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ECONOMENA LEBANESE ECONOMIC OUTLOOK 2015 ECONOMIC OVERVIEW Real estate to lag behind the economy in 2015, banking to come out on top, survey of leading economists shows from Economena Analytics ebanon’s real estate sector is expected to lag behind the rest of the economy in 2015, according to the Lebanese Economic Outlook, a survey of 15 leading Lebanese economists conducted by Economena Analytics, an independent economic data provider. Six of the 15 surveyed economists selected real estate as the worst performing sector for 2015, reflecting widespread pessimism over activity in the sector amid uncertain political and security environments, and weak demand from foreigners. Construction activity is also seen lagging behind in 12th place among 15 sectors, and growth in manufacturing activity, excluding food and beverages, is expected to considerably underperform the economy during the year. “A stagnation in construction is expected due to the decrease in real estate transactions by foreigners by 14 percent L 48 BOLD | March 2015 Economist Institution Role Mr. Alexandre Mouradian BLOMINVEST Bank Head of Investor Relations Dr. Annie Tortian Haigazian University Assistant Professor at the Faculty of Business Administration and Economics Dr. Charbel Kordahi Touch Chief Financial Officer / Economist Dr. Georges Nehme Antonine University Economist / Dean of the Faculty of Business Administration Dr. Hala Nassif IPEMED Consultant Dr. Hasan Omar El Ali Greystone Capital Group International Project Finance Dr. Hassan Hamadi Notre Dame University Professor Dr. Jassem Ajaka Ministry of Economy and Trade Economic Advsor / Startegic Expert Mr. Jihad Hokayem Jihad El Hokayem Chief Financial Market Strategist Mr. Joe Faddoul BML Istisharat Chief Executive Officer Ms. Joelle Samaha Credit Libanais Senior Economist Mr. Nader Kayrouz UNDP / FAO Consultant Statistician Mr. Roger Melki Ministry of Finance Economist / Consultant Mr. Walid Abousleiman Aksys Capital Chief Executive Officer / Economist Dr. Wissam Harake The World Bank Economist The views expressed represent the personal opinions of individual survey respondents, and not necessarily those of their institutions or employers. CONSENSUS 2015 OUTLOOK Note: -5 to +5, 0 indicating the same as in 2014 Increase in activity Banking 2.38 Restaurants 2.31 Information and Communications 2.17 F&B Manufacturing 2.07 Insurance Health And Social Care Overall Economy Wholesale And Retail Trade Eductaion Hotels Public Spendings Public Debt 2.07 Imports 1.79 Private Credit 1.64 Unemployment 1.53 1.92 Hotel Occupancy 1.50 1.85 New Car Sales 1.40 1.77 Tourist Arrivals 1.33 Private Deposits 1.31 Fastest 1.71 1.67 Moderate IncreaseBBeirut Stock Index 1.29 1.58 Fiscal Deficit 1.21 1.53 Balance Of Payment 1.21 1.50 Remittances 1.17 Public Revenues (Taxes) 1.50 Transport 1.50 Construction 1.48 Manufacturing (Excluding F&B) 1.40 Real Estate 0.64 Real Estate Transactions Slowest Increase 0.93 Inflation 0.73 Exports 0.71 Real Estate Prices 0.57 Based on a survey by Economena Analytics conducted between January 5 - 19, 2015. in 2014 as well as a lack of foreign investments, the absence of expats, and a tense security situation,” said Dr. Hala Nassif. The value of real estate transactions in 2014 had increased by only 2.8% to $8.95bn according to CADASTRE, while the number of transactions rose by 2.2%. Although still positive, the consensus among participating economists indicated that realty prices would struggle to hold at their current levels. On the opposite side, five economists chose banking as their top sector pick for the year, while four said restaurants and ICT would be the fastest growing sectors in the economy. “The Lebanese banking sector enjoys a historically-proven immunity towards internal or external shocks, and is always praised for its encouraging performance even in times of crisis,” said Joelle Samaha of Credit Libanais. The increase in the resident population will also contribute to increased ECONOMISTS WERE UNANIMOUS IN THEIR PESSIMISM OVER THE LOCAL LABOR MARKET demand for health and social care, although refugees do at the same time contribute to the crowding out of domestic private demand. In particular, Dr. Nassif pointed to “limited resilience capacity of the health system with an increased utilization of around 50% for PHC and hospital services.” Tourism is also expected to improve in 2015 with nine economists forecasting an increase in tourist arrivals during the year, and none predicting a decline. Most referred to the security situation as the wild card which will drive much of the tourism, hospitality, and to some extent real estate indicators. At the same time, economists were unanimous in their pessimism over the local labor market, with 14 of the surveyed economists anticipating an increase in unemployment in 2015, and one projecting stable employment. Opinions were somewhat divided over the outlook for exports, private deposits, inflation, new car sales, and stocks, although more of the expectations were tilted towards an increase in all the aforementioned indicators. If you are interested in participating in the next issue of the Lebanese Economic Outlook survey or for any feedback, please contact Ms. Amani Kandil at Amani@ economena.com or at 01.985.618. BOLD | March 2015 49 BOLD+ECONOMENA SURVEY 2015 2015 GROWTH OVERVIEW CONSENSUS REAL GDP GROWTH AT 2% The consensus growth forecast among the 15 surveyed economists was 2% in 2015. Forecasts ranged from -1.5% to 4.3%, with most economists pinning their forecasts on domestic political and security developments. The IMF estimates that Lebanon’s economy grew by 1.8% in 2014, a slight pickup over 2013. Lebanon’s economy continues to face major political and security ob- stacles. Parliament has failed to elect a President after several dozen sessions, leaving the country’s top post vacant for over nine months so far. Spillovers from the ongoing conflict in neighboring Syria have diminished, but still pose serious constraints for tourism, trade, and security. “A number of indicators point to a decline in private consumption in 2015. From the supply side, the tourism, wholesale and retail trade sectors were security environment,” said Dr. Hala Nassif. DISTRIBUTION OF REAL GDP GROWTH FORECASTS FOR 2015 distribution of respondents 35% 30 25 20 15 10 5 0 <0 <0-1% 1%-2% 2%-3% 3-4% >4% growth POSITIVE IMPACT FROM LOWER OIL PRICES IN 2015 Brent crude prices averaged $98.97 in 2014, down 8.8% from 2013, according to EIA. As a result, domestic gasoline prices dropped by 1,422 LBP, to average 32,415 LBP during 2014, 4.2% below their average the year before. EIA expects oil prices to continue to remain low in 2015, and to average $58, or 41.4% below 2014. Lebanese economists predominantly expect the economy to gain in 2015 from cheaper oil prices, with 12 out of 15 surveyed economists selecting oil as a positive factor for growth during the year, while three economists said the costs and ben“Government expenditure on electricity and energy consumption will be less costly, which will reduce the burden on the government,” stated one Dr. Annie Tortian of Haigazian University who expects real GDP growth of only 0.5%0.75% in 2015. Reduced foreign exchange outflows are also among the benefits of cheaper oil, according to Joe Faddoul. The likely positive impact on the economy from higher disposable incomes is contingent upon the government not fixing gasoline prices in the domestic market, according to Walid Abousleiman of Aksys Capital. Besides the benefits, “decreasing oil prices would negatively impact GCC countries and would lead to a drop in capital inflows to Lebanon and to additional challenges for the Lebanese economy,” stated Joelle Samaha citing a study by the IMF published in 2012. 50 BOLD | March 2015 port bill, and lower costs for private sector. On the other hand, Dr. Harake expects lower remittances, a driver of consumption, and said that “income sourced from GCC nationals (tourists and investors) will not be a factor since it has been insignificant during the past few years.” “ Joelle Samaha DECREASING OIL PRICES WOULD NEGATIVELY IMPACT GCC COUNTRIES AND WOULD LEAD TO A DROP IN CAPITAL INFLOWS TO LEBANON AND TO ADDITIONAL CHALLENGES FOR THE LEBANESE ECONOMY Cheaper oil will also likely have a negative impact on non-resident deposits, while contributing to an increase in interest rates and a decrease in real estate prices, according to Jihad El Hokayem. Dr. Wissam Harake sees the forces of oil canceling each other out during the year. Among the benefits, he cited an improving fiscal balance, lower im- ECONOMIC IMPACT ON LEBANON OF CHEAPER OIL IN 2015 Neutral 3% Positive 12% 2015 Breakdown by sector Real estate is murky business in 2015 Transactions held up well in 2014, but economists are divided over the outlook for 2015. Some describe strong local demand for small, affordable residence, while others point to the absence of Gulf investors and to strong local, regional, and international headwinds. “After a period of denial, brokers are starting to admit that business is slow and that prices have in some cases come down by almost 30%, often in the form of “discounts”. There are almost no clients for anything priced above $5,000 per sqm,” said Jihad El Hokayem, a Chief Financial Markets Strategist. “That is unlikely to change in the absence of Gulf investors since the local market is quite shallow and is not enough to satisfy what many realtors are calling an oversupplied market,” said El Hokayem. El Hokayem also believes that the drop in oil prices will likely reduce inflows to Lebanon and ultimately hurt the real estate market. Oil exporting countries will have less liquidity to transfer to Lebanon or to finance new projects at home which means slower recruitment of Lebanese labor. Lebanese in Europe are also suffering from a decrease in their purchasing power due to the weaker Euro, which doesn’t bode well for homebuying in Lebanon, according to El Hokayem. “We practically have a recession in Lebanon, so there is weak domestic demand, and if the summer passes without an improvement in sales activity, several smaller developers will begin to default. Effectively, there is a negative correlation between Beirut and Dubai real estate, and now it appears to be Dubai’s time to boom,” said El Hokayem. Tourist arrivals Hotel occupancy Tourist numbers barely changed in 2014, but growth in the second half of the year helped drive a late resurgence. Most economists see tourist arrivals rising in 2015, while three economists forecast the same number of arrivals, with almost all referencing the security situation as the key variable. Hotel occupancy averaged 52% in 2014, virtually unchanged from 2013, and well below the heydays of 2010. Most economists expect hotel occupancy rates to pick up in 2015 if the security and political situations hold. Tourist arrivals (millions) Outlook 2015 Beirut hotel occupancy rate (%, 4 and 5-stars) 70 65 Decline 0 2.17 Same 3 1.66 2011 Decline 60 58.1 55 1 54.5 50 1.37 2010 Outlook 2015 68.3 2012 1.27 1.35 2013 2014 51.6 1 52 45 Increase 9 Same Increase 10 40 2010 2011 2012 2013 2014 New car sales Real estate transactions: Growth in new car sales accelerated in 2014 despite the slow economy, driven largely by sales of affordable fuel efficient vehicles. With new loan regulations requiring a 25% down payment, some economists say sales of new cars may come to a standstill or even fall in 2015, although a majority still expect the new car market to remain resilient. The value of registered real estate transactions inched up 2.8% to $8.95bn in 2014 even as foreigners played a diminishing role in the market during the year. Economists were divided over the prospects for the real estate market, with five anticipating a stable to declining market in 2015. New car sales (thousands) 10 40.1 40 37.7 38 36 Outlook 2015 36.1 34 9 Decline 38.4 Real estate transactions($bn) 1 34.5 Same 3 Outlook 2015 9.5 9.2 9 9 Decline 9.0 8.8 3 8.7 9 8 32 30 2010 2011 2012 52 BOLD | March 2015 2013 2014 Increase 11 Increase 9 8 2010 2011 2012 2013 2014 Same 2 Breakdown by sector 2015 Lower energy bill won’t hold back imports in 2015 Fuel prices have dipped by over 40% and the Euro has slipped by nearly 20% against the dollar in recent months, but Lebanon’s import bill is unlikely to change much in 2015, according to a survey of 15 leading Lebanese economists. “We live in a consumption-based economy with 1.5 million Syrian refugees, and the population is rising, so logically speaking, we will need to import more. At the same time, the basket of goods has changed, with households shifting their savings on fuel to other products, which are pre-dominantly imported since we mostly consume foreign goods given the small size of local production,” explained Dr. Georges Nehme, an economist and the Dean of the Faculty of Business Administration at Antonine University. Balance of payments ($bn) 4 3 2010 2011 2012 2013 2014 Outlook 2015 3.3 Decline 2 Same 2 1 1 0 -1 -2 -2.0 -1.5 -1.1 -1.3 Note: 2014 through November Increase 11 Inflation Unemployment Inflation averaged 3.5% in 2014 according to the IMF, slightly ahead of the rate in 2013. A majority of economists see inflation picking up again in 2015, while six economists forecast slower or similar inflation during the year on lower oil prices and cheaper imports from the Euro area. None of the surveyed economists expects unemployment to decrease in 2015, reflecting the impact on the labor market from Syrian refugees and the slow rate of job creation. Inflation (%, average) Unemployment (%, estimates) Outlook 2015 8 7 7.2 6 5 5.1 4 10 Decline 5.9 2 3.2 3 3.5 11.9 12 Same 4 8 Outlook 2015 10.1 8.9 Decline 0 6 Same 1 4 2 2 1 Increase 9 0 2010 2011 2012 2013 0 2012 2014 2013 2014 Increase 14 Imports Exports Imports fell by a slight 3.5% to $20.49bn in 2014. Despite expectations of a lower energy import bill, estimated at $4.8n in 2014, most economists still see imports rising considerably in 2015, while two surveyed economists see imports maintain the same level. Uncertainty over the security situation along the Lebanese Syrian border and in key export markets like Iraq and Egypt will likely affect exports in 2015. Economists are forecasting the same level of exports in 2015 as in 2014, or a very slight increase. Imports ($bn) Exports ($bn) Outlook 2015 22 21.3 21 21.2 20.2 20 20.5 Decline 0 19 18 Same 2 5 4 4 4.3 4.3 Decline 4 Same 5 4 3 17 Increase 12 16 2010 1 3.9 4 18.0 Outlook 2015 4.5 2011 2012 2013 2014 3.3 3 Increase 3 2010 2011 2012 2013 2014 8 BOLD | March 2015 53 Breakdown by sector 2015 Cheaper oil won’t save the fiscal deficit either… Expectations of a decrease in the deficit at Electricite du Liban have failed to convert into a positive outlook for public finances in Lebanon. The government may save up to $500m from cheaper fuel in 2015, according to the Ministry of Finance, but the consensus among economists still points to a larger deficit, or at best, a similar shortfall to 2014. “We cannot but expect an increase in the deficit given current macroeconomic conditions. We’ve been hearing of severe cost cuts at various public sector departments, which implies very tight public finances in my view,” said Dr. Nehme who expects the deficit to rise slightly in 2015. “At the same time, the debt service burden has risen considerably in recent years due to higher debt levels, and the lack of transparency in government finances gives credence to pockets of spending of which we may not be aware yet.” Dr. Nehme also attributed his forecast of a higher deficit in 2015 to the vacancy in Lebanon’s top post. “In the absence of a President, the signature of every minister is required to pass decisions in the Cabinet. This means ministers have an incentive not to upset each other, and in this way, more ministers are able to get their respective projects approved.” Public debt Private credit Gross public debt grew by 4.9% in 2014, equivalent to $3.14bn. Economists expect debt levels to increase rapidly in 2015. Credit to the private sector grew by 7.4% in 2014 to $50.9bn, its slowest pace in 3 years. Still, most economists expect production to remain strong in 2015 with four out of 15 economists selecting private credit as their top growth metric for the year. Gross public debt ($bn) Private credit ($bn) Outlook 2015 70 66.6 65 63.5 55 Decline 1 60 Outlook 2015 Same 0 50.9 50 43.5 45 57.7 55 52.6 35 Increase 14 50 2011 2010 2012 2013 34.9 Same 1 Increase 14 30 2014 1 39.4 40 53.7 47.4 Decline 2010 2011 2012 2013 2014 Private deposits Fiscal deficit Private sector deposits rose 6% to $144.4bn in 2014, its slowest pace in 9 years, as deposits of non-residents slowed. New regulations, including FATCA contributed to the smaller flow of deposits from abroad. “Non residents' deposits are on a backward trend which will ultimately negatively impact the sector. Hence the active search of new markets by leading Lebanese banks.” – Dr. Hala Nassif. The deficit at Electricity du Liban is set to shrink in 2015 on lower oil prices, requiring less transfers from the Ministry of Finance. Still, a majority of economists see the deficit rising during the year on the back of higher interest payments and weaker revenue growth. Private deposits ($bn) 144.4 150 Decline 1 125.0 130 110 107.2 Same 2011 2012 54 BOLD | March 2015 2013 2012 2013 2014 2 2014 Increase 10 -5 Outlook 2015 1 -2 -4 100 2010 2011 Decline -3 115.7 120 0 2010 Outlook 2015 -1 136.2 140 Fiscal deficit ($bn) -2.9 -2.3 -2.4 -3.9 Increase 10 -4.2 Note: 2014 through October Same 3