Diplomacy

Making the Best

The Syria Effect

Lebanon has done better than many had hoped in withstanding the pressures of the crisis in neighboring Syria.

A recent report, Lebanon Economic Monitor, commissioned by the World Bank analyzed the impact of the spillover on different levels. According to the report, consumer confidence reached a low in 2012, plunging by 36.8% compared to 2011. This is expected to drive households to increase precautionary savings and in turn consume less, directly reducing aggregate demand and leading to a slowdown in economic activities. Lebanese exports were also affected, as transit routes were severely disrupted if not closed. Lebanese exports overall dropped by 0.2 percentage points of GDP to 10.4% in 2012. This shows how the Syrian crisis limited the access of Lebanese products to Arab markets, resulting in exports through Syria dropping by 0.5% of GDP in 2012, a trend that has continued in 2013, with exports through Syria dropping by 20.2%. On the other hand, Lebanese exports to Syria increased by 0.15% of GDP in 2012, as a result of Lebanese exports filling part of a breach in supply following the damage done to Syria’s industrial base. Also, Lebanon is still one of the few market entry points into the neighboring country, as borders remain open.

One of the sectors that has been more severely hit is tourism. The study estimates 2012 losses at 0.5% of GDP. Tourist arrivals dropped significantly in 2012, while hotel occupancy dropped by around 4 percentage points to 22.1%. Transit points crossing to Lebanon through Syria by land for tourists, especially from the GCC, Jordan, and Iraq, were closed. Also, clashes and other violent incidents triggered a GCC travel warning on the country, and the increasing global perception of danger in the region also affected non-Arab tourists coming. These losses, however, were compensated by consumption from Syrian citizens and refugees residing in Lebanon. This is reflected in real estate rent levels as well as occupancy at non-luxury hotels. Although Syrian nationals do not spend much on high-end products, their length of stay surpasses the average for regular tourists. Many high-income Syrians have purchased apartments in Lebanon, partially offsetting the decrease in GCC citizen’s real estate transactions and in real estate activity in general, with property registration fees paid by foreigners slightly increasing.

The report continued highlighting the resilience of the Lebanese banking sector and indicated that seven Lebanese banks are operating in Syria. Before the crisis their market share was close to 22%, this is in terms of total deposits and lending in the Syrian banking sector. They also had over 60% of the share of private banks. According to the report, the Banque du Liban—the central bank—estimated the losses of Lebanese banks operating in Syria at around $400 million, or 18.7% of total banking sector profits and 0.27% of total assets, it added. Hence, Lebanese banks have increased their provisions to cover losses, and although it will impact their profitability in the short term, the medium- to long-term outlook remains positive, it concluded.

Although Lebanon is facing serious challenges, the country has surprisingly coped with the vast increase in refugees. As Jürg Montani, head of the ICRC’s (International Committee of the Red Cross) operations in Lebanon explained, with Syrian refugee numbers growing, and their displacement lasting longer, their living conditions have become increasingly difficult, he stated on the ICRC’s webpage. Additionally, some communities are running out of public buildings and space to host refugees appropriately, with an increase in improvised tent settlements becoming more pronounced.

For Lebanon, a negotiated settlement to the Syrian crisis would have a profound effect on the economy, as well as the political landscape. In the meantime, Lebanese businesses will seek to reduce their exposure to any possible externalities, and look to foreign markets for their expansion hopes.

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