In a speech in Beirut on October 7, Edward Gardner, the International Monetary Fund's (IMF) chief representative in Lebanon, said the country's economy could prove relatively resilient.

According to Gardner, Lebanon faces a lower threat level than other emerging economies, as the banking sector has few direct links to the current crisis. This is partly due to the central bank not exposing itself to high-risk financial products and limiting private banks from buying into the US subprime market. In 2004, the central bank issued a circular restricting domestic financial institutions from freely trading in the subprime market, while earlier this year it limited bank lending to 60% of the cost of real-estate projects in order to shield the local financial sector from excessive speculation.

Though Lebanon has laboured under a massive national debt, confidence in Lebanese markets remains high due to internal financing from the central bank; large remittances; no history of bank defaults; and banks' maintenance of large liquidity as a buffer to defaults, Gardner said.

While Lebanon had so far remained relatively immune from the worst of the economic crisis, Gardner did warn that there was no room for complacency. "Fundamentally sound institutions are not immune from panic attacks," he said.

In particular, he said Lebanon could be indirectly affected if the powerful economies in the Gulf region were hard hit by the crisis, which could result in job losses for Lebanese expatiate workers, a fall in remittances and a decline in foreign direct investment.

Gardner's comments echoed those of another IMF official, the fund's division chief for its Middle East and Central Asia Department, Domenico Fanizza. On October 3, Fanizza told local media that the global crisis had had no direct impact on Lebanon, "thanks to the supervision of the central bank, which helped the Lebanese banks not to be exposed to the financial crisis abroad".

However, Fanizza too sounded a note of warning, citing some concern that the financial turmoil could translate into decreased economic activity in the Middle East in general, and in the Gulf region in particular.

One possible victim of the economic crisis will be the planned privatisation of Lebanon's two mobile phone networks. The government had hoped to sell off the licences for the state-owned operators before the general election tentatively scheduled for May next year. The sale could generate up to $6bn, which the government had planned to use to pay off some of the state debt.

Economist Kamal Hamdan believes the global downturn could mean that the time is not right to call for foreign or Arab bids for the two networks.

"The financial crisis may turn into a recession in 2009 and of course this will have an impact on the region in general," Hamdan told local media on October 9. "A credit crunch means that investors will be less inclined to put their money on projects."

Gardner also suggested that the telco sell-off might have to be postponed until market conditions were more favourable. "Obviously, you don't want to privatise in a market where there is no credit," he said.

Falling economic confidence and a tightening of global belts could also see a drop in tourism arrivals in Lebanon, impacting one of the country's biggest revenue earners. With the Gulf states providing the bulk of Lebanon's foreign visitors, a roll back of the regional economy could upset the tourism industry, which is still struggling to recover from the setbacks caused by Israel's military intervention in 2006 and the long-running domestic political instability that followed.

According to former Finance Minister Jihad Azour, while Lebanon has so far managed to maintain economic stability, the need remains for a tight hand on the financial markets so as to avoid becoming embroiled in the crisis.

His foremost concern was the continued monitoring of Lebanese banks, "especially their transactions outside of Lebanon and in the markets which have been affected by the crisis," Azour said at a conference on October 8.

Riad Salameh, governor of the central bank, has vowed that the bank will continue its interventionist policy, which he says has been vindicated by the economy's limited exposure to the subprime crisis.

"The central bank will not let any bank fail," Salameh said during a conference in mid-September. "Today, this statement will attract much less criticism as we have seen the US, the UK and other European countries prevent their banks from defaulting even when it necessitated the use of contributors or central-bank money, which we, in Lebanon, have never done."

While promising to keep monetary policy on a short leash, Salameh and the central bank may have their work cut out for them if the global economic crisis takes hold in the Middle East.

Source: Oxford Business Group