Lebanon’s Numbing Neighborhood Knocks

Lebanese shares were down 3 percent on the MSCI frontier roster through July after a sovereign outlook demotion to negative reflecting the economic consequences of internal and cross-border political conflict. The civil war in Syria has reinstated domestic sectarian confrontation as refugees stream in and banks cease operations there, although international advocacy groups accuse networks of aiding the Assad regime and its ally Iran, with a Washington lobby urging an investment boycott in retaliation. GDP there has contacted 3 percent with the budget deficit increasing fivefold, and inflation and currency devaluation are at least 30 percent, according to outside observers. Foreign reserves are not yet at a critical stage as oil and other trade ties endure with China and Russia, the latter with thousands of citizens in Damascus from longstanding diplomatic and personal interaction. The Mikati government had just overcome coalition dissension over the fate of the UN special court investigating the Harriri assassination when street fighting erupted between pro and anti-Assad factions in Beirut and Tripoli recalling past carnage. Parties including Hezbollah have appealed for calm as they try to reach the 3 percent GDP growth forecast this year and keep the budget and current account gaps in check. Remittances and tourism from the Gulf are holding up but government debt persists at 135 percent of output, and commercial banks have reduced exposure leaving the central bank to absorb the slack. Dollarization has risen to 60 percent of deposits with the pound peg intact but assets in Syrian subsidiaries shrank one-third in 2011. As with other food and fuel importers in the region, inflation is a worry and with public sector wage hikes may hit 5 percent. The authorities have no immediate plans for external bond issuance in contrast to pressing past redemptions but CDS spreads have again crept toward 500 basis points on both geopolitical spillover and structural reform stalemate despite preliminary indications of offshore energy finds.

Another policymaking hammerlock and losing bourse can be found in oil-rich Kuwait where the emir suspended parliament in June after it rejected the next development plan and urged greater shariah law application to combat corruption. The body did approve privatization and capital markets oversight laws, but relations with the executive continue strained as the royal family contemplates succession to its septuagenarian leaders. Alone in the GCC the currency is tied to an unknown foreign basket instead of solely the greenback, and banks have been encouraged to participate in a Treasury bond push. However they remain stuck in investment company workouts which have gone multiple rounds as the government refuses a rescue. The  investment-grade sovereign rating has been untouched but the wealth fund’s lack of transparency is regularly criticized both by local lawmakers and overseas interlopers.