollarisation of the economy.
