Is Lebanon back in the investment game?

After nine months of political deadlock, Lebanon’s cabinet was formed in late January, thereby unlocking $11bn in foreign loans for infrastructure development. Several weeks earlier, McKinsey & Company’s national economic vision for Lebanon was released, covering topics from corruption to cannabis.

Moody’s said the government formation was positive for the country’s credit rating which, only 10 days earlier, was downgraded deeper into junk territory, to Caa1 from B3.

Bumps in the road

Lebanon needs $22.9bn to revamp its dilapidated infrastructure, according to the country’s ambitious Capital Investment Program (CIP) launched at Cedre, an international development conference for Lebanon that took place in Paris in April 2018.

Cedre saw the international community, in particular the World Bank, pledge $11.6bn to the CIP – mostly in soft loans – on the condition that national reforms were implemented, such as reducing the fiscal deficit and fighting corruption. With the new government now formed, these pledges can begin rolling.

Indeed, only 24 hours after the cabinet was formed, the World Bank urged Lebanon to essentially ‘get on with it’ and prioritise electricity reform. This was echoed by prime minister Saad Hariri, who said Lebanon needed "bold reforms" immediately. With daily blackouts as a norm, Lebanon spends $2bn annually on its crumbling electricity sector, according to Mr Hariri.

Indeed, the country has the world’s fourth worst quality of publicly provided electricity, behind Haiti, Nigeria and Yemen, and Lebanese citizens spend 50% more time than needed on congested roads, only 15% of which are in good condition, according to McKinsey’s recent report, Lebanon Economic Vision. It is no surprise, therefore, that Lebanon’s infrastructure is ranked 113th out of 137 countries in the report.

Major opportunities

The CIP offers a plethora of investment opportunities, most of which are in transport, electricity and wastewater.

These opportunities include the expansion of Beirut International Airport for approximately $500m, the creation of the Nahr Ibrahim Expressway for roughly $2.86bn, and the building of the El-Bared wastewater dam for $300m. The country is also developing its first special economic zone, based in Tripoli and requiring $270m.

These projects are intended for local or foreign investment under Lebanon’s newly adopted PPP law, with contracts expected to be awarded in 2020.  

Lebanese expats in the Federation of Global Lebanese Investors recently launched a $100m Switzerland-based investment fund to support the infrastructure PPPs. Lebanon’s 14 million-strong diaspora sent back $7.08bn in remittances in 2017, according to World Bank, the vast majority of which sits in bank deposits.  

Part of the plan

McKinsey was contracted by the Lebanese government in 2017 to develop a national economic vision that identified necessary reforms, growth sectors and quantifiable targets for 2025 and 2035. In short, it was intended as a road map for a government that has never had a long-term, technocratic economic plan.

The report identified five economic sectors that present the highest economic potential for Lebanon: agriculture, industry, tourism, financial services and the knowledge economy.

McKinsey recommends that Lebanon’s tourism industry should specialise in medical tourism and ultra-luxury eco-tourism, while in financial services the country should expand beyond banking into investment management, and seek to become an offshore hub that exports financial services.

Indeed, considering the high level of education among Lebanon's workforce, its knowledge economy sector could become a regional talent hub for technology, outsourcing, creative industries and education, states the report.

Within agriculture, the McKinsey report recommends the cultivation of medical marijuana for export, among other cash crops. Regarding industry, the report states that Lebanon could be a niche regional leader in high-value industries, especially if it capitalises on opportunities provided by the reconstruction requirements of Syria and Iraq.

“I worked with McKinsey to show the big potential of the marijuana market. I’ve not seen any political party that’s against this. My inner feeling and information [says] it will be passed by parliament. [Another] flagship opportunity for foreign investors in Lebanon is the reconstruction of Syria. We expect this process to start soon. The Chinese have already shown concrete interest in this,” says Lebanon’s former caretaker minister of economy, Raed Khoury. The World Bank estimates Syria’s reconstruction will cost about $200bn.

Unctad hails a success

The Lebanese government also asked Unctad to publish an investment policy review (IPR) on Lebanon, 15 years since its last IPR.

The recently released report states that Lebanon is a success story in the Middle East, attracting FDI of more than $2bn every year since 2003, above the regional average in proportionate terms.

“Lebanon is leveraging its advantages as a destination for FDI in IT and the digital economy... The country [boasts] a strong local private sector, skilled labour and strategic location,” says the IPR.

However, like the McKinsey report, Unctad’s review highlights the significant constraints that hamper Lebanon’s operational environment for investors, such as energy infrastructure, regulatory obstacles, burdensome administrative requirements and institutional weaknesses.

Nonetheless, improvements to Lebanon’s business climate are under way, as symbolised by the commissioning of the IPR and McKinsey report, with Lebanon’s very active investment promotion agency, IDAL, a driving force behind them.  

On a more concrete level, significant legislative reforms were made in 2018, especially with regards to judicial mediation, e-transactions and transparency in Lebanon’s new-found oil and gas sector, which will see a Total-Eni-Novatec consortium drill its first well this year.

Overcoming challenges

Lebanon is not an economist’s dreamland. The country has an unemployment rate of 25%, experienced GDP growth of only about 1% over the past three years, it had a budget deficit of close to 11% in 2018, and it has the third highest debt-to-GDP ratio in the world, according to the McKinsey report. Moreover, Lebanon is ranked 138th out of 180 countries in Transparency International’s Corruption Perception Index for 2018.

In an effort to attract US dollar deposits and maintain the country’s two-decade-old peg to the currency, interest rates remain very high in Lebanese banks. While this may be necessary, it is deterring private sector spending, which partially explains why Lebanon’s house prices have fallen so steeply, though this now presents a potential opportunity for foreign investors to buy on the cheap.

Lebanon’s political situation is major concern for investors. As well as a very precarious sectarian balance involving the growing influence of militant group Hezbollah, Lebanon is caught up in a regional web of conflicts involving Iran, Saudi Arabia, Israel and Syria.  

“[However], If you understand Lebanon’s [political and business] risks, then you can make money," says Mr Khoury. "The risks seem very high, but they’re manageable. Lebanese expats understand this better, and invest more easily, but we encourage FDI. Lebanon has, for decades, dealt with political instability, but our private sector is extremely resilient.”