Lebanon Economic & Strategic Outlook: Global Research

Global Research Economic
Lebanon November 2006
Lebanon Economic & Strategic Outlook

The Phoenix - Hurt & Sore, Can It Still Soar
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Table of Contents
Summary.............................................................................................................. 1
Annual Indicators .............................................................................................. 4
Economic News flow .......................................................................................... 5
Macroeconomic Profile ...................................................................................... 7
Gross Domestic Product ....................................................................................... 9

Public Finance ...................................................................................................... 10
Public Debt ........................................................................................................... 13
External Trade ...................................................................................................... 17
Current Account ................................................................................................... 20
Capital and Financial Account ............................................................................. 21
Monetary Policy ................................................................................................... 22
Interest Rates ........................................................................................................ 25
Inflation ................................................................................................................ 26
Population and Demographics ............................................................................. 27
Structural Reforms ............................................................................................... 30
Taxes .................................................................................................................... 32
Privatization ......................................................................................................... 33
Sectors’ Performances
Banking Sector ..................................................................................................... 35

Insurance Sector ................................................................................................... 45
Industrial Sector ................................................................................................... 48
Agriculture Sector ................................................................................................ 50
Real Estate & Construction Sector ....................................................................... 52
Tourism Sector ..................................................................................................... 57
Stock Market and Corporate Performance
Beirut Stock Exchange ......................................................................................... 62

Corporate Earnings .............................................................................................. 68
Global Research - Lebanon Global Investment House
Summary
Lebanon is a beautiful country located between Israel and Syria, bordering the
Mediterranean Sea, populated by about 3.9mn people. It is one of the countries plagued
by wars and conflicts. Lebanon had a civil war, which lasted almost 15 years, insurgence
from Syria, loss of its prominent leader late P.M. Mr. Rafik Hariri, who spearheaded
Lebanon recovery post civil war and finally attack by Israel that devastated country’s
infrastructure and economy. The 1975-90 civil war seriously damaged Lebanon’s
economic infrastructure and cut national output by half. As a result of such a long war
Lebanon accumulated high debt. The figure was US$28.3bn or 165.8% of GDP in 2001
and the debt kept on piling up and increased to US$38.8bn or 176.1% of GDP by the
end of Jun-06. As per the Finance Minister of Lebanon statement, recent conflict with
Israel, lasting from July 12 to August 14, 2006 would push the figure to US$41bn this
year (2006).
Nevertheless, Lebanon’s economy has made impressive gains since the launch of
“Horizon 2000,” the government’s US$20bn reconstruction program launched in 1993,
until Jul-06 when Israeli attack broke in. The country registered growth of 5% and 6%
in its real GDP for the year 2003 and 2004. Tourism, industrials and real estate are some
of the key drivers of the economy and they are doing well, fuelled by increased demand
from the Gulf Co-operation Council (GCC) and other Arab countries.
The year 2005 was an eventful year for Lebanese people and its economy. The country,
having lost its leader Mr. Hariri, faced financial crisis in the form of withdrawal of
US$2bn in deposits and conversion of another US$5.5bn into dollar deposits. A sharp
rise in interest rates on Lebanese pound (LL) deposits eventually contributed to stabilize
the situation, until the effects of the political crisis waned. The situation got better in latter
part of year 2005 when a Eurobond issue of US$750mn was heavily oversubscribed and
spread on the Eurobond came down to 180 bp. Consequently, year 2005 was the year of
slowdown leading to reduced private and public demand with the country registering a
real GDP growth of only 1%.
The country registered impressive growth in tourism and export in 1H06 and had it not
been for the recent conflict between Hezbollah and Israel, Lebanon would have posted a
growth in vicinity of 6% (as per IMF estimates). However, because of the Israeli attack,
the economy is likely to contract in 2H06 and Lebanon could see a wider fiscal deficit in
year 2006 than that in 2005. The conflict that lasted more than a month resulted in direct
damage to infrastructure to the tune of more than US$3.5bn (as per Lebanese Council for
Development and Reconstruction). Indirect damage in terms of lost trade and economic
activity could be higher as a result of this. Hence, the country is likely to post a below
zero growth in its GDP in 2006.
The inflation rate in Lebanon measured by the percentage change in the Consumer Price
Index dropped in 2003 to 1.3% compared to 1.8% in 2002. It rose to 3.0% in 2004 but fell
to 0.3% in 2005. The sharp decline in the inflation rate came because of drop in demand
following the uncertainty in aftermath of assassination of Mr. Hariri. However, we expect
inflation to rise sharply this year for two reasons: one is the increased expenditure by the
November 2006 Economic & Strategic Outlook

government to help reconstruction activity in the country and the other is rising prices
of the commodities on the back of hampered supply in Lebanon due to the devastated
infrastructure.
The population of Lebanon has been growing at much lower rate as compared with other
countries in the Arab world; it has been growing at around 1.3% for last six years and
for year 2006 it is estimated to grow at 1.23% (average for the Arab countries is 2.3%).
Lebanon has had high unemployment historically, which was reported to be 18.3%
in 1997 and 14% in 2000. Agriculture sector has been a great job provider with 12%
of the people working in this sector. This is matched by the tourism industry, which
provides employment to another 12% of the people. Recent attack has hit these two
industries very badly, which could mean that people engaged in these industries would
be unemployed for significantly long time that can last for a few to several months
depending on how quickly peace is stabilized in the country to restore the tourism and
how quickly the Lebanese people and authorities can clear the fields of cluster bombs to
restore the agrarian activities. Hence, we expect unemployment rate to rise significantly
for the second half of 2006, which should fall back to normal rate next year onwards as
the situation stabilized.
The country’s economy is largely made up by services sector, which accounts for
about 60% of GDP as of year 2005. Major sub-sectors are commerce, tourism and
financial services. Rest 40% is contributed by real estate & construction, industrial, and
agriculture.
The strategic position of Lebanon, its mild climate and natural beauty, consisting of
snow-capped mountains, valleys and the Mediterranean Sea, make it a natural tourist
attraction. In its best days, before the advent of civil war (1975-90), tourism accounted
for about 20% of the country’s GDP. The overall number of tourists visiting Lebanon
had steadily increased since 2000 to reach 1.3mn by 2004, but dipped by 11% in 2005.
1H06 was good with about 0.6 million tourist visiting Lebanon and Ministry of Tourism
was expecting 1.6mn tourist in year 2006. However, recent attack by Israel has caused
tourism industry to slowdown. We expect lesser tourist activity in 2H06 as compared to
that in 2H05.
Currently, the main financial services offered are commercial banking, investment
banking and insurance. Despite the conflict and a crisis in the late 1980s involving
a small number of banks, the commercial banking sector remains the centerpiece of
the Republic’s service-oriented economy. The Lebanese banking sector witnessed
unprecedented growth during the period from 1992 to the present. Commercial banks’
deposits stood at US$42bn in 2001. Deposits dropped slightly in 1H05 post assassination
of Mr. Hariri, however, it recovered within next three months and closed at US$60.3bn
at the end of 2005. Deposits climbed further in 1H06 to US$63.9bn by the end of Jun-06;
Israeli attack caused yet another strain on deposits and it dropped to reach US$61.6bn
at Jul-06.
Economic & Strategic Outlook November 2006

Lebanon used to follow floating exchange regime until Sep-99 when it pegged LL to
US$. By that time LL had lost its value drastically, from LL3.43/US$ to more than
LL1,500/US$. Currently (as at September, 30 2006) it quotes at LL1,508/US$. On
Purchasing Power Parity basis, the US$ would exchange at about LL1,403.
The stock market in the country is in the infancy stage. The market was reopened on
Jan-96, post civil war. Market showed smart gains in 2005 with market capitalization
showing gain of 111.2% to reach US$4.9bn at the end of the year. Despite the economic
problems due to the conflict with Israel, market has continued to gain in 2006 and market
capitalization stood at US$7.1bn as at the end of Sep-06. Market cap/GDP is 32.2% as at
Sep-06, which is very low as compared to other Arab and GCC countries because BSE
has very few number of companies as compared to other better developed markets in
Arab countries, such as KSA’s Tadawul or Kuwait Stock Exchange.
Attack by Israel has obviously cost Lebanon and its economy deeply. The summary of
effect of Israeli attack, which lasted from July 12 to August 14, 2006:
• Damage to infrastructure: The Israeli attack cost Lebanon to the extent of US$3.6bn
in terms of damage to buildings, bridges etc.
• Increased unemployment: The Israeli attack has impacted two important sectors for the
economy, namely Tourism and Agriculture. These two sectors provide employment
to about 1/4 of the people. Hence it’s likely that Lebanon could suffer additional
unemployment.
• The LL1,720.8bn decrease in M3 in the month of Jul-06, on the back of drop in net
foreign asset to the extent of LL2,765.7bn.
• Increased dollarization in economy: Deposit dollarization increased to 71.1% from

68.4% during the period Jun-06 to Jul-06. This is explained by increased risk and
uncertainty created by attack and dollar being considered a safe heaven by the
investors.
• In Jul-06, the total area of construction permits considerably dropped to 384 thousand
square meters, down from 960 thousand square meters in the previous month.
• The total amount of imports of goods dropped to US$601mn in Jul-06, down from
US$878mn in the previous month.
• The total value of exports of goods reached US$104mn in Jul-06, down from
US$270mn reported in Jun-06.

Annual Indicators
2001 2002 2003 2004 2005
Economic Performance
Nominal GDP (US$ mn) 17,062.9 18,462.0 19,895.0 21,768.0 22,052.0
Nominal GDP Growth Rate (%) 2.4 8.2 7.8 9.4 1.3
Real GDP growth (%) -0.6 2.9 5.0 6.0 1.0
Per Capita GDP (US$) 4,729.8 5,049.0 5,370.0 5,799.0 5,799.0
Growth in Per Capita GDP (%) NA 6.7 6.4 8.0 0.0
Inflation
GDP Deflator (%) 3.0 5.1 2.6 3.2 0.3
CPI (%) -0.4 1.8 1.3 3.0 0.3
M3/GDP (Money Velocity) 1.97 1.96 2.02 2.06 2.18
Interest Rates (%)
LL Deposit Rate 10.2 9.8 7.8 7.0 7.7
LL Lending Rate 16.8 16.1 11.3 10.5 10.1
Public Finance (US$ mn)
Total Revenue & Grants 3,190.8 3,880.6 4,377.6 4,965.5 4,913.7
Tax Revenue NA 2,664.2 3,004.0 3,430.0 3,229.6
Non-Tax Revenue NA 1,215.7 1,373.6 1,535.5 1,684.1
Total Expenditure 6,415.6 3,361.6 3,730.6 4,217.7 4,394.8
Current Expenditure NA 2,976.1 3,124.1 3,519.6 3,940.9
Capital Expenditure NA 385.5 606.5 698.1 453.9
Overall Primary Deficit/Surplus -3,224.9 518.9 647.0 747.2 518.9
Public Debt (US$ mn)
Domestic Debt 18,721.8 16,784.0 17,806.0 17,493.0 19,609.0
External Debt 9,572.6 13,943.0 15,575.0 18,368.0 18,899.0
Public Debt 28,294.4 30,727.0 33,381.0 35,861.0 38,508.0
Public Debt % of GDP 165.8 166.4 167.8 164.7 174.6
Current Account (US$ mn)
A. Good & Services (Net) -4,253.0 -4,060.0 -4,238.0 -5,440.0 -4,067.0
B. Income (Net) -391.0 -1,002.0 -1,237.0 -1,432.0 -830.0
C. Transfer (Net) 1,056.0 2,220.0 2,449.0 2,902.0 2,105.0
Current Account Balance(A+B+C) -3,588.0 -2,842.0 -3,026.0 -3,970.0 -2,792.0
Current account balance (% of GDP) -21.0 -15.4 -15.2 -18.2 -12.7
Money Supply (US$ mn)
Currency in Circulation 920.1 896.2 1,002.3 1,021.6 1,014.9
M1 1,516.8 1,657.3 1,836.3 1,955.2 1,896.6
M2 11,243.9 13,428.6 17,171.7 16,977.6 15,995.0
M3 34,791.3 37,706.7 42,577.4 46,956.8 49,033.5
M4 39,449.0 42,920.6 46,631.3 49,625.2 51,589.4
Stock Market Indicators
Listed Companies (as at year end) 13 13 14 16 15
Market Capitalization (US$ mn) 1,248.3 1,395.3 1,503.0 2,330.7 4,917.2
Market Cap/GDP 7.3% 7.6% 7.6% 10.7% 22.3%
Value Traded (US$ mn) 52.9 118.9 131.0 197.8 923.4
Volume Traded (in mn) 14.7 26.2 23.5 24.5 89.7
Turnover Ratio 3.7% 9.0% 9.0% 10.3% 25.5%
Number of transactions in the year 4,750 3,209 3,494 7,581 16,228
Change in Market Cap (Y-o-Y) -20.9% 11.2% 7.9% 55.3% 111.2%
Source: IMF, BDL, Beirut Stock Exchange

Economic News Flow (January 2006 to November 2006)

• The IMF states that Lebanon’s economy is expected to contract 5% this year after
the attack by Israel. The IMF’s previous forecast, made after the conflict ended in
August, was for a 3.2% contraction in GDP. (Source: Reuters, Nov-06)
• According to Ministry of Tourism statistics, more than 26,000 people arrived in

Lebanon in August an 85.4 percent decrease from the same month last year. In
September, the number jumped to more than 67,000 - a majority from other Arab
countries, however, it was still nearly 43 percent less than September 2005. (Source:
Washington News, Oct-06)
• Billionaire of Lebanese origin (Najem) pledged to invest US$15bn in various economic

and social reconstruction initiatives to “make Lebanon like it was between 1967-72”.
He said work would begin as soon as Byblos Bank accepts his initial US$4bn deposit,
after which he will establish an office to monitor transactions. (Source: Zawya, Oct-
06)
• Israel attacked Lebanon at July 12, 2006 due to conflict of Hezbollah with Israel. The
attack lasted 34 days and caused massive destruction to Lebanon, including destruction
of 130,000 housing units (as per latest reports on October 10, 2006) and displaced
25% of the Lebanese from their homes. The estimated damage to infrastructure is to
the extent of US$3.6bn. (Source: Jerusalem Post and CDR, Oct-06)
• Saudi Arabia’s Islamic Development Bank allocated US$250mn to rebuild Lebanon’s

destroyed infrastructure after a meeting with Lebanese officials. (Source: Zawya,
Sep-06)
• Standard & Poor’s affirmed its B-/C long and short-term counterparty credit ratings
for Bank Audi and Bank Med and the B- long-term counterparty credit rating for
Blom Bank. The rating actions follow that for the Republic of Lebanon, which was
B-/C. The ratings on all three banks reflect the high risks inherent in operating in
Lebanon that are a result of the country’s macroeconomic problems, according to the
S&P. (Source: Zawya, Sep-06)
• As per the Finance Minister’s statement, Lebanon’s public debt is expected to rise to
US$41bn by the end of the year as a result of the Israeli bombardment and continued
air and naval blockade. (Source: Zawya, Sep-06)
• In its latest World Economic Outlook, the Washington-based International Monetary

Fund estimated annual average CPI inflation in Lebanon to reach 4.5%, compared to
a figure of 0.3% in 2005 (Source: IMF, Sep-06).
• Since fighting between Israel and Hezbollah ended on August 14, 2006, Lebanese
authorities have been in talks with potential donor countries and international
organizations to find short and long-term financial aid. An emergency aid meeting
in Stockholm on August 31, 2006 resulted in pledges of more than US$900mn in
immediate aid. (Source: Zawya, Sep-06)

• The Centre for Economic Research in Beirut predicts repair and reconstruction costs
will rise above US$7bn. The biggest cost will be for repairs to roads, bridges, ports and
airports, estimated at US$404mn. More than 94 roads and 70 bridges were bombed
by the Israelis. Other government repair costs include power supplies (US$208mn),
telecom (US$99mn), water (US$74mn) and military installations (US$16mn).
(Source: The Guardian Unlimited, Aug-06)
• Saudi Arabia’s King Abdullah has decreed donations totaling US$1.5bn to Lebanon;
a total US$500mn was earmarked for the reconstruction of Lebanon, and the King
authorised US$1bn to be deposited in Lebanon’s central bank to support the battered
economy. (Source: BBC News, Jul-06)
• Lebanon ranked 73 in the 2006 index of economic freedom which was released by
the US Heritage Foundation, with 3.00 points in total on a scale of 1 to 5 with 1 being
the best and 5 the worst. The economies with scores of 1 to 1.99 are regarded as free
economies, a score of 2 to 2.99 mean mostly free economies, while 3 to 3.99 mean
mostly un-free economies. Lebanon stood sixth among the Arab countries in the list
behind Israel, Kuwait, Jordan, KSA and UAE. (Source: www.Heritage.org)

Macroeconomic Profile
Lebanon is a competitive and free market regime with a strong proactive commercial
tradition. The Lebanese economy is service-oriented; main growth sectors include
banking and tourism. There are no restrictions on foreign exchange or capital movement
or on foreign investment, and bank secrecy is strictly enforced. Lebanon benefits from
its large, cohesive, and entrepreneurial diaspora.
The civil war led to accumulation of significant debt, which had reached US$28.3bn,
or more than 165% of GDP by year 2001. Debt as percentage of GDP has been on rise
consistently and in Jun-06, it is estimated to be 176.1% of GDP or US$38.8bn. Public
external debt services charges has been rising continually since 2002; it has climbed from
US$724mn (3.9% of GDP) in 2002 to US$2,891mn (13.1% of GDP) in 2005. Economic
performance was sluggish in 2000 and 2001 (below zero growth in 2000, and in 2001,
largely attributed to little increases in tourism, banking, industry, and construction). The
growth improved for the next three years at 2.9%, 5% and 6% in 2002, 2003 and 2004
respectively.
Year 2005 saw drastic fall in real GDP growth to 1% (as per estimates by IMF) mainly
due to political crisis faced by the country; 2006 is likely to be another year of subzero
growth after 2000 & 2001 due to Israeli attack caused destruction to infrastructure and
consequent effects on economy. Unemployment was estimated at 14% for 2000, which
is expected to further increases in 2006 due to the impact of attack. Lebanon experienced
reduced fiscal deficit from US$2.95bn in 2002 to US$1.94bn in 2005 (as per estimates
by IMF), on the back of rising export of goods & services (33% of GDP in 2001 to
49% of GDP in 2005), reduced interest burden due to refinancing of debt with zero
interest Paris II loan and reduced imports because of contracted demand in economy.
Per capita GDP has risen from US$4,730 in 2001 to US$5,799 in 2005 (as estimated by
IMF). However, it might go down significantly in 2006 because of contracted demand in
economy post Israeli attack.
The government of Lebanon is keen on opening of economy and has taken several
measures to promote trade with Arab and rest of world. As per Greater Arab Free Trade
Agreement (GAFTA), It has been reducing tariffs since 1998 by 10% every year in order
to facilitate establishment of Arab Free Trade Zone by 2008. Before the Israeli attack,
the government had plans to attain WTO membership by 2006.
To combat the increasing burden of debt and interest, the government has adopted
several structural reforms measures. The government has established a Value Added
Tax (VAT) directorate to take care of VAT related issues, which was introduced in 2002
as a mean to increase the government revenues. A large tax payer office was established
to facilitate tax collections.
In addition quite a few legislations are awaiting approval of Parliament, such as – anti
dumping legislation, which is expected to bring Lebanon in sync with WTO guidelines
and help its accession to WTO membership. A draft law establishing public debt
directorate at Ministry of Finance is awaiting approval.

Moreover, the government is trying to promote privatization of the public companies

such as Electricity du Liban (EDL), Middle East Airlines (MEA). This privatization
would help the government two fold – one, it would reduce the liability on government as
it doesn’t have to bear the losses made by these; two, the revenue generated by the sale of
these companies would help the government in repaying its debt, thus reduce the burden
of interest. This in turn would result in reduced fiscal deficit. However, privatization
efforts are yet to meet any success.
The nation has very high literacy rate of about 95% (as in year 2005), which means
availability of highly skilled labor force within the country. Lebanon’s population is
3.8mn as in year 2005. About 24% of Lebanese population is between 10 to 24 year of
age. This means that Lebanon would see increased participation rate in labor market
and increased demand for housing in next five to ten years. During last three to four
years, until 1H06, Lebanon’s real estate and tourism have been growing well fuelled by
increased demand from the Arab people. These two sectors that account for significant
share of GDP (as in 2005) are likely to pick up again as we see stability and peace in the
region.
Recent attack by Israel devastated the infrastructure of Lebanon and damaged the two
prominent sectors tourism and agriculture. It has cost about US$3.6bn in terms of damage
to infrastructure. To reconstruct Lebanon and boost its tourism and agriculture, Paris III
conference is being organized in Jan-07. This is the third conference since 2001, when
Paris I conference was held to raise Euro500mn.
Hence, Lebanon currently faces the daunting task of rebuilding its infrastructure,
rehabilitating its people and winning back confidence of people abroad to restart one
of its prominent sectors – tourism. In addition Lebanon would require to refinance its
public debt so that it can reduce its interest burden and keep its fiscal deficit in check.
Lebanon is expecting to get major financial aid from Paris III conference, to be held on
Jan-07. It would need about US$8bn to enable itself to rebuild the infrastructure and pay
its US$2.4bn Paris II loan that is maturing in Dec-06. Hence, recovery from impact of
Israeli attack and growth in years to come depend a great deal on the success of Paris III
conference.

Gross Domestic Product

Lebanon’s nominal GDP grew at a CAGR of 6.6% during the four year period from
2001-2005. In real terms, GDP grew at CAGR of 2.4% during the same period. On year-
on-year basis however preliminary figures point out that real GDP grew at a slower rate
in the year 2005 (1%) compared to 2004 (6%). Nominal GDP stood at around US$22.1bn
in 2005 and grew at 1.3% compared to GDP of US$21.8bn and growth rate of 9.4% in
2004. The deceleration in GDP growth in 2005 as opposed to 2004 is attributed to the
political and financial crisis created by assassination of Mr. Hariri. On the other hand,
Lebanon’s per capita GDP has increased from US$4,730 in 2001 to US$5,799 in 2005.
It is the services sector, which makes major chunk, about 60% of Lebanon’s GDP. Major
sub-sectors are commerce, tourism and financial services. Rest 40% is contributed by
Real Estate & Construction, Industrial (about 20%), and Agriculture that makes (about
11%). Export of goods and services receipts have been increasing as a proportion of the
GDP – 33% in 2001 to 49% in 2005.
Figure 01: Lebanon’s GDP Growth

25.00 7.00
6.00
20.00
5.00
4.00
15.00
% growth
$ bn
3.00
10.00 2.00
1.00
5.00
0.00
0.00 -1.00
2001 2002 2003 2004 2005
Nominal GDP Nominal GDP Growth Real GDP Growth
Source: IMF
Lebanon’s population grew at a GAGR of 1.3% during the four year period from 2001
to 2005, while GDP per capita grew at a CAGR of 5.2% during the same period. Going
forward, we expect GDP for 2006 to show sub optimal growth because of expected
economic slowdown in the wake of after effects of attack by Israel. Though first half of
2006 was good for the economy, real GDP is expected to grow at below zero in 2006
because of expected high inflation post attack and little or low growth in nominal GDP.

Public Finance
Contrarary to the other non-oil Arab economies, the general budget of the central
government of Lebanon has been eased in last three years. The budget deficit on check
issued basis has come down in the last three years from LL3,930bn in 2002 to LL2,628bn
in 2005. Apart from increase in revenue from taxes the main reason for the decrease
in budget deficit has been reduced interest burden due to refinancing of debt by zero
interest US$2.4bn Paris II loan.
Taxes, which made about 70% of the revenue in 2002, accounted for about 65% of the
government revenue in 2005. However, tax revenue has increased by 20% during the
same period. Taxes on income and profit has increased from LL727bn to LL1,047bn.
This is a good sign for economy overall as it suggests increase in Lebanese corporate’s
profitability. Taxes on domestic goods and services has also risen from LL1,181bn
to LL1,896bn. Tax revenue from excise and tariff has decreased during year 2005 as
compared to 2004 from LL1,617bn to LL1,268bn. This is the result of ongoing reduction
in tariffs (by 10% every year) between the rest of Arab countries and Lebanon in order
to achieve Arab Free Trade Zone by 2008.
Table 01: Central Government Primary Balance

Figures in LL bn 2002 2003 2004 2005 (E*)
Primary balance 782 975 1,126 782
Revenue and grants 5,848 6,597 7,483 7,405

Revenue 5,846 6,597 7,483 7,405
Tax Revenue 4,015 4,527 5,169 4,867
Non-Tax Revenue 1,832 2,070 2,314 2,538
Grants 2 - - -
Primary Expenditure 5,066 5,622 6,356 6,623

Current primary expenditure 4,485 4,708 5,304 5,939
Wages, salaries and pensions 3,008 3,078 3,094 3,193
Transfers to EDL 60 174 184 637
Other current 1,417 1,456 2,026 2,109
Capital expenditure 581 914 1,052 684
Domestically financed 392 713 817 534
Foreign financed 189 201 235 150
Source: IMF (Ministry of Finance)
*Estimates by IMF
Most of the government expenditure goes to meet the current expenditure demands
(88.5% in 2002 to 89.7% in 2005). Rest is made by capital expenditure i.e. capital
expenditure makes just over 10% of the government expenditure. The government needs
to spend more on capital expenditure to enhance long term growth in economy. For this
to happen, the government would need to reduce its interest burden. Hence it needs to
refinance its loan by soft loans such as from Paris III conference, to be held in Jan - 07.
10 Economic & Strategic Outlook November 2006

Table 02: Lebanon: Overall Fiscal Deficit and Financing

Figures in LL bn 2002 2003 2004 2005(E*)
Primary balance 782 975 1,126 782
Interest bill 4,712 4,942 3,921 3,410
Overall balance (checks-issued basis) -3,930 -3,967 -2,795 -2,628
Float and statistical discrepancy 520 -215 242 299
Overall balance (cash basis) -4,450 -3,752 -3,037 -2,927
Net financing 4,450 3,752 3,037 2,927
Banking system -872 3,047 4,256 2,653
BDL (1) -4,170 8,305 673 53
Commercial banks 3,298 -5,258 3,592 2,600
Government institutions 157 -616 -357 245
Other creditors 2,746 -1,197 -1,219 183
Net change in arrears -436 0 0 -419
Exceptional financing 3,152 2,999 517 0
Valuation adjustment -297 -480 -169 265
Source: IMF (Lebanese authorities; and Fund staff estimates)
(1) Figures for 2003 are affected by the intermediation role played by the BdL in the debt exchange with banks,
that tends to increase BDL financing and decrease commercial bank financing of the government.
* Estimates by IMF
Fiscal deficit is expected to rise in 2006…

The fiscal deficit has been decreasing for Lebanon. The driving factor behind this has
been falling interest bill, which has been consistently coming down since 2002 from
LL4,712bn (US$3,126.7mn) to LL3,410bn (US$2,262.8mn) in 2005. Consequently,
fiscal deficit (cash basis) has reduced from LL4,450bn (US$2,952.9mn) in 2002 to
LL2,927bn (US$1,942.3mn) in 2005. Fiscal deficit is expected to increase a great deal for
2006 as government revenue is likely to fall because of lesser tax collection as compared
to 2005 and government expenditures are likely to increase a great deal because of need
to rebuild post Israeli attack.
Besides this, the budgetary support to Electricity du Liban (EDL), a public sector
electricity producing company, has gone from 1.1% of GDP in 2002 to 3.2% of GDP
in 2005. This shows that EDL has been a great drag on the government budget and
privatizing EDL would be of great benefit to the government.
November 2006 Economic & Strategic Outlook 11

Figure 02: Fiscal Deficit and Interest Bill for the government
0 0.0
2002 2003 2004 2005
-2.0
-500
-4.0
-1000
-6.0
-1500 -8.0
$ mn
%
-2000 -10.0
-12.0
-2500
-14.0
-3000
-16.0
-3500 -18.0
Interest Bill Fiscal Deficit Interest Bill as % of GDP Fiscal Deficit as % of GDP
Source: IMF
Debt to Bank Du Liban (BDL) makes significant chunk now as it rose from 7.7% of
total debt in 2002 to 25.0% of total debt in 2005. Debt to commercial banks has come
down from 59.4% of the total debt to 48.5% of total debt during the same period. This
is the reason that interest bill has come down during the period despite increase in debt.
Besides this, US$2.4bn received from Paris II loan replaced the high interest loan in
2002; this is another reason of falling interest bill for Lebanon.

Public Debt
The public debt is the major problem that Lebanon currently face. It has huge public debt
to the extent of 176.1% of GDP (at Jun-06). The government is planning to refinance its
loan with soft loan it expects to receive from Paris III conference, to be held on Jan-07.
Table 03: Government Debt

Figures in $mn 2002 2003 2004 2005
Gross debt (1) (2) 30,727 33,381 35,861 38,508
Domestic currency 16,784 17,806 17,493 19,609
Foreign currency 13,943 15,575 18,368 18,899
Debt to Banque du Liban 2,351 7,937 9,052 9,606
Domestic currency 479 5,929 7,066 7,752
Debt to commercial banks 18,256 14,526 16,898 18,680
Domestic currency 11,417 8,161 8,106 9,373
Debt to public entities (3) 2,137 1,701 1,415 1,623
Other debt to non-bank sector 7,983 9,217 8,461 8,598
Domestic currency 2,751 2,016 871 861
in % of GDP
Gross debt 166.4 167.8 164.7 174.6
Domestic currency 90.9 89.5 80.4 88.9
Foreign currency 75.5 78.3 84.4 85.7
Debt to Banque du Liban 12.7 39.8 41.6 43.6
Debt to commercial banks 98.9 73.0 77.6 84.7
Debt to public entities 11.6 8.6 6.5 7.4
Other debt to non-bank sector 43.2 46.3 38.9 39.0
in % of Public Debt
Gross debt 100.0 100.0 100.0 100.0
Debt to Banque du Liban 7.7 23.8 25.2 25.0
Debt to commercial banks 59.4 43.5 47.1 48.5
Debt to public entities 7.0 5.1 4.0 4.2
Other debt to non-bank sector 26.0 27.6 23.6 22.3
Source: IMF (Lebanese authorities; and staff estimates)
(1) Includes all debt contracted by the treasury on behalf of the central government and public agencies other than
the central bank. It excludes arrears to the private sector , includes accrued interest.
(2) It excludes arrears to domestic sector
(3) In domestic currency, and mainly to the National Social Security Fund (NSSF) and the National Deposit
Insurance Fund (NDIF).

Increasing public debt…

The debt has increased from US$28.3bn in 2001 to US$38.5bn in 2005, which means a
CAGR of 8.0% p.a. The debt in foreign currency has gone up from 33.8% of total debt
in 2001 to 49.1% of total debt in 2005. This increases the foreign currency risk for the
government. Gross debt in percentage of M4 has also gone up from 71.7% to 74.6%
during the period (2001-05).
Figure 03: Public Debt

25.00 45.00
40.00
External & Domestic Debt ($ bn)
20.00 35.00
30.00
Total Debt ($ bn)

15.00
25.00
20.00
10.00
15.00
5.00 10.00
5.00
0.00 0.00
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Jun-06
External Debt Domestic Debt Total Debt
Source: IMF and BDL
On Y-o-Y basis (for 2005) external debt has increased by 2.9% to reach US$18.9bn
and domestic debt increased by 12.1% to reach US$19.6bn, while total debt moved
up by 7.3% and stood at US$38.5bn. As per the latest figures (Jun-06) , external debt
(US$19.9bn) makes more than 50% of the total debt (US$38.8bn).
Figure 04: Lebanon’s Public Debt as percentage of GDP

178
176
174
172
170
168
%
166
164
162
160
158
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Sep-02
Sep-03
Sep-04
Sep-05
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Total Debt/GDP (%)

Source:IMF
The debt as percentage of GDP increased from 165.8% in 2001 to 174.6% in 2005 and
as per the latest estimates (Jun-06) it makes 176.1% of GDP. Such a high burden of debt
causes the government to spend most of its revenue (about 46% in 2005) on servicing of
debt. This leaves lesser than required for other necessary expenses such as salary and wages
of employee, expenditure on healthcare and education. As a result most of government’s

expenditure goes as current expenditure (89.7% of the government expenditure in 2005)

and leaves little for capital expenditure that is necessary for sustainable development for
Lebanon. It is imperative that the government reduced its debt burden significantly so
that it can allocate its budget to necessary items to provide for better quality of life to its
people and to invest for long term growth of the country.
Figure 05: Public Debt as percentage of GDP (2005)

175
150
125
100
%
75
50
25
0
Lebanon KSA Bahrain Egypt Jordan Sudan
Public Debt/GDP (%)
Source: Global Research & IMF
It is clear from the chart that Lebanon has got worst debt position among the six
countries. However, it can be explained by the turmoil and damage that the country has
gone through because of wars and attacks time and again. To combat the problem of
debt, the government sought help from international bodies. It received a zero interest
loan in 2002 (Paris II) and it used US$2.4bn of the loan as budgetary support. Another
conference (Paris III) is being held on Jan-07 to support Lebanon to help it rebuild and
reduce its debt burden. It is reported that Lebanon would need about US$8bn from this
conference.
Figure 06: Maturity structure of Public Debt

140
120
100
80
60
40
20
0
Short-term public debt Long-term public debt Gross official reserves Gross official reserves
as % of total public debt as % of total public debt as % of short term debt +Government revenue
as % of short term debt
2003 2004 2005
Source: IMF

Though short term debt has been declining as percentage of total debt, as well as in
absolute terms on Y-o-Y basis, it is still very large as compared to government revenue
and GDP of Lebanon. The gross official reserves as percentage of short-term debt stood
at 92.4% and sum of gross official reserves and government revenue stood at 138.4%
of short term debt in 2005. If we consider the interest burden which was 46% of the
government revenue for the year 2005, Lebanon wouldn’t have enough reserves to service
its short term public debt. This is not a good sign and there lies potential of default with
regards to payment of its debt on the part of the government, unless it gets financial
aid from international supporters. In addition to it, the Paris II loan worth US$2.4bn is
maturing in Dec-06, which would make the need of support even more pronounced.

External Trade
The World Bank reports that Lebanon’s weighted average tariff rate in 2002 (the most
recent year for which World Bank data are available) was 6.3%. (The World Bank has
revised the figure for 2002 downward from the 8% reported in the 2005 Index).
Figure 07: Trade Balance

2000
-2000
$ mn
-4000
-6000
-8000
-10000
2001 2002 2003 2004 2005 1H06
Exports Imports Trade Balance

Source: IMF and BDL
Lebanon has seen reduced trade deficit for 2005 on Y-o-Y basis by 3.4% to reach
US$6,861mn. Exports of goods were up by 13.9% during the year, while imports fell
by 0.3% during the year. The reason for fall in import was overall fall in demand in
economy because of uncertainty created by assassination of the last Prime Minister Mr.
Hariri. The trade deficit for 1H06 stood at US$3,753.9mn (widened by 9.1%); exports
went up by 49% to reach $1,302.3mn as compared to six months last year, while imports
went up by 17.2% to reach $5,056.2mn as compared to six months last year. The increase
in exports and imports came on the back of buoyant economy during the period. Trade
deficit widened by 9.1% despite higher rate of increase in exports due to much larger
increase in imports in absolute value as compared to that in exports.
Exports
Lebanon’s major export partners (as per data available until Aug-06) are Switzerland
(25% of exports), UAE and Syria (7% each), Kuwait, Jordan and Turkey (4% each).
Figure 08: Export partners of Lebanon and their share

Switzerland
25%
Others 49%
UAE 7%
Syria 7%
Kuwait 4%
Jordan
Turkey
4%
4%
Source: Lebanese Customs

Lebanese exports are well diversified and not dependent on just one country, which
should give it ability to absorb shock in demand from any particular country.
Table 04: Top 10 Export Items

Product Category (2005) % share in total
Machinery and mechanical appliances, electrical equipment 19.1
Base metals and articles of base metal 16.8
Natural pearls, precious or semi-precious stones 13.6
Prepared foodstuffs 11.6
Products of the chemical or allied industries 9.9
Mineral products 7.6
Pulp of wood or of other fibrous Cellulose material 7.1
Textiles and textile articles 5.0
Plastics and articles thereof; rubber and articles thereof 4.7
Vegetable products 4.7
TOTAL 100.0
Source: www.databank.com.lb (Lebanese Customs)
NB: Figures might not add up to total because of rounding
Machinery and appliances top the chart for export items. Base metal, jewellery, and
foodstuffs are other major items.
Imports
The top import partners of Lebanon (as per data available until Aug-06) are USA (10%
of imports), France (8%), Italy (8%), China (7%), Germany (7%), followed by UK (4%),
Egypt (4%) and KSA (3%).
Figure 09: Import partners of Lebanon and their share

Italy 8%
Germany 7%
France 8%
China 7%
Others 49%
USA 10%
UK 4%
KSA 3%
Egypt 4%
Source: Lebanese Customs
Lebanese imports are well diversified and not dependent on just one country, which
should give it ability to absorb variations in supply from any particular country.

Table 05: Top 10 Import Items

Product Category (2005) % share in total
Mineral products 28.2
Machinery, mechanical appliances, electrical equipment 13.5
Products of the chemical or allied industries 10.4
Vehicles, aircraft, vessels and associated transport equipment 10.3
Base metals and articles of base metal 8.3
Prepared foodstuffs 6.7
Pearls, precious or semi-precious stones 6.2
Textiles and textile articles 6.2
Live animals, animal products 5.4
Vegetable products 4.9
TOTAL 100.0
Source: www.databank.com.lb (Lebanese Customs)
Mineral products top the chart for import items. Machinery and appliances, chemical
products and vehicles are other major items.

Current Account
The year 2005 witnessed significant improvement in the current account which registered
a deficit of US$2,792mn against deficit of US$3,970mn in 2004. This improvement
came on the back of a 3.4% y-o-y improvement in trade deficit (due to 14% increase in
exports and 0.3% decrease in imports) and 67.7% improvement in net receipt for services
in 2005. This took care of 27.5% y-o-y decline in current transfers too. The current
account was positively affected by the increased export of jewellery and other goods (up
by 14.0%) and at the same time decrease in imports and payment of services (down by
3.8%) for the year. As a result, current account deficit came down from 18.2% of GDP
in 2004 to 12.7% of GDP in 2005. The reason for decreased imports was contracted
demand following the uncertainty after assassination of Mr. Hariri. We believe decrease
in demand is not a good sign for the economy.
Table 06: Current Account Balance

Figures in US$ mn 2001 2002 2003 2004 2005(E*)
Goods
Export Proceeds 880 1,018 1,444 1,598 1,821
Import Payments -6,800 -5,974 -6,665 -8,704 -8,682
1. Trade Balance (Net goods) -5,920 -4,956 -5,221 -7,106 -6,861
Services
Receipts 4,700 6,484 7,009 8,411 8,981
Payments -3,033 -5,588 -6,026 -6,745 -6,187
2.Services (net) 1,667 896 983 1,666 2,794
A. Goods & Services (Net) (1+2) -4,253 -4,060 -4,238 -5,440 -4,067
B. Income (Net) -391 -1,002 -1,237 -1,432 -830
C. Transfers (Net) 1,056 2,220 2,449 2,902 2,105
Current Account (A+B+C) -3,588 -2,842 -3,026 -3,970 -2,792
Current account balance (% of GDP) -21.0 -15.4 -15.2 -18.2 -12.7
Source: IMF
*Estimates by IMF
Situation turned round the corner in 1H06 with increased export and even more increased
import in US$ value that resulted in larger deficit as compared to 1H05. Nevertheless, the
overall economic picture was much better as compared to 1H05 as demand was healthy
and economy fared well reflecting in increased tourism and construction activity etc.
However, exports are likely to take hit in 2H06, while imports will be hit even worse
because of contracted demand and embargo by Israel during and after the attack. Though
we might see reduced trade deficit and current account deficit, we would see a much lower
(sub zero growth in real terms) growth in 2006 due to expected bad second half. Transfer
would increase this year owing to aid that Lebanon would receive from international
bodies for the reconstruction purpose, further reducing current account deficit for year
2006.

Capital and Financial Account

The Capital and Financial account has been in surplus and it had seen big surge in 2003
to US$5,792mn on the back of increased FDI and portfolio investment before it dipped
to US$3,257mn in 2004, mainly due to drain of portfolio investment (a decrease of 58%
Y-o-Y basis). The account recovered slightly in 2005 to US$3,397mn.
Table 07: Capital and Financial Account

Figures in US$ mn 2001 2002 2003 2004 2005
Capital and Financial Account 1,167 2,415 5,792 3,257 3,397
FDI 1,518 1,385 1,558 1,478 1,682
Portfolio Investment, loans -351 1,030 4,234 1,780 1,715
Government (Net) -94 1,210 -505 -105 408
Eurobonds (Net) 357 743 -207 343 373
T Bills (Net) -487 506 -268 -484 82
Loans (Net) 36 -39 -29 36 -46
Banks (Net) 274 506 3,845 1,293 1,331
Foreign Assets NA -846 -48 -2,706 -90
Non Resident Deposits NA 1,351 3,892 3,999 1,422
Non-Bank Private Sector (Net) -531 -685 894 591 -24
Source: IMF
Capital and financial account would see reduced FDI and sell in portfolio investment in
2H06. On an average, FDI to the country has been increasing for last three years, which
is a good sign for the long term growth of Lebanon Economy. FDI has grown at CAGR
of 6.7% for the period of 2002-05.
Table 08: FDI to Lebanon compared with rest of countries

Lebanon’s FDI 2001 2002 2003 2004
% share of Arab countries 2.7 3.2 3.8 2.4
% share of developing countries 0.11 0.17 0.22 0.10
% share of world 0.03 0.04 0.06 0.04
Source: www.databank.com.lb (UNCTAD website)
In past, Lebanon has attracted a little share of FDI (around 3%) to Arab states. Though
FDI would drop in 2006 for the uncertainty that is prevailing in the country post Israeli
attack, we expect that figures should improve in coming years as situation normalized
in the region.

Monetary Policy
The primary objectives of the central bank’s monetary policy in Lebanon is to maintain
adequate levels of domestic liquidity, control the inflation rate and maintain the pegged
exchange rate with the US dollar (target rate is LL1,501 to LL1,508 to 1 US$), at the same
time limit the level of dollarization in the economy. To keep the exchange rate pegged,
the government needs to have flexible interest rates. Looking at domestic liquidity,
money supply in its narrow definition (M1) improved by 7.5% on Y-o-Y basis to reach
US$2,066.3mn on Aug-06. M1 also improved on the week extending from August 24
to 31, 2006, which is a sign of recovery for Lebanese economy post Israeli attack. The
broad money supply (M2) improved only marginally during the period, up by 0.4% on
Y-o-Y basis to reach US$15,488.6mn on Aug-06. M3 and M4 also improved by 6.2%
and 6.9% for the period on Y-o-Y basis to reach US$50,579.8mn and US$53,282.3mn
respectively as at end of Aug-06.
Figure 10: Currency in Circulation (adjusted for inflation)

1600.00 12
1550.00 10
1500.00
8
1450.00
%
LL bn
6
1400.00
4
1350.00
1300.00 2
1250.00 0
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Jun-06
Currency in Circulation LL Deposit Rate
Source: BDL
Currency in circulation took sharp dip in 2002 following worldwide global recession.
Apart from this, we can see that currency in circulation (adjusted for inflation) has been
in up-trend generally for last five years. This means improving liquidity in the economy
of Lebanon. Interest rates has followed global trend (falling during 2002 to 2004) and it
appears to show strong negative correlation with the currency in circulation.

Table 09: Money Supply

%Change
Figures in US$ mn 2001 2002 2003 2004 2005 31-Aug-06 YTD, 31-
Aug-06
Currency in Circulation 920.1 896.2 1,002.3 1,021.6 1,014.9 994.9* -2.0%
M1 1,516.8 1,657.3 1,836.3 1,955.2 1,896.6 2,066.3 9.0%
M2 11,243.9 13,428.6 17,171.7 16,977.6 15,995.0 15,488.6 -3.2%
M3 34,791.3 37,706.7 42,577.4 46,956.8 49,033.5 50,579.8 3.2%
M4 39,449.0 42,920.6 46,631.3 49,625.2 51,589.4 53,282.3 3.3%
M2 - M1 9,727.1 11,771.3 15,335.3 15,022.4 14,098.4 13,422.2 -4.8%
M3 - M2 23,547.5 24,278.2 25,405.8 29,979.2 33,038.5 35,091.2 6.2%
M4 - M3 4,657.6 5,213.9 4,053.9 2,668.4 2,555.9 2,702.5 5.7%
Source: BDL
* As at June 30, 2006
From the figures, we have made notable observations for the period of Dec-05 to Aug-
06:
• Deposits other than demand deposits in LL (M2 – M1) has gone down by 4.8%
• Deposits in foreign exchange (M3 – M2) has gone up by 6.2%
• T Bills held by banks (M4 – M3) has gone up by 5.7%
Following are the main figures from the monetary surveys:
Table 10: Lebanon Monetary Survey

CAGR
Figures in LL bn 2001 2002 2003 2004 2005 Y-o-Y
(2001-05)
Net foreign assets 21,530.0 24,832.0 33,857.0 36,880.0 38,663.0 4.8% 15.8%
Net domestic assets 40,704.0 41,362.0 42,771.0 48,852.0 50,057.0 2.5% 5.3%
Net claims on public sector 28,524.0 28,191.0 30,670.0 34,029.0 35,966.0 5.7% 6.0%
Of which : Net claims
29,596.0 29,035.0 31,970.0 35,625.0 38,113.0 7.0% 6.5%
on Government
Banque du Liban 6,583.0 2,499.0 10,983.0 11,491.0 11,448.0 -0.4% 14.8%
Commercial banks 23,013.0 26,536.0 20,987.0 24,134.0 26,665.0 10.5% 3.8%
Claims on private sector 22,393.0 22,963.0 23,233.0 24,375.0 24,774.0 1.6% 2.6%
Source: IMF
Both domestic assets and net foreign assets improved marginally in 2005 on Y-o-Y basis.
Domestic assets were up by 2.5% to reach LL50.05tn in 2005, while net foreign assets
notched up by 4.8% to reach LL38.63tn. It is worth noting, the growth in net foreign
assets slowed down relative to the growth rate of 8.9% recorded in 2004. The same was
true for growth in net domestic assets, which fell from 14.2% in 2004 to just 2.5% in
2005. This was mainly the result of the political uncertainty created by assassination of
the Prime Minister Mr. Hariri in Feb-05.
Claims on both private and public sectors have been increasing, however, claims on
public sector (5.7% Y-o-Y basis for the year 2005 and at CAGR of 6% since 2001) have
risen much faster as compared to claims on private sector (1.6% Y-o-Y basis for the year
2005 and at CAGR of 2.6% since 2001). In the coming years we expect share of private

sector’s claims to grow as compared to that of government sector’s. This should lead to
stronger market discipline, and, in the process, the ability of emerging market borrowers
to protect themselves against volatility and herd behavior of fleeing by the debtor in
times of crisis.
BDL Foreign Reserves
Though, the central bank’s foreign reserves fell in month of February and Mar-
05 (following Mr. Hariri assassination) to US$7,561mn by the end of March from
US$9,713mn in Jan-05, a fall of 22.2%, it replenished by the year end and reached
US$9,844mn, worth eight months of import.
Figure 11: Bank du Liban’s foreign reserves

12000 12.00
10000 10.00
8000 8.00
months
$ mn
6000 6.00
4000 4.00
2000 2.00
0 0.00
2001 2002 2003 2004 2005
Foreign Exchange Reserves of BDL Foreign Exchange Reserves worth months of imports
Source: BDL and IMF
BDL foreign exchange reserves have been on rise on average for last five years and
stood at fair level of US$11,020mn at Jun-06. It fell to US$10,563mn on the backdrop of
attack by Israel. The position was stabilized by US$1bn support from KSA.

Interest Rates
As LL is pegged to US$ since Sep-99, it would have been imperative that BDL moved its
interest rates in line with Fed rates. However, this has not happened in last three years.
Figure 12: Interest Rates in Lebanon

25
20
15
10
%
0
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Repo Rate T Bills 3 Months US Fed Rate Spread between Repo and T Bills
Source: BDL & Federal Reserve Board
Since Dec-03 Fed rates have been on constant rise (increased from 1% in Dec-03 to
5.25% till Jun-06, an increase of 4.25%), while interest rate on 3 months T Bills of
government of Lebanon has been constant at 5.15%. The reason could be already fragile
economy of Lebanon, which could not sustain anymore tightening in monetary policy.
Spread between repo rate and interest on T bills has been decreasing since 2003 and
stood at 6.85% only as at Jun-06, as against close to 15% in 2003. This means that
perceived risk by the debtor has reduced.
Figure 13: Yield Curve (Jun-06)

12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
3 Months
6 Months
12 Months
24 Months
36 Months
48 Months
60 Months
Interest on T bills
Source: BDL
The yield curve for Lebanon is normal going upward, as we move from short to long
term rates . It is in contrast with that seen in US economy where we see a slightly
inverted yield curve. The upward sloping yield curve, which is normally expected in an
economy means (when considered in conjunction with other indicators) that investors
expect the economy to do well in future and investment by the private sector is likely to
improve or at least be maintained at the current level.

Inflation
After experiencing more than 100% inflation in early nineties, Lebanon economy has
experienced low inflation 2000 onward. CPI has always been below 3% since 2000,
according to IMF. The inflation rate in 2005 as measured by the percentage change in
the Consumer Price Index dipped to 0.3% from 3.0% of 2004 levels. The reason was
contracted economy in Lebanon due to uncertainty after assassination of Mr. Hariri. We
can see from the graph that GDP deflator (another measure of inflation in an economy)
also dipped sharply, which was due to fall in demand of imported goods for the reason
mentioned earlier.
Figure 14: Inflation

6.0
5.0
4.0
3.0
%
2.0
1.0
0.0
-1.0 2001 2002 2003 2004 2005
GDP Deflator CPI

Source: IMF
Looking forward we expect inflation to increase a great deal in 2006 because of increased
expected expenditure by the government to reconstruct the infrastructure. The increased
inflation would affect the consumers at large, as prices of household items would increase.
This would hurt the retailing sector as people would try to cut their consumption on the
back of high prices. However, the inflation should ease in 2007 and more so in 2008 as
the economy revert back to normal.

Population and Demographics

The population of Lebanon is 3.87mn as per the latest estimates (Jul-06). As per US
Census Bureau, population is expected to grow at 1.23% in 2006. The population growth
rate has been decreasing for last five years. The population growth rate for Lebanon
is much lower as compared to that in Arab Countries and closer to that in developed
countries. It is likely to drop below 1.1% by 2010. This is a good sign for the country as
resources wouldn’t spread too thin and most of its growth will get to its current people
and per capita GDP will grow at a better rate than would have been possible otherwise.
Figure 15: Population Growth Rate

1.5
1.4
1.3
1.2
%
1.1
1
0.9
0.8
2001
2002
2003
2004
2005
2006(E)
2007(F)
2008(F)
2009(F)
2010(F)
Population Growth Rate
Source: U.S. Census Bureau, International Data Base
Lebanon’s population consists of mainly young people; 28% of people are less than 15
years and 23.8% of the people are 10 years to 24 years of age. Lebanese people enjoy
very high literacy rate of about 95% (as per 2005 estimates by Population Reference
Bureau). This means Lebanon potentially has highly skilled labor within the country
itself.
Figure 16: Population Structure (2005)

65 Years &
above, 6%
0-14 Years, 28%
15-64 Years, 66%
Source: Population Reference Bureau

As Lebanon has significant number of people in young age group, we expect demand for
housing to go up in the next five to ten years. In addition to it, we can expect increased
participation by the Lebanese in labor market, which is a good sign for housing and
financial services companies.
Lebanon labor market is dominated by males. However, females also make significant
part of labor force.
Table 11: Breakdown of Labor Force by Profession

Male Female Total (%)
Skilled laborers 26.3 4.9 21.6
Executives & directors 14.2 5.2 12.3
Unskilled labor 12.4 21.5 14.4
Machinery operators & drivers 10.0 3.5 8.5
Service and retail employees 8.9 13.0 9.8
Professors and teachers 7.4 21.4 10.5
Middle management professionals 6.6 14.5 8.3
Agriculture qualified 5.6 2.1 4.8
Army personnel 4.6 0.1 3.6
Administration staff 3.8 13.6 6.0
Unspecified 0.2 0.2 0.2
Total 100.0 100.0 100.0
Source: www.databank.com.lb ( Central Administration of Statistics (CAS))
Laborers dominate the professional employment at 36.0% of the total workers, followed
by managers at 20.6%. Professors & Teachers and Services & retail employees make
about 10% each of the labor force.
Economic Activity Rate & Unemployment
The economic activity rate measures the percentage of the population who are in
employment or unemployed, and is therefore a useful general measure of the labor
market opportunities available to people.
As per the latest estimates available, Lebanon has activity rate of 52.3%, which is likely
to reduce to 29.7% by 2010 (as per ILO projections) Economic activity rate for Lebanon
is low as compared to other countries in the region, such as Bahrain, Kuwait, Qatar and
UAE. The low level of economic activity is partly explained by low level physical and
intellectual property rights; consequently the country has lower level of production per
capita than that in the countries with high economic activity rate.

Unemployment rate is also very high in Lebanon, the rate fluctuating since nineties-
Table 12: Unemployment rate

Year Unemployment Rate (%)
1992 6.7
1995 14
1998 10
1999 12
2000 13.9
2001 21.3
2002 11.5*
Source: www.databank.com.lb (Madma)
* Source: USJ study
Lebanon’s unemployment rate has been low about 11.5% (as per 2002 estimates) as
compared to average of about 15% in the Arab world (as per Council on Foreign Relations,
USA). However, it’s likely to get higher in 2006 following attack by Israel because two
main industries (Tourism, Agriculture) that account for more than 1/4 of employment
in the country have been badly hit. As a result of this, we expect unemployment to go
significantly higher as compared to recent years. However, it should revert back to the
average figures during 2007/08 as the economy would get back to normal. As a result of
expected increase in unemployment in 2006, we expect economy and demand for goods
and services to contract and fall in real GDP for the year.

Structural Reforms

In late 2000, the government substantially reduced customs duties, adopted export
promotion schemes for agriculture, decreased social security fees and restrictions on
investment in real estate by foreigners, and adopted an open-skies policy, with positive
effects on trade in 2001. The country has pegged LL to US$ and weakening of US$ in
last five years has boosted the export of goods that has risen consistently from 5.1% of
GDP in 2001 to 5.9% of GDP in 2005.
In 2001, the government turned its focus to fiscal measures, increasing gasoline taxes,
reducing expenditures, and approving a value-added-tax that became effective in Feb-
02. Slow money growth and dollarization of deposits have hampered the ability of
commercial banks to finance the government, leaving more of the burden to the central
bank. The dollarization is taken care by keeping interest rate spread between Lebanese
Pound deposits and US$ deposits very high. However, the spread has been decreasing
for last few years from 5.8% in 2002 to 3.7% in 2004 and it stood at 3.6% as of 2005
and dropped further to reach 3.2% by Jun-06. The monetization of the fiscal deficit put
enormous pressure on central bank reserves, mitigated only slightly with the issuance
of new Eurobonds in 2000 and 2001. The central bank has maintained a stable currency
by intervening directly in the market, keeping the inflation low. Thus, it succeeded in
maintaining investors’ confidence in debt.
For 2002, the government put primary emphasis on privatization, initially in the telecom
sector and electricity, with continued planning for sales of the state airline, Beirut port,
and water utilities. The government pledged to use the proceeds of sales to reducing the
public debt and the budget deficit. However, it met with partial success as public debt
kept on piling up and is expected to touch US$41bn in 2006 (US$28.3bn in 2001) while,
budget deficit on cash basis, came down (due to reduced interest burden and contracted
demand) from US$2.95bn in 2002 to US$1.94bn in 2005 (as per estimates by IMF).
Structural Reform Initiatives
Lebanon has taken quite a few structural reform initiative during 2004-06, at the level of
public sector, capital market and domestic market.
Public Sector Reforms
• Reorganization of revenue administration - Large taxpayer’s office established in

May-05, although not yet fully operational. This is expected to improve tax collection
by the government and increase its revenue.
• VAT directorate - Law establishing a VAT directorate passed in Aug-05. The

directorate will take care of issues related with VAT, which has become a significant
earner of tax revenue for the government.
• Deduction at source of tax on salaries - Registration of all private sector employees was
completed by May-05. This is expected to improve tax collection by the government
and increase its revenue.

• Public debt - Draft law establishing an independent public debt directorate at the
ministry of finance pending in Parliament. The directorate is expected to introduce/
recommend measures to take care of burgeoning public debt and help in reducing
fiscal deficit.
• Strengthening financial control of state-owned enterprises - An amendment to the

2001 budget law to be submitted to Parliament in the near future, requiring annual
external audits of all public institutions. This should result in better management of
the public sector companies and reduced losses incurred by them, which would mean
reduced drag on the government budget.
Capital Markets and Banks Mergers
• Capital markets - Draft law on capital market development and the establishment of a
regulatory commission with powers to oversee the Beirut Stock Exchange pending in
Parliament. This is expected to bring much better transparency in the stock exchange’s
activity and protection to the investors’ rights, which is vital to the development of
the stock market.
• Securitization - Legislation allowing the securitization of financial assets passed in

Dec-05. This would result in enhanced liquidity of the instruments and in turn better
availability of finance to the creditors.
• Insider trading - Draft legislation outlawing insider trading pending in Parliament.

This law is expected to protect the investors’ interest by putting them at equal footing
with the insider and ruling out the potential advantage an insider has in a stock’s
trading.
• Insurance regulatory commission - Draft legislation establishing an insurance

regulatory commission under review by government. This draft yet again is expected
to enhance the size of the market as the appropriate regulations rules out or lessen
the possibility of ‘Moral Hazard’ by the insurance companies in the market, which
ensures increased acceptability of the products by the consumers.
• Bank mergers - Amendment to the law regulating the central bank’s role in facilitating
bank mergers approved by Parliament in Feb-05. We expect enhanced efficiency of
the whole sector as economy of scale comes into play. Moreover, it would be possible
for the banks to cross-sell their products to the customers.
Competition and Domestic Market Reform
• Anti-dumping - Draft for anti-dumping legislation in line with WTO standards pending
in Parliament. This legislation is expected to provide Lebanese exporters better terms
and condition in foreign markets as other countries are likely to reciprocate by reducing
duty on Lebanese products. Thus, it should lead to increase in export revenue.
• Streamlining import licensing procedures - Draft law on International Trade and

Licensing in line with WTO agreements pending in Parliament. This should result in
enhanced trade with other countries.

Taxes
Fiscal year extends from January 1 to December 31 of a year. All legal entities, regardless
of type, purpose, nationality or place of business, are subject to the income tax provisions
of DL 144 (Article 4, DL144) on their net profits derived in Lebanon . The scope of
coverage includes all Lebanese and foreign companies as well as their subsidiaries
and branch offices, regardless of whether or not they are based in Lebanon. Limited
companies and limited liability companies are taxed on their profits at a 10% rate.
Dividends income shared by holdings and offshore companies are tax-exempted.

Otherwise, capital gains are taxed at the rate of 6%, while, the tax on dividends is 5%.
Tax exemption - The general applicability of the provisions is limited by exemptions

provided in DL 144 itself and in DL 45 and DL 46. DL 144 provides for two types of
exemptions: an indefinite exemption and a ten- year exemption.
Indefinite Exemption: The indefinite exemption applies to the following companies and
institutions:
• Educational institutions
• Hospitals, orphanages and shelters that admit patients without charge
• Mental institutions
• Agricultural ventures
• Agricultural consumer cooperatives.
Ten-Year Exemption: The ten-year exemption applies to the profits generated by

industrial entities that
• Established in Lebanon after 1980

• Established in areas that the government wants to develop
• Produce new products not produced in Lebanon before January 1, 1980
• Own more than LL500mn (US$300,000) in production assets.
(Source: http://www.dm.net.lb/tmalouli/practice/tax.htm)
The Value Added Tax (VAT) constitutes the most important element of the tax reform
undertaken by the Lebanese government since the end of the war in 1990. The VAT was
introduced in Feb-02 at two rates: a standard rate, 10%, and a zero rate. It is an indirect
tax that is collected by the Treasury at the level of the business unit but paid by the buyer
and ultimately by the consumer. The introduction of the VAT in Lebanon was based on
several considerations:
On the one hand, VAT would contribute in reducing the deficit and containing the
debt levels accumulated during the years of the civil war and the years thereafter, its
implementation would help in ensuring continuous economic growth and financial
and monetary stability. On the other hand, the Lebanese tax system had traditionally
relied heavily on import duties. Therefore, in its effort to implement its international
and regional trade obligations (WTO, EU, Arab Trade Union), which had required the
reduction of custom tariffs, Lebanon had to introduce an alternative broad base tax
on consumption, which would play an important role in generating revenue. (Source:
Ministry of Finance)

Privatization
The Higher Council for Privatization (HCP)
The HCP, in close coordination with sector ministries, is entrusted to drafting laws, and
implementing strategies for the privatization of selected sectors. At the most comprehensive
level, a general law (law 228) relating to the organization and implementation of the
privatization program became effective as at May 31, 2000.
Under the late Mr. Hariri, the former government’s structural reform priority was to
raise over US$6bn over 2003 and 2004 by privatizing a number of utility companies,
including telecommunications, electricity, airline and water companies. Apart from
alleviating the debt position, privatization was intended to improve the productivity of
public institutions. For this to happen, Lebanon needs to put proper regulations regarding
competition, the main pillar of which should be a liberal trade and Foreign Direct
Investment policy stance. WTO accession plans have recently initiated the formulation
of more consistent antitrust laws.
Telecommunication Sector
The HCP together with the ministry of Telecommunications have finalized the
telecommunications law, which organizes the services of the sector, determines the
rules for the transfer of its assets to the private sector, and includes the role of the State
in this field. It has become effective as at July 23, 2002. Studies on the restructuring
and organization of the sector – conducted by international consultant Deloitte and
Touche and financed by the World Bank – began in 1994. Under specific legislation
affecting the sector, Ogero, the state company managing the fixed line network, first
became a corporation named Liban Telecom, taking with it a part of the Ministry of
Telecommunication staff.
Electricity du Liban
Electricity du Liban (EDL), which supplies 85% of the country’s electricity, is also a
candidate for privatization. As per the IMF estimates, in 2005, government support for
EDL amounted to 3.2% of its GDP. EDL’s current output is around 1250 MW, while
peak demand often hits 1800 MW. In 2003, HCP released an electricity law, which
Parliament approved, and initiated a privatization road show. The law paved the way for
an experienced operator to acquire an initial 40% stake in the generation and distribution
assets of EDL, with full control of management.
Middle East Airline
Middle East Airline (MEA) is the national airline of Lebanon. In 1996, it was taken over
by BDL (99%) to save it from bankruptcy. Since then, MEA made more than US$300mn
in losses, despite a mega restructuring plan, which has seen its workforce slashed by
a third. The efforts resulted in a maiden net profit in 2002 in over 25 years. In 2003 it
achieved net profit of US$22mn and in 2004 the figure was US$50mn. It serves more
than 25 destinations and in 2004, MEA carried more than 1,100,000 passengers.

Beirut and Tripoli Ports
The government strategised to get out of running business enterprises, hence it intended
to sell off the Beirut and Tripoli seaports. Beirut port was operated privately for more
than 100 years before coming under government control in 1990.
The Water Sector
The government decided on privatization of water sector in 2001 with a view to

improving the sectors’ performance and minimizing its own investment burden. To meet
this objective, Société Générale de Banque au Liban (SGBL) and Societe Generale S.A.
were contracted to provide consulting services. If successful, the privatization could
bring in revenues of more than a billion dollars over two to three decades.
As for its scope, it will cover the water and wastewater sector, excluding irrigation,
which will remain the responsibility of the government. Consequently, the cost of dams,
mainly used for irrigation purposes, will be borne by the government.
The Oil Sector
The oil sector is also on the privatization list, and expected to raise close to US$1bn
for the government. The sector was transferred to Parliament for further study in 2002.
The draft law will allow private companies to rehabilitate existing oil refineries or to
construct new ones, on a build operate transfer basis. Also included in the draft law are
plans for the reactivation of the Zahrani plant, which has been out of use for more than
20 years.
The government of Lebanon is planning to invite international oil companies to bid for
licenses to produce and/or explore oil and hydrocarbon offshore Lebanon, once the legal,
technical and other supporting measures are finalized.

Sectors’ Performances
Banking Sector
Lebanon was often called the “Switzerland of the Middle East”, mainly because of its
well-reputed banking network that was built up between the end of the First World War
and the beginning of the civil war in the mid-seventies. The power of the Banking sector
in Beirut drew in most of the Arab capital from the Gulf, later proving its ability to
manage funds from any origin.
Initially, the banking system in Lebanon was dominated by the presence of branches of
foreign institutions. These foreign banks focused on the financing of Lebanon’s foreign
trade, leaving the domestic financing to local banks whose capital was limited and
scope of activities restricted to the region of their establishment. They mainly engaged
in discounting of short term bills of exchange, provided collateral loans and advances
against goods or in the form of current accounts, and engaged in foreign exchange
trading. They also accepted deposit from the customers.
On the other hand, local banks greatly relied on the receipt of deposits by offering higher
deposit rates of interest. However, a great proportion of funds were retained with foreign
banks abroad. Local banks also provided advances in the form of current accounts and
discounting of local bills of exchange, and engaged in foreign exchange operations.
Discount houses also existed and their main operations revolved around discounting and
rediscounting commercial paper which were not accepted by banks. However, unlike
local commercial banks, they relied on their own funds to finance their activities. In
addition, a large number of money lenders were widely spread granting commercial,
agricultural, and consumption loans against high interest rates.
In the period prior to the establishment of the Banque du Liban, banks operating in
Lebanon were classified by the Ministry of Finance into three categories. The above
mentioned approved banks whose guarantees were accepted by the Lebanese government,
non-approved banks whose guarantees were not accepted, and discount houses. Prior to
that year, the Lebanese banking system was characterized by the absence of specific
banking regulations and supervision.
Regulations
The passing of the banking secrecy law on September 3, 1956, subjected all banks
established in Lebanon as well as foreign banks’ branches to the “secret of the
profession”. All banks managers and employees who are exposed to the banks activities,
cannot reveal what they know concerning their clients names, assets or holdings to any
party whatsoever whether individuals or public authority, be it administrative, military
or judicial. Such information is released only when granted written authorization by
the client or his/her heirs, in case of bankruptcy, or in case of any litigation between
the bank and the client. The law, however, in order to ensure the security of banks’
investments, allows for mutual communication among banks, and under the provision of
bank secrecy, of information related to the debtor accounts of their clients. Moreover, in

case of request presented by the judiciary authorities for cases of illicit accumulation of
wealth, banks cannot refrain from revealing the necessary information.
The Banking Control Commission (BCC), an independent regulatory body that is the
part of Banque du Liban and established in 1967, is responsible for supervising banking
activities and ensuring compliance with the various rules and regulations. Overall
banking activities are subject to both the Code of Commerce (1942) and the Code of
Money and Credit (1963).
Banque du Liban (BDL) – The Central Bank
BDL was created in 1963. The central bank is the sole custodian of public funds, supervises
and regulates the banking system and is vested by law with the exclusive authority of
issuing the national currency. The central bank’s primary role is to safeguard the currency
and promote monetary stability, thereby creating a favorable environment for economic
and social progress. The central bank also advises the government on various economic
and financial matters. In conducting its monetary management function, the central
bank utilizes a wide range of instruments, including reserve requirements on Lebanese
Pound deposits with commercial banks, liquidity requirements on U.S. Dollar deposits
in commercial banks, Treasury bill repurchase and swap agreements with commercial
banks, as well as Lebanese Pound denominated certificates of deposits issued by Banque
du Liban.
Banking Control Commission (BCC) has proved to be a stringent and a proactive

regulator which has maintained stability in the Lebanese banking industry and has been
successful in dealing with the problem cases. The BCC also has the proven track record
of preventing the bank failures as shown in the case of Bank Intra and Credit Libanais.
The effectiveness of the BCC in supervising and regulating the banking sector implies
that the likelihood of a systematic crisis arising from a single bank failure is low.
High deposit dollarization…

As a result of high inflation in early 1990s, the Lebanese private sector deposits became
substantially dollarized. The proportion of foreign currency deposits decreased from
73.5% in Dec-90 to 52.2% in Jun-97 before increasing to 60.1% at the end of 1997 and
60.7% at the end of 1998 due in part to the turmoil generally affecting emerging markets
following the Asian crisis. In 1999, the proportion of foreign currency deposits declined
gradually to reach 56.6% at year end, with a further decline to 55.9% at end of Mar-
2000. From Mar-2000, the proportion of foreign currency deposits increased to 69.1% at
December 31, 2001 due to regional tensions and a higher than expected budget deficit.
This ratio continued to increase until May-02, reaching 71.5%, when it again started to
decline, reaching 65.6% by the end of 2002. Dollarization rate rose to its peak in Mar-05
(after assassination of Mr. Hariri) when it touched 76.6%. It gradually declined to 69.2%
by Dec-05. Conflict with Lebanon has pushed dollarization higher to 71.1% (end of Jul-
06) as compared to 68.4% in Jun-06. The dollarization rate of loans to the private sector
stood at 81.8% at Jul-06 (82.4% at the end of 2005).

Figure 17: Dollarization of Deposits

80.00
78.00
76.00
74.00
72.00
70.00
%
68.00
66.00
64.00
62.00
60.00
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Dollarization
Source:BDL
Foreign banks were well represented in the Republic and unlike the banking sector
in some other emerging market countries, the banking sector in Lebanon is generally
acknowledged to be stable and financially strong, and plays a critical role in the economy
as a whole.
The return of foreign banks to the Republic is seen as a key step to diversifying the
financial sector and strengthening competitive forces. Foreign banks are gradually re-
establishing themselves in Lebanon, with ING and Citibank having each received a
banking license in 1996 and Banque Nationale du Canada in 1998 and Cairo Amman
Bank in 1999 and other foreign banks acquiring participations in the capital of Lebanese
banks.
Banking Coverage
Within the context of a low-growth economic environment, bank activity growth was
relatively healthy as the compound average growth rate of assets reported 10.1% per
annum over the period of 2001-05. However, the political turmoil in 2005 had its affect
on the economy and banking sector wherein till Dec-05, the assets reported a growth of
3.7% only. Asset growth showed reasonable recovery in 2006 and by June, it had grown
by 6.6% YTD. In the month of Jul-06, assets in the bank’s balance sheet reduced by
2.4% as compared to Jun-06, as a result of attack by Israel.
Lebanon also boasts of one of the highest deposits to GDP ratio which increased from
245.9% in 2001 to 268.2% in 2004 fueled by the expatriate remittances reflecting the very
important banking dimension relative to economic dimension. It notched up marginally
to reach 273.5% of GDP on 2005. The reason for this low growth in deposit in 2005 was
instability created by assassination of the last PM, Mr. Hariri. Deposit base improved a
great deal in 1H06; it increased to reach 289.8% of GDP by Jun-06. However, as a result
of attack by Israel, the deposit dipped sharply to reach 279.4% of GDP by the end of
Jul-06.

Consolidation of the banking system, which started a few years ago, is expected to
continue, and its pace would probably accelerate if the health of the government’s
finances were to improve. With limited organic growth opportunities, larger banks
have been acquiring and merging with smaller banks to extract more synergy savings,
achieve higher economies of scale and leverage their non-financial resources. BDL has
facilitated this consolidation process by providing financial incentives through long-
term soft loans.
Interest Rates
In contrast to rest of the market, the average rate on LL as well as the foreign deposits has
seen a decline (compared to 2002). However, interest rates in Lebanon has been going
up since 2004. The average rate on the LL deposits (which constituted 31.6% of the total
deposits) at Jun-06 was 7.6% compared to 7.7% at the end of 2005 and 7.0% at 2004.
Table 13: Interest Rates

Figures in percent (unless mentioned otherwise) 2002 2003 2004 2005 1H06
Average Rate on LL Deposits 9.8 7.8 7.0 7.7 7.6
Average Rate on FC Deposits 4.0 3.4 3.3 4.1 4.4
Average Lending Rate – LL 16.1 11.3 10.5 10.1 10.2
Average Lending Rate – US$ 9.6 8.8 8.0 8.4 8.5
Spread on LL Loans 6.3 3.5 3.5 2.4 2.6
Spread on US$ Loans 5.6 5.4 4.7 4.3 4.0
Interbank Rate on Call 7.0 4.0 3.8 3.8 3.5
Private Sector Deposits (in LL bn) 19,091.8 23,649.2 23,347.0 22,042.4 23,972.5
Private Sector Deposits in Foreign Currencies (in LL bn) 36,359.0 38,142.0 44,921.0 49,589.8 51,925.1
Source: BDL
The average rate on the foreign currency deposits, which constituted 68.4% (69.2% in
Dec-05) of the total deposits as on Jun-06 was 4.4% as compared to the interest rate of
4.1% in Dec-05.
Asset-Liability Structure of Lebanese Banks
The analysis of the asset structure over the past 5 years shows significant modification
at the level of the breakdown of assets and liabilities and the currency structure. The
assets structure witnessed a significant increase in the exposure of the banking sector on
the State of Lebanon at the detriment of the share of loans and advances to the private
sector. This is significant with regards to capital adequacy ratio as claims on government
are regarded as risk free, while in reality the government has significant debt (external
& domestic), which is 176.1% of GDP as per latest estimates (Jun-06); interest burden
made more than 10% of GDP and 46% of the government revenue (in 2005). We believe,
in light of these facts it is not prudent to consider debt to government as risk free and as
such capital adequacy ratio would be impacted.

Table 14: Balance Sheet of Commercial Banks in Lebanon

Figures in LL bn 2001 2002 2003 2004 2005 Jun-06 Jul-06
Reserves 10,656.0 11,960.0 28,332.0 29,879.0 30,917.3 29,186.5 29,616.5
Vault Cash 146.0 166.0 186.0 197.0 201.1 237.8 286.4
Deposits with Central Bank 10,510.0 11,794.0 28,146 29,682.0 30,716.2 28,948.7 29,330.1
Claims on Private Sector 22,358.0 22,927.0 22,836.0 24,020.0 24,466.8 25,526.6 25,654.8
Claims on Private Sector in LL 3,285.0 4,139.0 3,856.0 4,268.0 4,305.7 4,616.3 4,654.8
Claims on Private Sector in Foreign Currencies 19,073.0 18,788.0 18,980.0 19,752.0 20,161.1 20,910.4 20,999.9
Claims on Public Sector 23,067.0 26,577.0 21,006.0 24,155.0 26,696.5 30,695.9 30,197.2
Fixed Assets 2,568.0 2,884.0 2,931.0 3,131.0 3,458.2 3,382.3 3,333.5
Total Assets 72,021.0 79,236.0 90,623.0 102,187.0 106,014.4 113,059.0 110,375.4
Total Private Sector Deposits 51,652.0 55,451.0 61,791.0 68,268.0 71,632.2 75,897.6 74,060.8
Demand Deposits in LL of Private Sector 904.0 1,094.0 1,277.0 1,389.0 1,358.5 1,560.4 1,494.3
Time & Saving Deposits in LL of Private Sector 15,067.0 17,998.0 22,372.0 21,958.0 20,683.9 22,412.2 19,904.7
Private Sector Deposits in Foreign Currencies 35,681.0 36,359.0 38,142.0 44,921.0 49,589.8 51,925.1 52,661.8
Public Sector Deposits 526.0 591.0 1,325.0 1,480.0 1,704.9 1,320.7 1,414.9
Deposits of Non Resident 9,268.0 9,237.0 11,663.0 14,422.0 14,274.0 15,510.5 14,096.9
Deposits of Non Resident Banks 1,796.0 1,859.0 2,398.0 3,813.0 3,263.4 3,580.7 3,324.7
Other Financial Liabilities 8.0 157.0 58.0 150.0 88.3 86.1 87.1
Capital Accounts 4,463.0 5,023.0 5,499.0 5,809.0 6,410.7 8,234.5 8,318.3
Unclassified Liabilities 4,309.0 6,918.0 7,889.0 8,244.0 8,641.0 8,429.0 9,072.7
Total Liabilities 72,021.0 79,236.0 90,623.0 102,187.0 106,014.4 113,059.0 110,375.4
Exposure to government (% of total assets) 32.0% 33.5% 23.2% 23.6% 25.2% 27.2% 27.4%
Deposits as % of GDP 245.9% 241.3% 257.4% 268.2% 273.5% 289.8% 279.5%
Source: BDL
Growing balance sheets of commercial banks…

In Jun-06, the total assets of the consolidated balance sheet of commercial banks
operating in Lebanon amounted to LL113,059bn (US$75.0bn) at the end of the month,
hence increasing by 6.6% for the first six months of the year 2006. In Jul-06 assets
dipped by 2.4% to reach LL110,375.4bn (US$73.2bn) as compared to Jun-06. Total
claims on the public sector increased by 15.0% YTD to reach LL30,695.8bn by Jun-06;
it decreased by 1.6% as compared to Jun-06 to reach LL30,197.2bn in Jul-06. At the end
of Jul-06, the dollarization rate of total private sector deposits stood at 71.1% (68.4% at
the end of Jun-06 and 69.2% at the end of Dec-05). The dollarization rate of loans to the
private sector stood at 81.9% at Jul-06 (82.4% at the end of Dec-05).
As Lebanese banks expanded their financing of the State budget deficit through
subscription in LL of Treasury bills, the share of Lebanese T-Bills (LL25,305.3bn at end
of Dec-05 as compared to LL22,368bn at the end of 2004) in total bank assets increased.
Similarly, as banks were required to increase their reserves at the central bank and as the
central bank started to issue certificates of deposit in LL, the share of cash and central
bank rose. However, T-Bills in Lebanese system reduced in 2006 as compared to that in
2005, standing at LL27,856bn in JuL-06 vs. LL28,051bn at end of Jun-06.
The market is concentrated among the top-5 banks which accounted for more than 50%
of the total assets/deposits of the banking sector in Lebanon in 2005.

Table 15: Banking System Financial Indicators

Figures in percent ( unless otherwise mentioned) 2001 2002 2003 2004 1H05
Assets (US$ mn) 47,791.0 52,578.6 60,134.7 67,808.2 70,348.0*
Capital
Capital Adequacy Ratio 18.0 19.4 22.3 21.2 21.6
Capital to Asset Ratio 6.2 6.3 6.1 5.7 6.1*
Asset Quality
Net Problem Loans/Net total loans 10.0 12.4 12.8 10.1 9.9
Provision against problem loans/Problem loans 62.6 62.3 64.6 68.4 68.4
Total Provisions/problem loans 69.3 68.2 70.6 75.1 75.8
Asset concentration
Share of claims on government 32.0 33.5 23.2 23.6 25.2*
Profitability
RoAA 0.5 0.6 0.7 0.6 0.7
RoAE 9.1 9.4 10.9 10.6 9.8
NIM 1.9 2.0 2.6 2.1 1.9
Liquidity
Net liquid asset/total asset 45.9 41.3 49.1 45.6 43.6
Net liquid asset/short term liability 54.2 49.2 56.6 52.6 50.7
Pvt sector deposit/Asset 71.7 70.0 68.2 66.8 67.6*
Non resident deposit/Asset 15.4 14.0 15.5 17.8 16.5*
Rest
Change in assets (12 months) 5.8 10.0 14.4 12.8 3.8*
Change in deposits (12 months) 6.2 6.2 15.0 14.0 3.3*
FC loans/total loans (Private Sector) 85.3 81.9 83.1 82.2 82.4*
Source: IMF & BDL
*Figures as on Dec-05
• Assets for the Lebanese have been rising for last five years from $47,791mn in 2001
to $70,348mn in 2005.
• Capital adequacy ratio has improved from 18% in 2001 to 21.6% in 1H05.
• Liquidity has worsened slightly. Net liquid asset/short term liability has dropped
from 54.2% in 2001 to 50.7% in 1H05.
Capitalization
The Lebanese banks have been increasing their capital to match with increase in their
asset. Capital to asset ratio has been ranging from 5.7% to 6.3% and stood at 6.0% as
on Dec-05. While, capital adequacy ratio has improved from 18.0% in 2001 to 21.6%
in 1H05.

Figure 18: Capitalization of Lebanese Banks

25 6.4
6.2
Capital to Asset Ratio %

Capital Adequacy Ratio %
20
6.0
15
5.8
10
5.6
5 5.4
0 5.2
2001 2002 2003 2004 2005*
Capital Adequacy Ratio Capital to Asset Ratio
Source: IMF & BDL

*Capital Adequacy Ratio as on 1H05
The Lebanese banks have very high capital adequacy ratios which are mainly due to the
low risk weighted assets as a significant amount of the investment goes in the T-bills
which have a zero risk weighting. However, with the Basel II standard coming in, the
capital adequacy ratio will take a hit and the banks will have to augment their capital in
order to maintain the standards.
Asset Quality
The bad economic conditions in nineties and early 2000 had the effect on the corporate
sector and the asset quality of the Lebanese banks has been poor, reflected by high ratio
of net problem loans/total loans. Though, the figure has been improving since 2003 when
it was 12.8%, the highest for last five years, it remains high at 9.9% in 1H05. It is likely
to go further up this year post Israeli attack as corporates and individuals are likely to be
badly hit and default on their loans. Ratio of provisions against problem loans to problem
loans have improved consistently 68.4% in 1H05 as against 62.6% in 2001. However, it
is low in comparison to other banks in Arab world. This provision could not be enough
considering that of net problem loans/total loans are high at 9.9%, which is very high
indicating need for more provisions in balance sheets of the banks.

Figure 19: Asset Quality of Lebanese Banks

80 78
70 76
Problem Loans/Priblem
Problem Loans/Total
loans; Provision for
Priblem Loans (%)

60
Total Provision/
74
Loans (%)
50
72
40
70
30
20 68
10 66
0 64
2001 2002 2003 2004 1H05
Net Problem Loans/Net total loans Provision against problem loans/problem loans
Total Provisions/problem loans

Source: IMF
However, maintaining the asset quality will continue to pose a big challenge to the
Lebanese banking sector. The banks’ strategy should be on expanding the loan portfolios
very cautiously until economic growth is restored in 2007 & 2008 and the macro-
economic conditions remain are high and sustainable levels. Among the sectors, retail
banking sector is poised to grow which would help the Lebanese banks to reap high
margins and profitability.
Profitability
The profitability of banks in Lebanon has been declining and low for last few years, but
has stabilized at their recent lows. The main factors causing the decline in profitability
were the increased credit risk associated with the loan portfolio of banks, increasing levels
of non performing loans (NPLs) and significant increase in costs driven by investments
in IT, electronic banking and human resources.
Figure 20: Profitability Indicators of Lebanese Banks

12 3
10 2.5
RoAA% and RoAE %
8 2
NIM %
6 1.5
4 1
2 0.5
0 0
2001 2002 2003 2004 1H05
RoAA RoAE NIM
Source: IMF

Lebanese banks are not as profitable as other Arab banks, (RoA 0.7%, RoE 9.8%, &
NIM 1.9%, for Lebanese banks as at 1H05) the main reasons are that non performing
loan is quite high, the spreads are low and fee based income is less. In our view, for the
banks to improve their profitability they need to be judicious while granting loans to
decrease the proportion of non performing loans in their balance sheet.
Nevertheless, the banks in Lebanon have low loans to deposits ratio which provides
them with the opportunity to increase their loan portfolio especially in the lucrative area
of high-margin retail lending. Lebanese banks are increasingly looking to expand their
retail banking services and initiatives. Such a retail banking market is likely to expand
significantly in coming years given the relatively underdeveloped mass market.
Lebanese banks are also actively widening the range of products on offer - specifically
credit cards, car loans (to a lesser extent), personal loans and other pure fee-based services.
Alternative delivery channels such as ATMs, telephone banking and internet banking are
also areas being exploited, with the latter still at an early stage of development.
Lebanese banks are increasingly looking to expand their retail banking services and
initiatives. Consumer lending is one of the areas with a good potential for growth in the
country. Nevertheless, the entire financial system is vulnerable because of the high level
of dollarization. The deposit dollarization ratio has risen after attack by Israel and stands
at 71.1% as at Jul-06. The main risk resulting from currency mismatches lies in the event
of large depreciations of LL. Currency mismatches can affect banks’ balance sheets
directly or indirectly by undermining the quality of their dollar loan portfolio.
Conclusively, Lebanese banks are expected to benefit from positive economic conditions
currently prevailing in the ME region, provided peace prevailed in Lebanon. Before the
Israeli attack, positive economic environment prevailing in 1H06 had seen growth in
size of balance sheets of the commercial banks (6.6% growth in first six months of
2006). As such, we expect peace to prevail in Lebanon and a healthy competition that
should encourage Lebanese banks to better position themselves amongst the forthcoming
competition by developing their operations further as well as providing their clients with
enhanced range of products and services.
Before the Israeli attack, Lebanese banks had been investing in upgrading their IT
infrastructure and expanding their branch network. Lebanese banks actively widened
the range of products on offer - specifically credit cards, car loans (to a lesser extent),
personal loans and other pure fee-based services.
The banks also diversified their product portfolio concentrating towards the high margin
retail and private banking business. This would yield very positive result in future as
the economy takes a positive step forward. We believe that the retail banking market is
likely to expand significantly in coming years given the relatively underdeveloped mass
market. However, it would be imperative that economy should heal from the impact of
Israeli attack for this to materialize.
The banks in Lebanon have a potential to expand overseas and take advantage of the
presence of large number of Lebanese expatriate in the neighboring countries. Also the

increase in the trade within the Middle East region as well as the other countries augurs
well for the trade finance and corporate banking segments of the Lebanon banks. However,
the entire financial system is vulnerable because of the high level of dollarization and
extreme debt burden on Lebanese economy as such (176.1% of GDP as at Jun-06), and
short term loans making 48.5% of GDP as at Dec-05.
The banks should be cautious regarding the expansion of the loan portfolio in the medium
term until faster economic growth is established and macro-economic conditions are
improved. In the meantime, retail lending activities are expected to grow as the economy
stabilized, while the banks are also trying to increase their fee-based income which is
less susceptible to the interest rate movement.

Insurance Sector
The Lebanese insurance market is characterized by its openness and liberality unlike
that in the other countries of Arab world. The market is dominated by the private players
and government has little interference as a participant. This characteristic has helped the
sector respond to market forces such as supply and demand.
The existing rules and regulations already allow foreign insurers full ownership of local
operations and for the acquisition of a domestic insurer. Competition exists from a large
number of domestic firms as well as from Arab and foreign insurers already present in
the market.
In order to improve the supervision and increase the regulation government introduced a
law In 1999, which took effect in the summer of 2001, to raise minimum capitalization
to LL2.25bn. This had the effect of encouraging mergers and acquisitions, with the result
that the total number of companies declined from 73 in 2001 to 55 in 2004 (figures
as quoted by Infopro Centre for Economic Information). Other provisions of the law
were to set aside further technical reserves as per the line of business (LL1.2bn for
agriculture insurance; and LL350mn for each fire, marine and general accidents) and
show a solvency margin of 10% of gross premiums. The step is seen as strengthening the
sector and securing the sector’s future.
Regulatory Bodies:
Insurance Control Commission (ICC)
This is a supervisory group was formed to ensure insurance laws are properly
implemented. Experts are empowered to inspect company books and report their findings
to the Ministry of Economy and Trade. ICC is entrusted in monitoring and regulating
the insurance sector to protect policyholders from unfair market practices. The ICC is
responsible for monitoring, testing, and enforcing solvency requirements for insurance
companies that are licensed to operate, and is vested with some powers of intervention
over these companies. Thus, it helps in establishing the consumer’s confidence in the
companies providing insurance.
National Council of Insurance Companies
The National Council of Insurance Companies is located in the Ministry of Economy

and Trade, and it supervises the industry. Six of the 11-member group are appointed
Government officials, four are elected insurance practitioners, and one is a representative
from the Insurance Syndicate.

Association of Lebanese Insurance Companies (ACAL)
ACAL was created as per a 1968 insurance law in order to represent the interests of the
insurance companies, to set operational standards, and to submit proposals relating to the
insurance sector to the Ministry of Economy and Trade.
Actuaries
Actuaries use statistical analysis to calculate the cost of future risks and play a major role
in designing pension plans and developing their funding requirements. There are only
eight qualified actuaries in Lebanon, although their number is bolstered by a number of
foreigners. According to the actuarial association, the country should have at least 25
full-time actuaries, with around four employed at the National Social Security Fund. The
want of more actuaries indicates that the sector is still in premature stage.
Products and Premiums
Health, auto and life insurance dominate the underwriting of insurance categories in the
Lebanese market. The business of health insurance requires large outlays for service
infrastructure such as claims-handling technology, and sufficient membership to generate
negotiating clout with service providers.
The insurance sector grew by nearly 11% in 2004, with total premiums reaching
US$577mn. Growth was driven mainly by life insurance, as life premiums grew by
29.5% to reach US$180mn. Non-life insurance premiums grew more slowly, by 4.2%
to reach US$397mn. The insurance market’s growth has been increasingly driven by
the growth of life insurance. Life insurance premiums increased from 21.8% of total
insurance premiums in the year 2000, to 31.2% in 2004. The ratio of life insurance
premiums to total premiums is still far below emerging markets average of about 60%
of total premiums.
Table 16: Life and Non Life Premiums

Figures in US$ mn (unless mentioned otherwise)
Y-o-Y Y-o-Y Y-o-Y
Ratio of
Year Non-life Growth Life Growth Total Growth
Life/Total
(in %) (in %) (in %)
1995 149 - 53 - 202 - 26%
1996 217 45.6 64 20.8 281 39.1 23%
1997 262 20.7 61 -4.7 323 15.0 19%
1998 293 11.8 77 26.2 370 14.6 21%
1999 310 5.8 82 6.5 392 6.0 21%
2000 315 1.6 88 7.3 403 2.8 22%
2001 323 2.5 98 11.4 421 4.5 23%
2002 342 5.9 125 27.6 467 10.9 27%
2003 381 11.4 139 11.2 520 11.4 27%
2004 397 4.2 180 29.5 577 11.0 31%
Source: www.databank.com.lb (Al Bayan magazine)
Ratio of life to total has been improving consistently since 1998 and in 2004 it was 0.3. It
is lower as compared to that of emerging market average of 0.6. However, it is much better
compared to certain markets such as Jordan’s where this ratio was only 0.1 at 2004.

The premiums have been growing at healthy rates for last ten years. For the period of
1995 to 2004 premiums in non-life category have grown at a CAGR of 11.5%, premiums
in life category have grown at CAGR of 14.6% and the for life and on-ife combined the
figures stood at 12.4% for the period.
As an indicator of the maturity of the sector, following are figures for premium per capita
and premium as percentage of GDP for the countries in MENA region:
Table 17: MENA Per Capita Premium and Premium as percentage of GDP
Premium per capita (2004) Premium as % of GDP (2004)
1 UAE US$597 1 Morocco 2.7%
2 Qatar US$353 2 Lebanon 2.7%
3 Bahrain US$347 3 Jordan 2.5%
4 Kuwait US$196 4 Tunisia 2.0%
5 Lebanon US$144 5 Bahrain 1.8%
6 Oman US$91 6 UAE 1.7%
7 Tunisia US$55 7 Oman 1.3%
8 Saudi Arabia US$54 8 Qatar 1.2%
9 Jordan US$45 9 Palestine 1.0%
10 Morocco US$41 10 Kuwait 0.9%
11 Libya US$36 11 Egypt 0.8%
12 Algeria US$14 12 Libya 0.6%
13 Palestine US$11 13 Algeria 0.6%
14 Egypt US$8 14 KSA 0.6%
15 Syria US$6 15 Yemen 0.2%
16 Sudan US$3 16 Syria 0.2%
17 Yemen US$2 17 Sudan 0.1%
Source: www.databank.com.lb (Sigma report, Swiss Re)
Lebanon ranked fifth on premium per capita and first on premium as percentage of GDP,
which stood at 2.7%.
Lebanon posted a real growth rate of 8.0% in total premiums and a nominal growth of
11.0% in 2004 on Y-o-Y basis. Gross premiums per operating company have steadily
improved between 2001 and 2004, rising from US$5.8mn in 2001 to US$10.5mn in
2004. The increase in premium per company comes mainly because of reduction in
number of companies and partly because of increase in premium collection.
Lebanon has better developed life insurance sectors than that of other Arab countries,
which increases the comparative efficiency of the Lebanese market. Consolidation
would bring about improved operational efficiency. The reduced number of firms will
inevitably result in a smaller workforce, leading to higher premiums per employees. In
addition, Insurance regulatory commission legislation is waiting approval, which should
lead to increased business for the insurance providing companies by establishing the
consumer’s confidence.
To conclude, we expect the insurance sector to grow in future, provided we see political
stability in the country and thriving economy; because we see a great scope in terms of
market for the life insurance and until we have stability in country and generally well
going economy, it’s hard to expect to have higher sales of insurance policies.

Industrial Sector
The industrial sector makes about 20% of GDP (as per 2004 figures). Reflecting the free
market economy of Lebanon, the sector is liberal & open, it offer lesser barriers to entry
as compared to other Arab Countries. The prominent sub-sectors are printing, jewellery,
agro food, high fashion and winery.
The manufacturing sector makes major chunk of this sector in the country and is dominated
by the private players. There is no restriction on foreign participation or ownership of
the firm in this sector. The industrial sector is characterized by strong competition from
domestic and foreign participants from Arab and other countries. The industrial sector
consists of large number of small firms, about ¾ of the firms have 4 or lesser employees
and almost all of them don’t have employees in double figure.
The manufacturing sector has been one of the prime contributors to the economy as is
evident from its share in GDP. However, according to UNIDO, Manufacturing Value
Added (MVA) per capita declined from US$565 (at 1995 constant prices) in 1993 to
US$283 (at 1995 constant prices) in 2003. This is in contrast to the trend in the other
developing countries where MVA per capita improved from about US$240 (at 1995
constant prices) in 1993 to aboutUS$360 (in 1995 constant prices) in 2003. On the same
token MVA as percentage of GDP has also gone down for Lebanon from about 17%
in 1993 to about 8% in 2003, while the figure has been about 23% for the developing
countries for the period.
This shows dominance of services sector in the country and more so a need on part of
the country to develop skilled labor force. Major problems faced by the Industrial sector
are inadequate access to funds – due to undeveloped capital markets, slow economic
growth and high interest rates. Others are - High tariffs, High rent and energy costs
and cost attributed to social security contribution. In addition to it, dumping from other
countries poses yet another significant problem. Nevertheless, Industrial sector has been
the highest receiver of subsidized interest.
Table 18: Total Subsidized Interest Loans

Total 1999-2004
Value LL bn % of total Loans
Industry 1080.5 61.3
Tourism 532.9 30.2
Agriculture 121.4 6.9
Specialized Techn. 26.8 1.5
Handicrafts 1.1 0.1
Total 1762.6 100.0
Source: www.databank.com.lb (BDL)
NB: Figure might not add up to total because of rounding
In order to boost the sector, the government reduced the required company contribution
to ‘National Security Fund’. It cut custom duty to take care of high tariffs. Furthermore,
Investment Development Authority (IDA) has established programs to encourage export.
As a result, Lebanon has seen upsurge in industrial exports about US$759.4mn in 2001
to US$1,645mn in 2005. Main export goods are – machinery & mechanical appliances,
base metal, jewellery, foods & beverages followed by chemicals & pharmaceuticals.

Main market of export is Arab countries accounting for more than 50% of the exports.
Lebanon has entered multiple trade agreements with Arab and EU in order to encourage
its exports. A few of them are as follows:
• 1997, Greater Arab Free Trade Agreement (GAFTA) – 10% annual mutual reduction
in tariff that started from 1998.
• Jun-02 - European Mediterranean Partnership Accord – It gave Lebanon a grace

period of five years to eliminate duty, while EU immediately lifted them.
• May-04 - Free Trade Agreement (FTA) with six GCC countries
• Jun-04 - Free Trade Deal with the nations of European Free Trade Association (EFTA).
• 2006/2007 - Potential membership of WTO, it should result in increased access to the

world markets, hence increased trade for Lebanon.
All these are likely to have positive effects on exports and they have shown as increased
export (19.9% CAGR from 2001 to 2005). The figures for industrial export have also
shown similar trends with CAGR of 21.3%.
Figure 21: Industrial Exports

100.0 1800
90.0 1600
80.0 1400
70.0
1200
60.0
1000 $ mn
%
50.0
800
40.0
600
30.0
20.0 400
10.0 200
0.0 0
2001 2002 2003 2004 2005
Industrial export as % of total export Export of Industrial

Source: IMF and Ministry of Industry
The sector is also a major receiver of subsidized interest loans (more than 60% of total
during 1999 – 2004).
To summarize, after baking and tourism, the industrial sector is major driver of the
economy. Hence, it plays a major role in keeping the current account deficit in check.
However, to grow further, the sector needs politically stable environment to enable it to
attract investment and to retain the market as well as to penetrate the market further. As
this sector is the key driver of export (about 90% of the exports for last five years) and
earner of foreign currency for the country, we expect a conducive environment for the
sector in years to come. We can see further reduction in tariff, abolition contribution to
National Social Security Fund and subsidized energy to boost its growth.

Agriculture Sector
Agriculture, the mainstay of rural economy, along with tourism is one of the sectors
hardest hit by the recent conflict with Israel. The direct losses were in the southern part
of Lebanon, but other areas were also affected in the north, in the Beqaa valley. About
2/5 of the Lebanese population is dependent directly/indirectly on Agriculture sector.
The indirect losses affected all agricultural zones in Lebanon, even those untouched
by the Israeli attack, due to loss of marketing infrastructure such as roads and transport
vehicles. In addition to it, the foreign labor fled, which would result in loss of manpower
for the sector even after the attack. The agricultural and fisheries crises were aggravated
by the blockade on the airport and maritime ports and the cluster bombs in agricultural
fields and pastures.
According to PR Newswire, Food and Agricultural Organization (FAO) is currently

helping Lebanon speed up the recovery of its agriculture sector. FAO’s initiatives in
support of Lebanon’s recovery strategy include an agricultural sector damage and needs
assessment mission that is currently under way through a Technical Cooperation Project,
while another project is aimed at strengthening the veterinary services to prevent and
control highly pathogenic Avian Influenza outbreaks, thereby preventing serious losses
to poultry raisers and rural economies, as well as safeguarding human health.
Lebanon uses 13.7% of its land for crops and 16.3% of its land is arable i.e. can be used
for farming purposes. Lebanon’s agriculture sector produces about 11% of the GDP (as
in year 2005). According to the Ministry of Agriculture, Lebanon has around 200,000
farmers, the vast majority of whom are males (92%).
Compared to other countries in the region, there is generous water supply. Most rivers
run throughout the year. Total annual rainfall averages 8,600mn cubic meters (mcm).
However, evaporation and runoff reduce the total available surface water to 3,365mcm.
Lebanon’s arable land combined with availability of water to irrigate the crop makes it
one of the potentially agriculturally rich countries, provided it gets enough support from
sovereign to finance the infrastructure required.
Main challenges faced by the sector are degrading infrastructure, migration of people
from rural to urban area, fierce competition from imports and lack of adequate funding
or support from the government (government has been allocating less than 0.5% of its
budget in last few years). However, the sector has been receiving much required support
from the government off late; Industrial Development Authority of Lebanon (IDAL) has
introduced two programmes namely- Export Plus Program and Agro Plus Program
Export Plus Program
The government launched the program in Aug-01. Export Plus is a government program
to help farmers market their products overseas. The Investment Development Authority
of Lebanon (IDAL), which administers the scheme, bases Export Plus on three main
features: financial support, quality control, and marketing. Financial support for transport
costs varies from LL50,000 to LL200,000 per ton, depending on the destination.

Agro Plus Program
IDAL is also behind the Agro Plus program, which focuses on products such as canned
food and juice. Like Export Plus, it will provide subsidies and assist in improving quality,
marketing, and production costs. These two programmes have been a success as evident
from the increasing export of agricultural products.
Figure 22: Export of agriculture Products

2,000
1,800
1,600
% of total export
Export ($mn)
1,400
1,200
800
600
400
200
-
2001 2002 2003 2004 2005
Total Export Agriculture Produce Export % of total export
Source: www.databank.com.ib (Ministry of Agriculture) & IMF

**2005 figures are Estimates
Major products for agriculture export are – tobacco leaves, non alcoholic beverages and
sugar confectionary.
Agriculture accounts for about 7% of subsidized interest loans (1999 – 2004), which
is low for a sector having so many people dependent on it. The sector definitely needs
better commitment from the government and definite policies for its future prospects.
In the coming days, performance of the sector would depend on how quickly peace is
stabilized and arable land is made ready for the purpose of farming. In addition, the sector
would need to have its foreign labors back sooner than later to get going. Nevertheless, as
apparent from the growth attained by the sector in last four years and a few programmes
introduced by the government, we can expect a better future for the agriculture sector.

Real Estate & Construction Sector

The sector is one of the prominent sectors in Lebanese economy. The sector’s growth
is obviously dependent on general well being of Lebanese economy and its growth.
The sector has gone through highs and lows in last ten years, reflecting the growth in
economy. Construction permits granted reduced sharply during Jan-97 to Dec-2000 by
58% as compared to that during Jan-95 to Dec-97. However, construction permits, the
leading indicator of construction activities have grown consistently during 2001-2004.
Year 2005 saw 4.97% drop as compared to 2004 on Y-o-Y basis on the backdrop of
sluggish growth in economy (1.3% growth in nominal GDP).
Demand in the sector
According to International Fairs & Promotions (IFP), figures released by the Lebanese
Directorate of Real Estate show that property taxes amounted to LL123.8bn, or
US$82.1mn, in the first four months of 2006. Property taxes rose by a significant 75.6%
from LL 70.5bn in the same period of the previous year mainly due to a 164.2% rise
in property taxes collected in Beirut. The rise in property taxes is related to the real
estate boom in Lebanon and the region characterizing the period 2001-2005. According
to RAMCO, the Lebanese contracting and construction firm, the particular increase
in property taxes in Beirut may be attributed to increasing Arab investments in the
downtown district, which have been steadily rising since 2001 and continued to do so in
the aftermath of the assassination of former PM Rafik Hariri. Indeed, sales of property to
Arab investors in the Beirut downtown district in 2005 alone amounted to approximately
one million square meters, exceeding all non-Lebanese Solidere property sales in the
past seven years.
In addition to this, Arab investors bought more than two million square meters in
Lebanon in 2005 nationwide, compared to 1.7mn square meters in 2004 and 700,000
square meters in 2003. Furthermore, large transactions by Arab investors increased
by a huge 140.5% in three years, from 42 in 2002 to 101 in 2005. The number of large
transactions by Arab investors, particularly in the Mount Lebanon region, amounted to
272 between 2001 and end-2005 accounting for over 5.7mn square meters.
It is notable that Solidere, the largest real estate developer in Lebanon, aggressively
bought back its share in Dec-04, expecting a rise in property market.

Table 19: Percentage Share of a City in Value of Property Transaction

YTD,
2000 2001 2002 2003 2004 2005
Apr-06
Beirut 31.4% 28.1% 29.6% 23.5% 37.8% 32.6% 35.6%
Baabda, Aley, Chouf 19.0% 21.0% 21.9% 21.5% 24.0% 23.0% 24.6%
Kesrwan, Jbeil 12.3% 12.7% 12.0% 8.6% 8.5% 9.0% 10.8%
Metn 21.3% 19.8% 21.6% 14.5% 14.7% 20.2% 15.2%
Tripoli, Akkar 4.2% 5.7% 5.4% 3.2% 4.1% 3.6% 4.7%
Batroun, Koura, Ehden, Bsharri 3.0% 3.3% 2.9% 1.8% 2.1% 2.8% 2.7%
Bekaa 3.0% 3.8% 3.3% 2.3% 3.4% 2.3% 2.6%
Saida 5.0% 4.6% 4.3% 23.6% 4.1% 5.1% 2.4%
Nabatieh 0.9% 1.0% 1.3% 0.9% 1.3% 1.4% 1.4%
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: www.databank.com.lb (Real Estate Registry)
As we can see from the table above that activity for real estate is dominated by Beirut,
followed by Metn and Baabda, Aley, Chouf.
Table 20: Value of Property Transaction (US$)

YTD,
2000 2001 2002 2003 2004 2005
Apr-06
Beirut 865,148 740,904 956,041 1,017,653 1,643,290 1,618,008 524,289
Baabda, Aley, Chouf 522,431 553,986 706,227 934,007 1,043,763 1,143,805 362,041
Kesrwan, Jbeil 337,110 333,416 388,920 374,978 369,338 449,079 158,560
Metn 584,793 521,406 698,619 629,532 639,871 1,001,335 224,326
Tripoli, Akkar 114,182 149,499 172,834 140,559 177,801 180,177 69,218
Batroun, Koura,
82,642 87,119 93,117 79,592 89,289 137,257 39,855
Ehden, Bsharri
Bekaa 82,482 100,854 107,381 101,530 149,761 114,962 37,614
Saida 137,953 122,374 138,404 1,025,494 178,816 255,193 35,878
Nabatieh 25,170 25,512 40,350 37,411 54,161 68,688 20,830
TOTAL 2,751,911 2,635,070 3,228,975 4,338,756 4,348,063 4,968,504 1,472,611
It is obvious that real estate sector has grown well during the period, backed by increased
demand for housing in Lebanon due to high liquidity in the region. In addition to it, tourism
also has done well, which has been other contributor to the sector. This is supported by
the fact that value of property transaction has gone up by 70% in real terms (CAGR of
10.9%) and 80% in nominal terms (CAGR of 12.6%) during the period 2001-05.

Table 21: Number of Real Estate Transactions

YTD,
2000 2001 2002 2003 2004 2005
Apr-06
Beirut 4,346 4,667 4,826 4,995 5,631 5,545 1,546
Baabda, Aley, Chouf 11,154 11,735 11,841 13,465 15,166 14,770 4,583
Kesrwan, Jbeil 5,662 8,418 5,815 5,772 5,549 6,312 1,816
Metn 7,573 7,342 7,784 7,640 8,456 8,234 2,434
Tripoli, Akkar 4,346 4,376 4,861 5,068 5,504 5,612 1,638
Batroun, Koura, Ehden, Bsharri 4,482 4,433 4,543 4,519 4,676 4,299 1,216
Bekaa 5,141 6,127 6,348 6,610 6,116 5,888 1,731
Saida 3,886 4,127 4,657 4,686 4,764 5,041 1,394
Nabatieh 2,284 2,765 3,095 2,660 3,220 3,088 982
TOTAL 48,874 53,990 53,770 55,415 59,082 58,789 17,340
It can be seen that number of transaction has gone up by 20% during the period 2000-
2005. The first four months of 2006 were also good, however, demand for housing by
GCC and other Arab countries will take sharp blow post Israeli attack and we expect
recovery in the demand from this region only next year onwards. Hence, demand for
real estate is likely to fall in 2006 as compared to previous years. The only demand for
housing will come from reconstruction activity forged by the government of Lebanon.
Table 22: Value Per Transaction (US$)

YTD, % change from
2000 2001 2002 2003 2004 2005
Apr-06 2000 to Apr-06
Beirut 199.1 158.8 198.1 203.7 291.8 291.8 339.1 70.4%
Baabda, Aley, Chouf 46.8 47.2 59.6 69.4 68.8 77.4 79.0 68.7%
Kesrwan, Jbeil 59.5 39.6 66.9 65.0 66.6 71.2 87.3 46.7%
Metn 77.2 71.0 89.8 82.4 75.7 121.6 92.2 19.4%
Tripoli, Akkar 26.3 34.2 35.6 27.7 32.3 32.1 42.3 60.8%
Batroun, Koura, Ehden,
18.4 19.7 20.5 17.6 19.1 31.9 32.8 77.8%
Bsharri
Bekaa 16.0 16.5 16.9 15.4 24.5 19.5 21.7 35.4%
Saida 35.5 29.7 29.7 218.8 37.5 50.6 25.7 -27.5%
Nabatieh 11.0 9.2 13.0 14.1 16.8 22.2 21.2 92.5%
Average Value 56.3 48.8 60.1 78.3 73.6 84.5 84.9 50.8%
Following are the notable observations:
• Average value per transaction for the Lebanese real estate market has increased by
50% during the period 2000- Apr-06.
• Average value per transaction is among the highest for Beirut, Metn, Kesrouan,
Jbeil
• Saida is the only city that has seen decline in average value per transaction during the
period.

Coming back to 2006, the value of transactions in Lebanon improved by 43.7% to

LL1,472bn in the first four months of 2006 relative to the same period of the previous
year. The average property transaction value rose by 8.4% year-end to April when
compared to the corresponding period in 2006.
These figures are evidence enough of booming demand in Real Estate sector of Lebanon.
Though, the demand might fall in 2H06 because of effect of conflict with Israel, we
expect the sector to bounce back in 2007, provided peace prevailed in the region and
GGC economy remain as strong as it has been during last three years.
Determinants of Real Estate activity
Main drivers of the sector are – low real interest rate, increase in population, growing
banking sector, availability of mortgages, booming tourism sector and above all healthy
growth in economy in GCC region and in Lebanon itself, which should create high
liquidity in the region.
Loan rate in LL has been falling consistently for last five years, it has fallen from 16.8%
in 2001 to 10.1% in 2005. It notched up a bit in 1H06 to 10.2%. Banking sector has
managed to hang in during the period as discussed in previous sections. Tourism in
Lebanon has done well in last five years as evident from increasing number of tourists
every year except 2005. GCC economy has been doing exceptionally well for last three
years on the back of rising oil prices and in 2005 the region has grown at 6.9% in real
term; It is expected to grow at 5.8% in 2006 (as per ESCWA estimates).
Indicators of construction activities- the supply side
Cement delivery that reflects current activities in construction sector showed consistent
growth during last five years except for year 2002.
Figure 23: Cement Deliveries

3.50 50.0%
3.00 40.0%
2.50
Deliveries (mn of tons)
30.0%
% Change
2.00
20.0%
1.50
10.0%
1.00
0.50 0.0%
0.00 -10.0%
2001 2002 2003 2004 2005 May-06 (5
Months)
Cement deliveries (million of tons) % change for the comparable period
Source: BDL

Cement deliveries enjoyed Y-o-Y growth of 11.4% in 2005. 2006 was also a good year
(until the attack by Israel) as for first five months we saw 43.2% increase in deliveries
on Y-o-Y basis. 2H06 is likely to see fall in demand. However, We expect the demand
to pick up as the peace settled in the region.
Construction permits, a leading indicator of the activities in construction sector showed

consistent growth during last five years except for year 2002.
Figure 24: Construction Permits

10.00 80.00%
9.00 70.00%
8.00 60.00%
mn square meter
7.00
50.00%
% change
6.00
40.00%
5.00
4.00 30.00%
3.00 20.00%
2.00 10.00%
1.00 00.00%
0.00 -10.00%
2001 2002 2003 2004 2005 May-06 (5
Months)
Construction permit for million of square meters % changes for the comparable period
Source: BDL
As apparent from the figures, the first five months of 2006 were good for real estate
and consumer confidence was great (74.8% jump in area for which construction permits
granted in first five months of 2006 as compared to corresponding period last year,
2005)
Real estate to grow…

Lebanon’s Real Estate & Construction Sector has been doing well as indicated by more
than 12% compound growth in value of transactions in last five years (2000 - 2005).
The growth is driven by investment from the Arab investors and the trend is likely to
continue in near future as the Middle East economy is likely to do well, riding the price
waves of its oil pool.
Both the construction permits and cement delivery figures show that construction
activities were upbeat during 1H06. However, the attack by Israel had negative impact
on it and we expect the figures to decline for 2H06. Nevertheless, as fundamentals for
the real estate and construction sector remains sound, we expect the sector to do well in
coming years.

Tourism Sector
Tourism sector is the most important sector for Lebanese economy as it drives growth
for other sectors such as, real estate and transport, banking and retail sectors. Tourism
accounts for about 12% of GDP as per latest available figures. The country is located
at the crossroad of three continents and offers a wide diversity of archaeological and
cultural tourist attractions. Furthermore, the climate permits two distinct seasons: winters
in the mountains and summer on the beaches. The overall number of tourists visiting
Lebanon has steadily increased since 2000 to reach 1mn in 2003 and 1.3mn in 2004.
2005 saw a 11% dip in number to about 1.16mn due to tension following Mr. Hariri’s
assassination. The number of visitors in the first five months of 2006 were up by close
to 70% (Y-o-Y basis) to reach 0.46mn. As per Ministry of Tourism estimates prior to
Israeli attack, Lebanon was expecting 1.6mn tourists this year. Now, the expected figure
could be around a little over half of that for the year.
The average growth rate of tourism receipts was estimated by the World Tourism
Organization (WTO) to be 8.2% over the 1995-2000 period. The WTO estimates that
tourism in Lebanon generated revenue of US$955mn in 2002 and US$1,015mn in 2003,
with the trend clearly showing a strong increase in revenues.
Hotel occupancy, an indicator of well being of the tourism industry has been around 60%
to 70% in Lebanon during last 10 years. Hotel occupancy was about 90% in Jul-06 pre
attack; however, post attack it has come down to as low as 20%. Average occupancy rate
was 33%, which was about 40% lower than that achieved in 2005. Lebanon has proposed
tax relief and other measures to help its tourism industry recover from direct and indirect
losses, which the tourism minister estimated are around US$1bn.
Hospitality Indicators for MENA region:
Lebanon’s hotel occupancy is very much close to the average of region’s and behind only
two country’s in the region namely Egypt’s and UAE’s. This indicates competitiveness
of the Tourism Industry in Lebanon as compared to the other countries in the Arab world
and the sector is likely to do well in the future, provided peace prevailed in the region.
Table 23: Average Annual Room Occupancy

Average annual room occupancy 1997-2004
1997 1998 1999 2000 2001 2002 2003 2004
Bahrain Manama 63% 58% 56% 59% 62% 64% 64% 72%
Egypt Cairo-City Center 75% 69% 79% 78% 66% 68% 67% 78%
Cairo-pyramids 66% 47% 70% 76% 61% 62% 61% 73%
Jordan Amman 61% 56% 56% 59% 44% 45% 57% 72%
Kuwait Kuwait City 46% 46% 47% 46% 49% 53% 84% 64%
Lebanon Beirut 61% 61% 58% 61% 55% 55% 59% 71%
Oman Muscat 71% 56% 57% 55% 62% 59% 57% 69%
Qatar Doha 78% 72% 61% 58% 56% 60% 72% 72%
Saudi Arabia Jeddah 58% 60% 59% 63% 59% 57% 53% 54%
Riyadh 62% 63% 62% 60% 61% 65% 64% 59%
Syria Damascus 70% 69% 69% 66% 65% 67% 65% 69%
UAE Abu Dhabi 65% 66% 64% 67% 67% 68% 68% 82%
Dubai 73% 70% 70% 74% 71% 76% 79% 86%
Average 66% 61% 65% 68% 64% 66% 66% 72%
Source: www.databank.com.lb (HVS international research)

RevPAR (arrived at by multiplying the occupancy rate with average rent per room), is an
indicator of profitability of the hotel business. The figure improved a great deal in 2004
by 30.8% as compared to an average of 17.7% in the MENA region; the same has grown
at CAGR of 5.6% during 1997-2004, while average for MENA has been 2.8%.
Table 24: Profitability of the Hotel Industry (RevPAR)

RevPAR Performance 1997-2004 (US$)
% change CAGR
1997 1998 1999 2000 2001 2002 2003 2004
03/04 (1997-04)
Bahrain Manama 56 54 57 62 64 76 78 95 21.8 7.8
Egypt Cairo-City Center 58 60 62 67 56 52 50 59 18.0 0.2
Cairo-pyramids 29 31 35 50 40 23 23 30 30.4 0.5
Jordan Amman 50 46 40 40 30 29 39 53 35.9 0.8
Kuwait Kuwait City 77 79 79 82 89 114 196 147 -25.0 9.7
Lebanon Beirut 81 81 75 82 76 83 91 119 30.8 5.7
Oman Muscat 72 54 52 47 50 44 38 57 50.0 -3.3
Qatar Doha 79 71 69 67 59 60 73 105 43.8 4.2
Saudi Arabia Jeddah 70 69 68 77 67 59 55 62 12.7 -1.7
Riyadh 69 70 72 69 67 70 67 58 -13.4 -2.5
Syria Damascus 82 77 72 65 61 63 66 69 4.6 -2.4
UAE Abu Dhabi 72 64 63 60 60 61 59 75 27.1 0.6
Dubai 92 75 73 78 73 84 89 124 39.3 4.4
Average 60 58 56 60 59 59 62 73 17.7 2.8
In summary, hotel industry in Lebanon has done better as compared to that in most of
other countries in the MENA region in terms of profitability. RevPAR for Lebanese
hotels in 2005 fell due to low occupancy rate (about 50%) following the political turmoil
post Feb-05.
Table 25: Beirut Hotels Occupancy

Beirut Hotel Occupancy 2005
Class Year Average rooms Average beds
5 intl 2005 39.9% 54.0%
4A 2005 32.0% 43.9%
4B 2005 32.3% 39.9%
3A 2005 19.7% 19.1%
3B 2005 43.8% 47.3%
2A 2005 50.1% 28.8%
Source: www.databank.com.lb (Ministry of Tourism)
The occupancy rate fell from 71% in 2004 to around 50% in 2005. This was on account
of turmoil and uncertainty created in aftermath of assassination of Mr. Hariri.

Table 26: Number of Hotel Rooms

1995 1998 1999 2000 2001 2002 2003 2004
10,217 10,843 11,232 12,485 12,968 14,039 14,731 16,171
Number of hotel rooms has gone up even in lean years such as 2002 and 2003, which
shows confidence of the business people in the tourism industry of Lebanon. Lebanon
hospitality propose even more hotel rooms in next three years.
Table 27: Proposed Hotels

Proposed Hotels-Lebanon
Number of
Hotel name Opening date Location Status
rooms
Metropolitan hotel 150 2006 Beirut suburb Under Construction
Four Seasons 230 2007 Solidere Under Construction
Grand Hyatt 300 2007 Solidere Approved
Raocuhe Rotana suites 176 2007 Beirut central Under Construction
Solidere Rotana suites 150 2007 Solidere Early construction
Boutique design hotel 100 2008 Solidere Early construction
Old Holiday Inn 300 2008 Beirut central Confirmed
Landmark hotel 300 2008 Solidere Confirmed
Five-Star hotel 250 2008 Raouche Confirmed
Saint-Georges hotel 250 2008 Beirut central Under renovation
Ritz-Carlton 90 2009 Solidere On hold
Hilton Beirut 250 2009 Beirut central Confirmation
• Lebanon’s hotel industry is going to add 2546 additional rooms in next three years,
which yet again shows confidence of the industry in its future.
• Most of them will be located in Beirut and Solidere. Hence, Beirut would retain
its position of economic activity hub in coming years. Thus, we expect increase in
construction activity in Beirut and real estate prices to go further up there.
Table 28: Top Arrivals (Region-wise)

YTD,
Regions 2000 2001 2002 2003 2004 2005
Apr-06
Africa 11,725 14,387 19,545 22,398 20,180 16,160 7,127
Americas 89,962 104,827 108,329 120,249 152,075 136,907 48,524
Arab countries 300,541 361,772 420,695 438,203 545,150 451,430 192,614
Asia 75,232 113,331 125,276 134,164 173,897 177,809 84,557
Europe 228,728 246,978 250,546 266,691 338,475 316,083 113,344
Oceania 31,951 30,279 31,185 32,847 47,343 39,826 13,172
Others 3,509 2,171 888 1,241 1,349 1,309 375
Total 741,648 873,745 956,464 1,015,793 1,278,469 1,139,524 459,713
% Change in number NA 17.8% 9.5% 6.2% 25.9% -10.9% NM
of visitors Y-o-Y
NM – Figures are not comparable, as we have only four months data for 2006

Since 2001, we have seen increase in numbers of visitors to Lebanon, except for year
2005 when we saw a dip of 10.9% in number of tourists on the backdrop of turmoil
created post assassination of Mr. Hariri in Feb-05.
Tourist mix reaching Lebanon is diverse. People from all over the world reach Lebanon.
However, the percentage of people visiting from Arab countries dominates the list.
Table 29: Tourists Percentage (Region-wise)

2006 YTD,
Regions 2000 2001 2002 2003 2004 2005
Apr-06
Africa 1.6% 1.7% 2.0% 2.2% 1.6% 1.4% 1.6%
Americas 12.1% 12.0% 11.3% 11.8% 11.9% 12.0% 10.6%
Arab countries 40.5% 41.4% 44.0% 43.1% 42.6% 39.6% 41.9%
Asia 10.1% 13.0% 13.1% 13.2% 13.6% 15.6% 18.4%
Europe 30.8% 28.3% 26.2% 26.3% 26.5% 27.7% 24.7%
Oceania 4.3% 3.5% 3.3% 3.2% 3.7% 3.5% 2.9%
Others 0.5% 0.3% 0.1% 0.1% 0.1% 0.1% 0.1%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
It is people from Arab and Europe that makes major chunk of the visitors; they together
make 2/3 of the visitors to Lebanon and Arab countries account for 2/5 of the visitors;
another important group of tourists are Americans that make about 12% of the tourists.
It is obvious that the tourism industry in Lebanon depends on the well being of the Arab
countries and we expect these countries to do well in near future in view of their oil
opulent economies for most of them.
Table 30: MENA Tourists Receipts

MENA Region Tourism Receipts in US$ mn
Figures in US$ mn Growth rate (%) Market share (%)
2000 2001 2002 2000 2001 2002 2000 2001 2002
Middle East 12,219 11,795 12,963 9.1 -3.5 9 100 100 100
Lebanon 742 837 956 10.3 12.8 12.4 6.1 7.1 7.4
Source: www.databank.com.lb (World Tourism Org.)
The most notable points observed are:
• Lebanon’s tourism industry has grown at a better rate as compared to the rest of
MENA region’s.
• Lebanon has increased its market share from 6.1% to 7.4% during 2000 to 2002
• Lebanon’s tourism sector is resilient and preferred destination for the people in the
region; the sector grew by 12.8% in 2001 when whole MENA region’s showed
negative growth (-3.5%)

Tourism industry has been the second highest receiver of soft loans after the Industrial
sector. It received a significant chunk of about 30% during 1999-2004. Besides this, it
also gets investment inflow from people outside of Lebanon.
Table 31: Subsidized Interest Loans

Total 1999-2004
Value LL bn % of total loan
Industry 1080.5 61.3
Tourism 532.9 30.2
Agriculture 121.4 6.9
Specialized Techn. 26.8 1.5
Handicrafts 1.1 0.1
Total 1762.6 100.0
Source: www.databank.com.lb (BDL)
NB: Figure might not add up to total because of rounding
A ‘V’ shaped recovery expected...

Except for the dip in 1H05 post assassination of Mr. Hariri, Lebanese tourism sector
had been doing well since 2000 until Jul-06, when Israel attacked Lebanon. Number
of tourists in 2006 was expected to surpass previous highs to reach 1.6mn in 2006.
The industry did well for last few years as Lebanon is a spot of attraction for the Arab
Tourists (more than 40% of the tourists visiting to Lebanon are from Arab Countries).
Lebanon offers great weather and open culture that attracts people from all over the
world besides Arab world. Lebanon hospitality industry is expanding as indicated by
number of proposed hotel rooms (2,546) in next three years. The average growth in
number of hotel rooms was 7.6% for 2004-06, while CAGR for the period of 1995-2004
was 5.2%. This indicates that industry expects better growth in years to come.
In light of these facts, we conclude, though, Lebanon tourist industry will be hit badly
during 2006 with expected lost revenue of US$1bn post Israeli attack . However, it is
likely to bounce back in 2007 and 2008 provided the peace prevailed in the region.

Stock Market and Corporate Performance

Beirut Stock Exchange
Beirut Stock Exchange (BSE) was established in 1920. The market was non functional
for very long time due to civil war and it resumed trading on Jan–96. The market
capitalization at that point of time was US$386.2mn and number of securities traded
was only four. Though the market has grown fairly since then, currently (as at Sep-06)
having 21 securities traded and 16 listed companies, the market at BSE is still in nascent
stage and is one of the smallest stock markets in the Middle East. Out of the 16 listed
companies, six are banks, five are investment funds and three are Industrials. BSE has
market capitalization of US$7.1bn as at September 30, 2006. Out of this, about 46% is
made up by Solidere, the real estate company.
The number of brokers came down to 13 at the end of 2005 from 15 at the beginning of
2001. Trading is computerized but is based on a price fixing system which takes place
once or twice a day, with a limit up or down of 5%. Clearing and settlement is performed
by Midclear S.A.L., a subsidiary of the central bank (BDL).
Structure and Maturity of the BSE Market
Following are the divisions of the market:
An Official Market for companies with a capital equivalent to US$3mn in Lebanese

pounds or more and that have been established for at least three years. These companies
need to float a minimum of 25% of their shares to the public and owned by at least 50
shareholders.
A Junior Market for companies with a capital equivalent to US$1mn in Lebanese

pounds or more and they also need to float a minimum of 25% of their shares to the
public and owned by at least 50 shareholders.
An Unlisted / Over the Counter Market for companies with a capital equivalent to at
least US$100,000 in Lebanese pound.
Table 32: Market Capitalization of BSE and Weights of the Companies

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06
Market Capitalization of BSE
9.2 7.3 7.5 7.5 7.3 7.2 6.1 6.7 7.1
US$ bn
Change in Market Cap. Over
87.0% -20.9% 2.0% 0.9% -2.8% -1.1% -15.0% 9.8% 5.7%
previous month
Solidere’s share in Market Cap. 46.4% 45.4% 48.2% 49.4% 50.2% 50.4% 46.7% 46.1% NA
Byblos Bank’s share 18.4% 17.6% 16.1% 15.2% 14.2% 14.2% 14.6% 13.5% NA
Rest of five Bank stock’s share 25.1% 26.8% 25.5% 26.0% 25.9% 25.7% 28.6% 28.9% NA
Rest of nine companies share 10.2% 10.2% 10.3% 9.4% 9.7% 9.7% 10.0% 11.5% NA
Source: Beirut Stock Exchange

BSE is an extremely volatile and immature market, as evident from very large variation
in market capitalization month to month (market cap increased by 87% in month of
Jan-06), the small number of listed companies (16 only) and the dominance of just two
companies in the whole market cap; Solidere and Byblos Bank together make 60% of
market capitalization. However, the share of both together has fallen a little since Jan-06
from 64.8% to 60% in Aug-06. Blom index (representative index for the BSE) fell from
1882.9 to 1364.1 (a fall of 27.6%) during the same period.
Table 33: Trade Summary 2001-2006

2006 (until
2001 2002 2003 2004 2005
August)
Transactions in the year 4,750 3,209 3,494 7,581 16,228 35,904
Number of listed companies 14 13 14 16 15 16
Value traded (US$ mn) 53.0 118.9 131.0 197.8 923.4 1,771.1
Volume traded (mn) 14.7 26.2 23.5 24.5 89.7 118.9
Market Cap. Year End (US$ mn) 1,248.3 1,395.3 1,503.0 2,330.7 4,917.2 6,743.2
Market Cap/GDP 7.3% 7.6% 7.6% 10.7% 22.3% 30.6%
Turnover Ratio (Annual) 3.7% 9.0% 9.0% 10.3% 25.5% 35.2%
% Gain in Market Cap over last Year -20.9% 11.2% 7.9% 55.3% 111.2% 37.0%
The notable observations are:
• Turnover ratio has been improving consistently from 2001 to Aug-06 it has risen
from very lean figure of 3.7% to a fair figure of 35.2%. However, this is still very
low as compared to other markets such as KSA (more than 150%). This indicates low
liquidity for the BSE market.
• Market cap/GDP ratio has also improved a great deal from a dismal 7.3% in 2001
to somewhat recognizable figure of 30.6% at Aug-06, which improved further to
reach 32.2% as at Sep-06. Nevertheless, market cap/GDP for BSE is still very low as
compared other emerging economy. The reason that Lebanon has very low market
Cap/GDP is that BSE has a few listed companies (only 16) while any relatively
developed market even in Arab world has close to 100 companies.
• BSE index gained 0.05% (Dec-05 to Oct-06) as compared to Egypt’s index, which
gained 5.4% during the period and -1.5% for Bahrain, and 18.0% for Oman’s indices,
which is the highest gainer this year among GCC.

Table 34: Trade Summary

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Total YTD,
Aug-06
Value of Traded Shares (US$ mn) 450.0 371.3 358.5 74.5 250.0 71.0 82.5 113.2 1,771.1
% Change in value of traded -17.5% -3.5% -79.2% 235.5% -71.6% 16.2% 37.2% NA
shares over Last Month
Volume of Traded Shares (mn) 27.8 18.5 26.4 5.6 22.9 5.0 3.8 9.0 118.9
% Change in Volume over last month -33.4% 42.6% -78.7% 308.6% -78.2% -24.8% 138.4% NA
Turnover Ratio (Monthly) 6.4% 4.5% 4.9% 1.0% 3.4% 1.0% 1.2% 1.8% NA
Market Capitalization of BSE US$ mn 9,234.0 7,304.2 7,447.5 7,516.6 7,303.6 7,226.2 6,142.2 6,743.2 NA
%Change in Market Cap. over 87.8 -20.9 2.0 0.9 -2.8 -1.1 -15.0 9.8 -27.0
Previous Month
The notable observations are:
• Despite the impact of Israeli attack, we have seen increased value of traded shares in
month of Jul-06. However, volume dropped in the month.
• Turnover ratio for the month was better in Jul-06 as compared to the previous
month.
• Market capitalization fell in the month of July, however, it bounced back in August
(gained 9.8%) and it continued up-move in September by gaining 5.7%.
The investors/traders at BSE seemed resilient to the bad condition in the month of July
and August, during and after the attack by Israel.
Relevant regulations passed in last twelve months
• Securitization - Legislation allowing the securitization of financial assets passed in

Dec-05. This will improve the efficiency of financial market and make availability of
finance easier to creditors as with securitization, it would be possible to trade the debt
paper and it would be possible to transfer the risk from one party to the other.
• Collective investment schemes - Legislation giving legal status to investment funds

passed in Dec-05
• Bank Mergers - Amendment to the law regulating the central Bank’s role in
facilitating mergers approved by Parliament in Feb-05. This would improve the
operational efficiency among banking sector by gaining advantage through economy
of scale and by enhancing chances of cross selling of the products to the customers.
In summary, it presents an opportunity for a stronger banking system, which in turn
could help in building the stock a stronger stock market.

Regulations pending
• Capital markets. Draft law on capital market development and the establishment
of a regulatory commission with powers to oversee the Beirut Stock Exchange
pending in Parliament. This would ensure enforcement of rules and regulations and
develop confidence of the investors in the stock market, which in turn would help in
development of the stock markets at Lebanon.
• Insider trading. Draft legislation outlawing insider trading pending in Parliament.
Figure 25: Movement of BSE Index

2000
BSE peaked to 1882.9 points at Jan-
1800
06; Market Cap being US$9.23bn
1600
1400
1200
Index
1000
800
600
400
200
0
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Blom Index
Source: Bloomberg
The market opened at 447.9 points on Jan-04 and closed at 441.9 points at the end of
month, losing 1.3%. On the back of good economic growth (5% real growth), market
gained smartly during next nine months and reached 632.9 points on Sep-04, while, it
remained flat until Feb-05, hovering around 650 points mark and closed at 638.4 points
at the end of Feb-05, registering a fall of 27.3 points or 4.4% fall for the month of Feb-
05. The market rebound next month and closed at 688.9 points on Mar-05. It gained
further during Apr-05 to reach 743.4 points. It continued its upward march and ended
year 2005 with a gain of 105.6% Y-o-Y basis at 1309.4 points.
Year 2006 has been an epitome of volatility for the BSE with all time highest gain of
43.8% (month on month basis) during Jan-06 to 1882.9 points, followed by all time
sharpest loss of 18.8% (month on month basis) or 354.3 points to 1528.6 points as at
the end of Feb-06. Market recovered only marginally (by 2.8%) during next two months
to reach 1574.0 points by Apr-06. It lost more than it gained during March and April
to reach 1517.7 points by the end of Jun-06. Such extreme volatility is explained by
small size of the market and little depth in it (only 16 companies). In addition about
half of market capitalization is made by one company only - Solidere that makes BSE
vulnerable to volatility.

The attack by Israel created panic at the BSE and market lost 15.4% during Jul-06 to
reach at 1283.1 points. The market is yet to recover fully and trading at 1310.0 points as
at Oct 31, 2006.
Comparison of BSE with other markets:
Lebanon appears to be one of the expensive markets in terms of P/E multiples (18.6 as at
30 Sep-06) reigning at the stock markets of the Arab Countries. Only Egypt (20.7) and
KSA (23.4) were quoted at higher multiples. Markets such as Kuwait (12.3) and UAE
(14.9) offer better opportunity both in terms of value (trading at lower P/E as compared
to Lebanon) and in terms of risk profile (stable and flourishing economies).
Figure 26: P/E Multiple (Sep-06)

25
20
15
P/E (X)
10
0
Lebanon Kuwait KSA UAE Qatar Bahrain Jordan Egypt
P/E
Source: Global Research & Stock Exchanges
* P/E for Lebanon is an estimated figure
Market capitalization/GDP is considered one of the important indicators of valuation

of the stock market of a country. Market capitalization/GDP emphasizes the efficiency,
integration and the penetration of the market i.e. the ratio of the companies that is listed
on the stock market and the total companies functioning in the country.
Figure 27: Market Cap/GDP (Sep-06)

300.00
250.00
200.00
150.00
%
100.00
50.00
0.00
Lebanon Oman Egypt KSA Qatar Bahrain UAE Kuwait Jordan
Market Cap/GDP
Source: Global Research

Lebanon is one of the cheapest markets in terms of market cap/GDP ratio (32.2%).
However, it is due to the fact that BSE has very less number of listed companies as
compared to the other bigger markets such as KSA (market cap/GDP 148.2%), UAE
(market cap/GDP 182.1%) and Kuwait (market cap/GDP 189.3%). Lebanon market cap/
GDP is quite close to that of Oman’s market (market cap/GDP 41.6%), which is also
very small as compared to other Arab markets.
Most of the markets in Arab countries have performed worse than in year 2005, with
Oman (gain of 18.0%, YTD, Oct-06) being the best among the lot.
Figure 28: Percentage Change in Indices Values (YTD, Oct-06)

20
10
(0.05%)
0
-10
-20
%
-30
-40
-50
-60
Beirut TASI MSM DSM NBAD Kuwait Bahrain Egypt DFM Jordan
(Hermes)
% Change
Source: Global Research, Zawya & Bloomberg
BSE was trading a shade higher (0.05%) at the end of Oct-06 as compared to year end
2005. Market peaked on Jan. 30, 2006 with Blom Index touching 1882.9 points. As at
Oct 31, 2006 it was quoted at 1310.0 points, which is a loss of 30.4% from the peak of
1882.9 points. This loss is explained in part by the uncertainty caused by attack by Israel
and partly by sharp rise in month of Jan-06.
Conclusively, Lebanon is a developing market, still in its infancy as indicated by

the number of companies listed, the thin turnover ratio and want of adequate rules
and regulation for the market participants. However, Lebanon is moving in the right
direction as legislation regarding securitization and amendments regarding bank mergers
are through. The market would grow well, once the amendments regarding regulatory
commission and insider trading are passed and peace stabilized in the region. This should
attract the companies to list their stocks on the BSE.

Corporate Earnings
Profitability for the listed Lebanese corporates has gone up sharply. Solidere, which
makes about 47% of the market capitalization currently (as at Sep-06), showed a
whopping jump of more than 100% in net profit in year 2005. Holcim was the second
best performer after Solidere, registering a jump of 83.6%in net profit in year 2005.
Table 35: Corporate Earnings

% change in 2005
Figures in US$ mn 2004 2005
over 2004
BLOM Bank 90.9 134.3 47.8
Solidere 54.1 108.5 100.7
Bank of Audi 71.0 104.9 47.8
Byblos Bank 52.7 67.8 28.6
Bank of Beirut 25.1 28.2 12.6
Holcim 12.4 22.8 83.9
Source: Zawya and financial statements of the companies
Bank of Audi, Blom Bank also showed impressive gains with net profit up by about
48% for both of them. Byblos Bank and Bank of Beirut were fair with 28.6% and 12.6%
increase in net profits.
The first half of 2006 was better as compared to the first half of 2005 for the Lebanese
economy overall. However, 2H06 is likely to be subdued because of contracted economy
of Lebanon. Margins for banking sector are likely to suffer because of likelihood of
increase in non performing loans because of poorer economic conditions as compared
to last year. Opportunity for construction sector will be there because Lebanon needs to
build homes in excess of 100,000 that were destroyed by Israeli attack. This would affect
earnings of Solidere positively and it’s likely to record an increase in its earnings for the
year 2006. For the same reason cement companies such as Holcim is also likely to be
benefited in FY2006.

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Global Research Economic

Lebanon November 2006

Lebanon Economic & Strategic Outlook

Global Investment House stock market indices can be accessed

Omar M. El-Quqa, CFA

Shailesh Dash, CFA

Faisal Hasan, CFA

Gross Domestic Product ....................................................................................... 9

Banking Sector ..................................................................................................... 35

Stock Market and Corporate Performance

Beirut Stock Exchange ......................................................................................... 62

November 2006 Economic & Strategic Outlook 

 Economic & Strategic Outlook November 2006

• Increased dollarization in economy: Deposit dollarization increased to 71.1% from

November 2006 Economic & Strategic Outlook 

 Economic & Strategic Outlook November 2006

Economic News Flow (January 2006 to November 2006)

• According to Ministry of Tourism statistics, more than 26,000 people arrived in

• Billionaire of Lebanese origin (Najem) pledged to invest US$15bn in various economic

• Saudi Arabia’s Islamic Development Bank allocated US$250mn to rebuild Lebanon’s

• In its latest World Economic Outlook, the Washington-based International Monetary

November 2006 Economic & Strategic Outlook 

 Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook 

Moreover, the government is trying to promote privatization of the public companies

 Economic & Strategic Outlook November 2006

Gross Domestic Product

Figure 01: Lebanon’s GDP Growth

Nominal GDP Nominal GDP Growth Real GDP Growth

November 2006 Economic & Strategic Outlook 

Table 01: Central Government Primary Balance

Revenue and grants 5,848 6,597 7,483 7,405

Primary Expenditure 5,066 5,622 6,356 6,623

10 Economic & Strategic Outlook November 2006

Table 02: Lebanon: Overall Fiscal Deficit and Financing

Fiscal deficit is expected to rise in 2006…

November 2006 Economic & Strategic Outlook 11

12 Economic & Strategic Outlook November 2006

Table 03: Government Debt

November 2006 Economic & Strategic Outlook 13

Increasing public debt…

Figure 03: Public Debt

Total Debt ($ bn)

External Debt Domestic Debt Total Debt

Source: IMF and BDL

Figure 04: Lebanon’s Public Debt as percentage of GDP

Total Debt/GDP (%)

14 Economic & Strategic Outlook November 2006

expenditure goes as current expenditure (89.7% of the government expenditure in 2005)

Figure 05: Public Debt as percentage of GDP (2005)

Public Debt/GDP (%)

Source: Global Research & IMF

Figure 06: Maturity structure of Public Debt

November 2006 Economic & Strategic Outlook 15

16 Economic & Strategic Outlook November 2006

Figure 07: Trade Balance

Exports Imports Trade Balance

Figure 08: Export partners of Lebanon and their share

November 2006 Economic & Strategic Outlook 17

Table 04: Top 10 Export Items

Figure 09: Import partners of Lebanon and their share

Source: Lebanese Customs

18 Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook

Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook

Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook

Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook

Economic & Strategic Outlook November 2006

November 2006 Economic & Strategic Outlook