Talks in Qatar between delegations from Prime Minister Fouad Siniora's government and the opposition on May 18 and 19 have yielded some positive results, according to Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr Al Thani. The two sides have discussed taking steps towards convening the parliament to elect General Michel Suleiman as the new president to replace Emile Lahoud, who left office in November. There have also been conversations on a new electoral law, a demand made by Hezbollah as a prerequisite to ending street protests and blocking the presidential vote.

One of the government delegates at the talks, Marwan Hamadeh, the Lebanese minister of telecommunications, said that while some serious issues still remained unresolved, such as Hezbollah's disarmament, the talks were moving forward.

"We cannot say that all the problems are solved. There is progress in some issues, but we have not yet reached a full positive progress," he said.

Progress or not, a week of violent conflict between government supporters and members of the opposition Hezbollah in mid-May that left more than 80 people dead has prompted fears of a return to the conditions of the civil war of 1975-1990.

It has also threatened to reverse the small gains made by the Lebanese economy following the severe downturn experienced during and after the Israeli military strikes against the country in the summer of 2006.

The tourism industry has been one of the sectors hardest hit by the renewed political unrest. As tension mounted in early May, road access to Beirut's Rafic Hariri International Airport was closed, in part due to arguments over whether a senior airport official was linked to Hezbollah. Almost immediately, most airlines servicing the airport cancelled all direct flights to the Lebanese capital.

Joe Sarkis, the minister of tourism, said the airport closure, along with the deepening political crisis, had resulted in a wave of cancellations by foreign tourists, especially from the key Middle Eastern market.

"Thousands of Arab tourists cancelled plans to visit Lebanon even before the closure of the airport. It seems that many of them felt that the situation would deteriorate sooner or later," Sarkis told the local press on May 15.

In another interview printed the same day, Sarkis said the Lebanese economy had already suffered losses up to $600m since early May, much of this due to a downturn in tourism receipts.

"It is a disaster because we were preparing ourselves for a promising season in spite of the political problems," Sarkis said. "If things do not go back to normal immediately, as we are now in the middle of May, it means that we are going to lose another year."

Besides a fall in tourism revenues, the economy has other challenges ahead. On May 15, Riad Salameh, the governor of the central bank, warned that Lebanon would face a sharp increase in inflation, tipping price rises of more than 10% for the year. If Salameh's predictions are fulfilled, it would be the first time since 1994 that Lebanon's inflation rate strays into double digits, having ranged between 2% and 4% for the past 12 years.

Salameh said this year's expected rise would mainly be due to global factors, such as increasing oil prices, but also acknowledged the importance of a stable domestic environment.

"If the political climate improves in 2008 this will be a very promising year for the banks and there will not be any harm to the economy," he said.

Salameh said that while the central bank had more than $14bn in foreign currency reserves, the bank had drawn up plans in case the current political crisis became drastically worse. Though not giving details of these contingency plans, Salameh said an increase in interest rates was not immediately on the cards.

At the height of the clashes, Moody's gave Lebanon a small vote of confidence, announcing that it was not making any change to its ratings for the country's foreign and local currency government bonds.

Though the current rating of "B3" is the lowest rating possible for governments that are not in default, or at imminent risk of default, a Moody's official said Lebanon had shown an ability to overcome many difficulties.

"Given that the government of Lebanon is not in default, Moody's believes that the country's low ratings already encapsulate the risk of severe political turmoil," said Tristan Cooper, vice-president of Moody's Sovereign Risk Unit.

However, there were still concerns over recent developments, and Moody's planned to monitor the situation closely, Cooper said.

"We would be particularly concerned if political chaos or a change in the composition of the government deterred donor support or altered the government's willingness to service its obligations," he said.

So far, donor countries such as Saudi Arabia and the US have remained committed to maintaining their political and financial support for the Siniora government. However, this backing may come to the test if Hezbollah returns to the government, one of the conditions it is seeking to end its campaign of unrest.

Source: Oxford Business Group