Strategy Note /

LEBANON: Positive 2018 so far, cheap equities but vulnerability of confessional politics persists

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    9 April 2018
    Published byTellimer Research
    Lebanon's cycle of crisis, survival, hope and frustration – Four characteristics of Lebanon drive a recurring cycle of crisis, survival, hope for structural reform and frustration over the failure to implement those reforms. (1) Economy: Lebanon suffers from low growth, high unemployment, high fiscal and current account deficits, high public debt and electricity shortages. (2) Political system: this is built on a distribution of power between different domestic religious groups (“confessional politics” which, for example, allocates the posts of President, Prime Minister and Parliament Speaker to the Christian Maronite, Muslim Sunni and Muslim Shia communities, respectively), but the basis for that split is a source of constant friction and ultimately undermines efforts to implement serious reform. (3) Geopolitics: it is at the mercy of regional geopolitics (Syria, Israel-Hezbollah, Saudi-Iran, US-Russia). (4) Support system: the maintenance of high real interest rates and the fixed FX rate by the central bank, the constant flow of remittances from the Lebanese diaspora, and the intermittent coordinated financial packages (mainly loans) from its international supporters have sustained this model. We may well be at the start of a cyclical upturn (in terms of survival and hope for structural reform) and, for those with a shorter-term timeframe that may be sufficient for the investment outlook over the next year (and for this group we see more opportunity in the equities, particularly the Banks, compared to US$-denominated sovereign debt). But we have little confidence that the structural shackles are going to be broken. The recipe for reform is well-known: articulated by the IMF as fiscal deficit reduction (VAT, fuel taxes, electricity subsidy cuts, civil service pay restraint) and public debt control, higher interest rates and less use of non-conventional financial operations, improvement in the reliability of electricity supply and anti-corruption measures. The cha