If political stability persists, Lebanon is set to witness a technical rebound of 3.5 percent in gross domestic product growth in 2012 compared to 1.5 percent last year, a senior economist at Standard Chartered Bank said Thursday.
“The Lebanese economy is confidence-driven because it is mainly dependent on tourism, construction and real estate, as well as consumption,” senior economist on Turkey, the Middle East and North Africa, Philipe Dauba-Pantanacce, told The Daily Star in an interview.
Dauba-Pantanacce said the Lebanese economy has shown resilience over the past years as it has bounced back after major shocks as soon as political stability is restored.
“Our only concern is a spill of the Syrian crisis to Lebanon,” Dauba-Pantanacce added.
While Lebanon’s security situation appears to be stable so far, political bickering has blocked the approval of the 2012 budget draft law as rival Lebanese parliamentary coalitions argue over extra-budgetary expenditures.
Legal government expenditures are frozen at $6.8 billion annually, which was the cap of the last budget approved by Parliament in 2005.
If approved, the 2012 budget, which stipulates some tax increases, would be a step in the right direction to cut the fiscal deficit, according to Dauba-Pantanacce.
The government is planning to increase VAT by 1 percent after it amended an earlier draft budget that stipulated a 2-percent increase.
Dauba-Pantanacce said VAT has proven to be one of the best channels of money collection and its increase by up to 2 percent would boost state revenues while remaining at an affordable rate. “The current 10 percent VAT is one of the lowest among countries comparable to Lebanon,” Dauba-Pantanacce added.
The VAT rise by 1 percent should generate LL350 billion (around $230 million) for the Treasury, according to Finance Minister Mohammad Safadi.
Dauba-Pantanacce believes that the government’s decision to increase the minimum wage would reflect positively on economic growth in 2012 as it would fuel consumption for a large segment of the Lebanese population that was cut off from spending prior to the wage hike.
“Not to forget that part of the wage hike is recouped by the state in the form of VAT ... If you spend more, you pay more VAT to the government,” Dauba-Pantanacce said.
Another hike in tax on interest on bank deposits from the current 5 to 8 percent is also positive, according to Dauba-Pantanacce. The tax on interest is expected to generate LL400 billion.
The new budget, if approved, would stand at LL21 trillion while the budget deficit would reach LL5.3 trillion.
Dauba-Pantanacce urged Lebanon to address its structural deficit, which is a major burden to the Lebanese economy represented by the country’s public debt.
Lebanon has acted recently upon the International Monetary Fund recommendation of raising the interest rate on Treasury bills by 50 basis points to make local debt more attractive to banks and reduce the government’s reliance on the Central Bank.
Together with domestic fiscal reforms, growth in oil-producing Gulf Cooperation Council countries fueled by a rise in international oil prices is also expected to boost growth in Lebanon, said Dauba-Pantanacce.
“There is positive correlation between the economy of GCC countries and Lebanon,” Dauba-Pantanacce said.
The negative impact of high oil prices on the Lebanese economy is offset by a flow of remittances from Lebanese expatriates in the Gulf, foreign direct investment and an increase in the number of Gulf visitors to Lebanon, Dauba-Pantanacce said.
GCC countries are forecast to continue to profit from a rise in oil prices in the second half of 2012 due to the geopolitical risk premium attributed to tensions between Iran and the West, as well as physical disruptions in supply due to instability in Sudan and Nigeria, Dauba-Pantanacce said.
Dauba-Pantanacce added that growth in the global economy – though slow – is expected to contribute to a rise in oil prices, with China expected to witness a soft landing after adjusting its policies to adapt to slowing global growth.
“China should see growth at 8.1 percent in 2012 from 9.2 percent during the previous year, which would still drive growth in oil demand,” Dauba-Pantanacce said.
He is also bullish about the commodity market rare or earth commodities which are needed to support growth in China and India.
Gold is forecast by some analysts to hit $1,975 an ounce at the end of 2012, supported by strong demand from central banks as well as investors’ fear of inflation due to new rounds of quantitative easing.
Standard Chartered revised Europe’s GDP growth forecast in 2012 from -1.5 percent to -0.5 percent.
“The intervention of the European Central Bank, lending money at cheap [rates] over the long term bought time during the crisis, which is essential to calm the markets to solve problems,” Dauba-Pantanacce said.
Dauba-Pantanacce, an expert on the regional economy and financial markets, hosted Wednesday at the Four Season Hotel in Beirut an economic session for a select group of consumer banking customers and corporate clients including industry, business and finance leaders.