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The Impact of Remittances on Economic Growth - May 2017

Migration has been a phenomenon plaguing the Lebanese society for more than a century. In recent years, remittances, a consequence and companion of migration, has been given special attention and has raised the interest of economists to study its possible impact on the economies and growth prospects of home countries. With respect to Lebanon, this interest heightens as the number of Lebanese emigrants reached 798,140 as at the end of 2015 with remittances nearing the $7.31 billion mark as at the end of 2016, representing 14.10% of GDP. In this context, Lebanon ranks among the top twenty receivers of remittances in the world and among the top three in the MENA region, outperforming all other countries on a per capita basis. It is worth noting, in this context, that Saudi Arabia is the major source of remittances to Lebanon, accounting alone for 20% of total remittances in 2015, also topping the list when it comes to remittance outflows per expatriate ($12,416).

This research report conducted by Credit Libanais’ Economic Research Unit illustrates the dependence of the balance of payments on remittance inflows over the 2010-2015 period. In 2015, remittance inflows reached $7.48 billion, surpassing by far the capital and financial inflows to Lebanon, which stood at $6.27 billion. Such remittance inflows limited, to a large extent, the deficit in the net foreign assets of the Lebanese financial sector (which stood at $3.35 billion in 2015), which otherwise would have worsened to read $5.37 billion had incoming remittances channeled through local banks (estimated at 27% of total remittances according to the IMF) been excluded. Concurrently, and as proven in this research report, remittance inflows to Lebanon ($7.48 billion in 2015) clearly exceeded foreign direct investment (FDI) and official development assistance (ODA) levels combined ($3.32 billion in 2015). While FDIs exhibit a cyclical behavior depending on the state of the economy, remittance inflows seem to reflect a more stable pattern. Moreover, as ODA comes conditioned and accompanied by restrictions, remittances flow independent of any obligations towards any party or foreign agency. From another standpoint, our study proves the significant contribution of remittance inflows channeled through banks in maintaining a steady growth in deposits, whereby remittances seem to have fueled some 21.12% of the growth in deposits at banks over the 2002-2016 period.

This research publication also attempts to capture the potential effect of oil price corrections on remittance inflows to Lebanon, especially that a large proportion of remittances (around 25% as at the end of 2015) comes from expatriates residing in oil-producing Gulf Cooperation Council (GCC) countries. On the short term, no immediate and substantial effect of a drop in oil prices on remittance inflows has been noticed. The measures taken by GCC countries in response to the oil price crisis have helped maintain, to some extent, their government spending and therefore economic stability. Moreover, the diversity of sources of remittance inflows to Lebanon has as well helped limit the impact of oil price changes on the size of total remittance inflows. Nevertheless, concerns over the medium and long terms still prevail as two factors remain uncertain: oil price behavior from one side, and the ability of GCC countries to still employ fiscal buffers in order to sustain their spending, from the other.

Finally, Credit Libanais’ Economic Research Unit conducted an empirical analysis to estimate the direct impact of remittances on economic growth. The model tested in the study depicted a positive yet statistically insignificant impact of remittances on GDP per capita growth. As far as other independent variables in the model are concerned, our regression analysis showed a negative and statistically significant impact of each of GDP per capita growth lag, trade, and population growth on GDP per capita growth, while it portrayed a positive and statistically significant impact of private consumption on growth. A possible explanation for the statistically insignificant coefficient of remittance inflows is that remittances may favor GDP growth indirectly through another major channel, namely, consumption. In particular, our analysis revealed a positive correlation (+0.55) between remittance inflows and private consumption, where the latter was shown to have a positive and statistically significant impact (β=+0.38, i.e. a 1% growth in private consumption drives GDP per capita growth up by 0.38%) on GDP per capita growth. In fact, a sizeable portion of remittance inflows is allocated to household consumption, which in turn stimulates GDP per capita growth via the multiplier effect.

Last but not least, the research report gives a series of recommendations of which we mention: adopting policies and measures that incentivize emigrants to allocate their money in investment-oriented activities which would favor growth, while at the same time striving to reduce the very high cost of sending remittances to Lebanon (noting that Lebanon emerged as the most expensive country in the world in 2015 when it comes to receiving remittances) in order to encourage expatriates to send more money through formal channels to their home country.

The Impact of Remittances on Economic Growth - May 2017
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Dissecting the Lebanese Public Debt: Debt Dynamics & Reform Measures - July 2016

High indebtedness has been plaguing the Lebanese economy over the past two decades or so, as the government has been caught in a vicious cycle of a hefty public debt burden and recurrent budget deficits. This has thwarted the economic growth, escalated the debt crisis, and positioned Lebanon among nations with the highest debt-to-GDP ratios in the world. More specifically, the Lebanese government embarked in the early 1990s on an expansionary fiscal policy and a costly reconstruction plan, aimed primarily at rehabilitating the severely destroyed infrastructure in the hope of fostering economic growth and doubling the GDP per capita. In this context, the Credit Libanais Economic Research Unit has analyzed the Lebanese public debt dynamics particularly in the post war era and recommended potential reform measures to trim the budget deficit and curb debt growth.

Our publication highlights that total capital expenditures stood at $12.49 billion between end of 1992 and 2014 out of which circa $5.02 billion were externally funded and $7.47 billion were financed by the government. The sizeable borrowings to restore the damaged public infrastructure, the high interest payments on said debt, along with the resulting budget deficits from debt servicing and transfers to EDL were the main culprits behind the ballooning public debt. More particularly, said debt grew at its fastest pace during the early post-civil war period, with growth decelerating at later stages. Delving further into details, our analysis uncovers that Lebanon’s debt grew at a CAGR of around 40% during the 1993-1998 era, increasing from $3.39 billion to $18.56 billion as the capital expenditures to GDP ratio hovered between 8% and 9% during the 1994-1998 period before slowing markedly to around 1% to 2% of GDP in the early 2000s. Similarly, government borrowings fell sharply between the years 1998 and 2015 due to the government’s efforts to refinance its existing debt by rolling it over on several occasions and at a cheaper cost, aided by the Paris conventions and other donors’ agreements. Transfers to EDL have been a major drain on public finances, aggregating to $16.85 billion over the 1992-2015 period, accounting for 23.96% of gross public debt at end of year 2015.

At present, the Lebanese banking sector still holds the lion’s share (53.8%) of total debt, despite managing to reduce its exposure from 59.3% in the year 2013. This is in fact mirrored by the smaller proportion of claims on the public sector which fell from 26.96% of local banking sector balance sheet in 2008 to 20.32% in 2015 and subsequently to 20.35% as of April 2016. Historically, Lebanon’s debt has been almost evenly split between the domestic currency and foreign currencies, with the share of local currency debt increasing significantly over the last couple of years. This new trend can be attributed to the fact that the issuance of foreign currency denominated debt in the form of Eurobonds requires the ratification of the parliament; the thing which was hard to secure in recent years on the back of the intense political bickering, which has derailed the regular convention of legislative parliamentary sessions.

At present, gross public debt stands at $71.65 billion (April 2016) with Lebanon’s debt to GDP ratio reaching an alarming 139% level, positioning it as the 4th highly indebted country in the world according to the CIA World Factbook. This debt figure excludes some sizeable amounts owed by the government to the National Social Security Fund, hospitals, and private sector contractors, among others which, if embedded in the calculation, would undoubtedly raise gross public debt to just above $74 billion. This trend is unsustainable and calls for immediate action from the government in the form of reform measures which can take several forms such as privatization, Public-Private Partnerships, expenditure rationalization, fiscal reforms, and many rounds of debt softening and financial engineering schemes.

Despite its strength as a reform measure, privatization seems to be the least applicable tool at present amid the prevailing local and regional turmoil which would widen the sovereign risk premium and accordingly depress the fair market values of public sector enterprises. Public-Private Partnership schemes, on the other hand, would be a viable solution to trim the budget deficit, especially if implemented in the exploration and extraction of the newly discovered offshore oil and gas reserves in Lebanon’s Exclusive Economic Zone, which are believed to be able to generate circa $1.85 billion in revenues for the government during the first year, a figure that can reach $3.66 billion over twenty years according to a research previously published by the Credit Libanais Economic Research Unit. The implementation of PPPs, however, is delayed by the inability of the parliament so far to pass the required laws due to the continuous political bickering.

Expenditure rationalization is essential to contain the structural deficit in public finances, yet would be almost impossible to implement without the passing of a budget law, noting that the government failed to pass a budget law proposal note since 2006. Fiscal reforms such as combating tax evasion and improving tax collections is another alternative to consider, with some progress being already accomplished including the introduction of e-payments both by the Ministry of Energy and Water for the settlement of the water bill and the Ministry of Finance for the payment of the built-up property tax among others. However, it is imperative to put an end to the prevailing paralysis on the executive and legislative fronts in order for the transition to the e-government to take full swing.

Finally, many rounds of debt servicing alleviation through swap mechanisms similar to the recently engineered $2 billion tripartite exchange between the Ministry of Finance, the Central Bank, and commercial banks can be considered to reduce the budget deficit and curb the growing public debt.
Dissecting the Lebanese Public Debt: Debt Dynamics & Reform Measures - July 2016
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Oil & Gas Sector: A New Economic Pillar for Lebanon - Research Report - January 2015

In the midst of the raging waters clawing the Arab world and the murky horizons smudging Lebanon’s future political and economic picture, a new gem has shined within the Middle Eastern seas, opening the page for a new era of economic prosperity. Discoveries of black gold have, in fact, enkindled the flame of hope to a country that has been suffering of ailing public finances for quite some time, fetching promises of healing Lebanon’s economic woes, from current account deficit to budget deficit, while paving the way towards a blossoming economic journey.

The concerned research report strives to quantify the potential repercussions of the exploitation of Lebanon’s oil & gas reserves on major macroeconomic indicators under the umbrella of the scenario and set of hypothesis adopted. Oil reserves under the tailored scenario (557.5 million barrels) were based on the mid value of the estimated interval of 440 million barrels to 675 million barrels of oil reserves conveyed by Beicip Franlab, the French company that conducted the seismic surveys, while gas reserves figures centered upon the interval of 12 trillion to 25 trillion cubic feet in Lebanon’s southern waters, as unveiled by Spectrum, the British company which surveyed the Lebanese coast. It is worth noting that a production horizon of 20 years was adopted in the tailored model, mimicking the estimates relayed to the press by the secretary-general of the World Energy Council. In parallel, oil & gas price forecasts used in the paper are based on the most recent Energy Information Administration’s (the statistical and analytical agency within the US department of Energy) published projections for the 2020-2039 period, which correspond to the assumed extraction phase. These prices range between $4.96 billion per TCF in the year 2020 and $12.04 billion per TCF in the year 2039 for gas, and $109.37 per barrel in the year 2020 and $224.62 per barrel in 2039 for oil. It is worth noting that the sharp drop in oil prices in the last quarter of 2014 was not accounted for in our model given that hydrocarbon production is not likely to kick-in before the year 2020, and that this downturn in prices may not be sustainable. In this context, the Credit Libanais Economic Research Unit projects the value of oil production to stand at $3.05 billion in the first year of extraction (2020), with gas production value estimated at $4.96 billion.

The total oil & gas output value is thus estimated at $8.01 billion in the first year of production, lifting as such the extrapolated nominal GDP figure to $77.60 billion in the year 2020, from an estimated $69.59 billion in the absence of oil & gas discoveries. In parallel, the Credit Libanais research publication projects Lebanon’s current account balance to turn into a surplus during the hydrocarbon production period, appreciating from $0.42 billion in the year 2020 to $2.87 billion in the year 2039. These figures compare to estimated current account deficits of $4.39 billion by end of year 2020 and $8.12 billion in the year 2039, based on an extrapolation of IMF estimates when excluding hydrocarbon production.

On the public finance front, the Credit Libanais research report expects the budget deficit to shed 5.64 percentage points in the first year of hydrocarbon extraction and settle at 4.36% of nominal GDP under the scenario adopted. The budget deficit has a tendency to increase gradually afterwards and reach 5.65% of GDP in the last year of production (2039), owing to the faster pace of growth in non-oil deficit when compared to the growth in oil & gas receipts.

On a cumulative basis, the model developed projects total government revenues to aggregate to $113.18 billion from oil & gas extraction over the twenty-year production period, representing around 45% of the country’s offshore hydrocarbon reserves.

The aforementioned simulation results center upon a scenario that channels all hydrocarbon proceeds towards taming the budget deficit. Nevertheless, and given both the government take in total oil and gas production and the projected budget deficit, said proceeds will most probably fail to reduce Lebanon’s debt stock, but instead will slow the accumulation of public debt and possibly reduce the debt-to-GDP ratio.

Oil & Gas Sector: A New Economic Pillar for Lebanon - Research Report - January 2015
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The Beirut Stock Exchange – Drivers of Activity & Stimulus Measures - May 2014

The Beirut Stock Exchange has been travelling through a wobbly path, clawed by the family nature of Lebanese companies, which continues to thwart the listing of new companies on the official market. In parallel, the ever-changing economic and political conditions reigning on the local scene have played a major role in setting the track to the Lebanese Stock Exchange’s trading activity, which has been oscillating between different periods of booms and busts since its re-opening in the year 1996.

Based on the empirical model developed in this research report, a positive and significant correlation is witnessed between net financial inflows to Lebanon and the performance of listed banking stocks represented by the Credit Libanais Financial Sector Stock Index (“CLFI”). The performance of the listed construction stocks, on the other hand, measured by the Credit Libanais Construction Sector Stock Index (“CLCI”) turns out to be significantly negatively correlated to political shocks. Accordingly, our econometric model leads us to conclude that the impact of a positive political shock, such as the election of a new president on the performance of listed construction stocks (Solidere “A”, Solidere “B”, Holcim Liban, and Ciments Blancs) is a 3.21% increase in their market capitalization to around $2,583.59 million as at end of June 2014.

The historical analysis of the BSE’s market capitalization, on the other hand, shows a 33.11% rally in the value of traded stocks during the eight-year period extending between the year 2006 and April 2014. This increase can be explained by the listings of additional securities by already listed companies on the official market amid various phases of capital increases over the past decade to address Basel solvency requirements on the one hand, and finance domestic and regional expansion on the other. In fact, and when factoring out the impact of new listings on the evolution of market capitalization, the latter would have suffered a sizeable 46.26% slump over the aforementioned period. Said drop mirrors the contraction in the prices of listed securities on the back of the recurrent sequences of political and economic shocks, of which we name the Israeli aggression on Lebanon in summer 2006, the long sit-in in the Beirut Central District since late 2006, the outbreak of the global financial crisis since early 2008, and the spillover of the Arab Spring since late 2010, only to name a few.

In this context, the turnover ratio of the Beirut Stock Exchange, which measures the aggregate traded volume as a percentage of the number of outstanding listed stocks, peaked at 15.44% in the year 2010, before plummeting to 4.07% in the year 2011, 3.27% in the year 2012, and an even lower 3.05% reading in the year 2013, hence mimicking the many stages of political bickering. From a different angle, the weighted average price to earnings (P/E) multiple of the Beirut bourse surpassed the 36x mark in the year 2007, mainly lifted by the rallying prices of heavy market-cap weighted Solidere shares and various other banking stocks. This owes to the fact that many Lebanese expatriates and regional investment funds channeled back their investment portfolios to the country as Lebanon was spared from the global financial crisis that struck major stock markets across the world. The BSE’s weighted average P/E subsequently spiraled through a downward twirl starting the year 2008 amid the wider spread of the global financial crisis, plunging to 19.67x in 2008, 13.81x in 2009, and a much lower 8.56x as at end of April 2014.

Finally, a number of factors have constrained the listing of new companies on the Beirut bourse including, among others, the small capitalization of Lebanese companies, the reluctance of family-owned firms to go public, the requirement to abide by international accounting standards, the limited exit potential for investors, and the depressed valuation multiples in recent years which discouraged candidate companies from floating their shares on the stock market. This research report highlights these issues and suggests corrective measures.
The Beirut Stock Exchange – Drivers of Activity & Stimulus Measures - May 2014
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Lebanon Country Report - October 2009

The Lebanese economy continues to prosper in 2009, notwithstanding the rippling effects of the global financial crisis and propagating World economic recession. Main indicators remain solid, thanks to a regained level of confidence in the economy, a strong banking sector, a prudent Central Bank and an unprecedented rebound in tourism activity.

Lebanon Country Report - October 2009
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Public-Private Partnership Report - November 2011

Private sector participation in public sector enterprises, which is said to enhance efficiency, improve the quality of services rendered and limit corruption, has always constituted a debatable issue in the Lebanese political arena. In fact, private sector involvement was first proposed in the form of privatization, an idea which received backing from international donors, with the Paris II and Paris III conferences even tying the disbursement of some pledged financial aids to the implementation of some reform measures including, among other, the privatization of the telecommunications and energy sectors.

Public-Private Partnership Report - November 2011
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The Lebanese Real Estate Sector - August 2012
Lebanon has long been regarded as the financial center of the region and a hub into the Middle East. However, a fifteen year appalling civil war inflicted heavy losses on the country’s economy, obliterated its infrastructure, and obstructed new investments. Lebanon, however, recuperated and engaged in a long journey to regain its pioneering role; a journey that was hindered but not deterred by a series of impediments and obstacles. In the first post war years, Lebanon engaged in a mega construction project and consequently, the once eradicated Beirut transformed to be the pearl of the East with high tech modern architecture while in the same time preserving its cultural heritage.
The Lebanese Real Estate Sector - October 2008
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The Lebanese Real Estate Sector - August 2012
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Lebanon Amid the Arab Spring - July 2013

The Arab Spring has been touted by many as one of the landmarks of the twenty first century. For decades, many Arab countries have been governed by oppressive leaders, restricting civil liberties and harnessing the resources of the economy to their own benefits, building up as such the momentum for a sentiment of resent and dissatisfaction among citizens. The first spark of the Arab Spring started in Tunisia, and then spread rapidly to other Arab economies, toppling age-long regimes via a domino effect whilst stirring civil wars in other neighboring countries. The Arab Spring, however, and which is still raging nowadays, has come at a catastrophic cost, whether on the human front, claiming tens of thousands of lives, or on the economic front, sending economies into shambles. More specifically, and according to our (Credit Libanais Economic Research Unit) estimates, real GDP losses have amounted to $9.23 billion in Tunisia, $1.15 billion in Yemen, $62.26 billion in Libya and $19.3 billion in Syria. In the case of Egypt, however, it could not be determined whether the losses, and which were not significant relative to GDP in the first place, were a result of the Arab Spring or a simple shift in the economic cycle.

On the local front, Lebanon was to a certain extent spared from the Arab Spring phenomenon, yet its geographical proximity to ailing Syria and the various inter-connections with neighboring Arab countries meant that the political and economic spillovers were inevitable. The tourism sector was one of the first sectors to feel the pinch of the Arab turmoil, as the resulting political instability and deteriorating domestic security conditions prompted some GCC countries to issue travel warnings to Lebanon. The real estate sector followed suit, with prices stagnating and the number of transactions dropping markedly, ending as such a four-year rapid acceleration spree. Accordingly, and due to its high reliance on the tertiary sector, the Lebanese economy suffered major setbacks, prompting international agencies to downwardly revise their growth estimates for Lebanon for the years 2011, 2012 and 2013. 

In this context, we have quantified the economic losses stemming from the Arab Spring on Gross Domestic Product. Accordingly, we have developed an empirical regression model that aims at evaluating the Arab Spring’s economic cost on GDP growth. According to our economic model, we have concluded that the Arab Spring has slashed some 3.3% of Lebanon’s real GDP growth per annum over the 2011-2013 period.

Finally, our economic model also led us to quantify the economic cost of the Arab Spring on Lebanon at $6.03 billion in real terms over the 2011-2013 period, representing 20.21% of the country’s year 2013 real GDP.

Lebanon Amid the Arab Spring - July 2013
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Where is the Euro Heading? - March 2014
The shadows of the “Euro zone crisis” have continued to haunt the old continent up until our present day, staining the Euro area’s economic, social, and political canvases and fueling the need for prompt policy actions. More particularly, economic growth in the Euro zone remains hindered by the high unemployment rates, frail demand, financial market fragmentation, and weak banking sector balance sheets, only to name a few.
In light of the sluggish recovery, which has been accompanied by a relatively low interest rate environment during the last couple of years, the European Central Bank has been envisaging various sorts of measures and policies, including several rounds of quantitative easing (QE), to counter the economic setback and to assure the stability of the zone’s inflation rates (i.e. “below, but close to, 2% over the medium term” according to the ECB).
The Euro currency did not escape the claws of the economic slowdown, displaying signs of volatility against various currencies. Nevertheless, and as witnessed during the latest sovereign debt crisis, the speeches, decisions, and actions of the European Central Bank and Euro zone influential authorities continue to be the main, if not the sole, explanatory factors behind the fluctuations and the volatility of the Euro currency, with other elements such as the improvement in the zone’s macroeconomic indicators (current account balance, capital flows, etc.) and other international macroeconomic indicators having a temporary and marginal effect on the currency’s direction. 
Glancing into the future, the Euro currency seems to continue its solo act, dancing to its own tune and puzzling economists. The key element to anticipate the future trend of the Euro currency’s exchange rate, however, resides in tracking the ECB’s plans and speeches to build a more realistic projection.
Where is the Euro Heading? - March 2014
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The Gold Commodity: Economic Determinants and Future Prospects - April 2014
The gold commodity has always been eyed as a safe-haven investment and a hedge against inflation and financial instability, attracting investors during periods of stock market volatility and macroeconomic turbulences. In fact, and after several years of relative stability, gold prices have soared throughout the global financial crisis era, peaking at around $1,900/ounce in September 2011. Since then, gold prices have been steadily decreasing amid the gradual economic recovery in the United States along with the corrections witnessed in major stock markets.
The different variables explaining gold prices’ volatility can be grouped under supply and demand components, with gold prices being entwined with any shock striking a variable under said components. In this context, the following paper aims at analyzing the interaction between macroeconomic variables that normally feel the pinch of such shocks and the evolution of gold prices.
The model developed in the paper herein leads us to conclude that gold prices have a tendency to slip to around $997 per ounce by year-end 2014, and this amid the improvement witnessed in major stock markets in recent years, coupled with a receding world inflation rate on the back of the gradual tapering in the Fed’s quantitative easing. Our forecast of the price of gold may have to be revisited in the event of any major world economic shock.
The Gold Commodity: Economic Determinants and Future Prospects - April 2014
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