Bank Audi released its annual economic report titled "Has the Uphill Climb Begun, with the Possibility of an Economic Turnaround?"
The report highlights the negative impact of the Hamas-Israel war in the last quarter of the year. Despite an initial improvement, the economy faced a lack of growth.
Bank Audi considers 2023 a year of "performance fluctuations." The first quarter saw a significant depreciation of the national currency, with the exchange rate of LBP to USD reaching an unprecedented level of 145,000 in March, compared to 43,000 at the beginning of the year. This depreciation had substantial negative repercussions on economic and social conditions in Lebanon.
The second quarter witnessed a relative improvement in real sector conditions, with monetary stability and the exchange rate stabilizing around 90,000 LBP. The third quarter experienced a relative macro-economic recovery, thanks to the notably positive performance of the tourism sector and the stability of the exchange rate.
However, the fourth quarter was marked by the reopening of the southern front after the Hamas attack on Israel on October 7. Consequently, most economic gains made by various sectors during the summer dissipated in the fall.
The report indicates that the tourism sector, which was a key driver of growth in the first nine months, has suffered a setback since October due to the negative impacts of the war on tourist influx and Lebanese expatriates returning to the country. Visitor numbers decreased by 18% in the last quarter of 2023 compared to the same period the previous year.
Real sector indicators were mixed throughout 2023, reflecting the overall economic performance. Positive growth was observed in some real sector indicators, including the number of tourists (+17.1%) in the first eleven months, travelers passing through Beirut airport (+12.1%) for the entire year, cement deliveries (+10.7%) in the first six months, and goods volume at the Port of Beirut (+6.5%) in the first ten months.
However, some indicators contracted in 2023, such as cashed checks (-6.3%) in the first eleven months, building permits (-40.8%) for the entire year, exports (-24.0%) in the first seven months, electricity production (-13.9%) in the first six months, and imports (-9.3%) in the first seven months.
Despite the relative stability of the Lebanese pound since March, inflation has remained above 100%. The report indicates that inflation reached 204% in December 2023 on an annual basis, thus leading to a cumulative inflation of around 5,000% since the crisis began in October 2019. Notably, there was an accumulated inflation in US dollars of 47% in 2023.
Regarding monetary policy, the Lebanese Central Bank (BDL) aims to preserve the remainder of its foreign exchange reserves, which have increased by $0.7 billion since the end of July.
In the financial sector, the government approved the budget for 2024 within constitutional deadlines and submitted it to parliament for approval. The budget estimated expenses at about 295.1 billion pounds or $3.3 billion, with revenues of 277.9 billion pounds or $3.1 billion, resulting in a financial deficit of approximately 17.2 trillion pounds or $191 million.
In the banking sector, three separate budgets are adopted by banks: a budget in LBP, a budget in local dollars (lollars), and a budget in fresh dollars. The report highlights an increase in cash deposits, estimated at around $3.5 billion, compared to $2 billion a year ago. Thus, normalizing banking activity and strengthening operational conditions require authorities to adopt a comprehensive recovery plan to reduce the financial deficit caused by state imbalances.
As for the Lebanese capital markets, the stock market continued its upward trend, with the price index rising by 41.2% in 2023, following a 37.2% growth in 2022, driven by the increase in Solidere's stock prices.
The report notes that the war between Israel and Hamas, along with exchanges of fire in southern Lebanon between Hezbollah and the Israeli Army, slowed down the rise of the tertiary sector (commerce and services) with a significant slowdown when several countries advised their citizens against traveling to Lebanon, leading to a decrease in foreign visitors.
On the external front, the balance of payments recorded a surplus of $1.6 billion in the first eleven months of the year, compared to a deficit of $3.2 billion for the entire year 2022. This surplus, despite the decrease in the net external assets of the BDL by $0.9 billion, is due to an increase in the net external assets of banks by $2.6 billion.
Regarding foreign trade, the latest available figures (for the first seven months of the year) show that Lebanese imports decreased by 9% while exports declined by 24% compared to the first seven months of 2022, resulting in a 6% contraction in the external deficit between these two periods.
Foreign currency bank liquidity abroad reached $4.3 billion, in addition to $0.8 billion in foreign currency liquidity in local treasuries.
As for 2024 forecasts, the report outlines three scenarios: a positive scenario with a 25% implementation probability, a negative scenario with about 25%, and an intermediate scenario with 50%.
In regards to the positive scenario, it all depends on the end of war, upcoming presidential elections, the formation of an effective government, the launch of reforms, the conclusion of a final agreement with the International Monetary Fund, and securing foreign aid. In such case, Bank Audi estimates that the real growth rate will exceed 7%, inflation will decrease, the exchange rate will stabilize, the reserves of the BDL will strengthen, and the balance of payments will show a $5 billion surplus.
As for the negative scenario, it is focused on the expansion of the conflict in Lebanese territory, a prolonged presidential vacuum (and thus the continuation of a government without full powers), the absence of economic reforms, and no agreement with the IMF. This would result in a negative GDP growth rate of about -20%, an inflation increase to 400%, a decrease in the reserves of the BDL, and a balance of payments deficit of at least $5 billion.
The intermediate scenario assumes that the conflict in the south will remain limited and that there will be no internal political breakthroughs leading to economic reforms. In this intermediate scenario, the growth rate could hover around zero and the inflation rate could near 100%, with a slight decrease in the reserves of the BDL and an almost fair balance of payments.
The report highlights the negative impact of the Hamas-Israel war in the last quarter of the year. Despite an initial improvement, the economy faced a lack of growth.
Bank Audi considers 2023 a year of "performance fluctuations." The first quarter saw a significant depreciation of the national currency, with the exchange rate of LBP to USD reaching an unprecedented level of 145,000 in March, compared to 43,000 at the beginning of the year. This depreciation had substantial negative repercussions on economic and social conditions in Lebanon.
The second quarter witnessed a relative improvement in real sector conditions, with monetary stability and the exchange rate stabilizing around 90,000 LBP. The third quarter experienced a relative macro-economic recovery, thanks to the notably positive performance of the tourism sector and the stability of the exchange rate.
However, the fourth quarter was marked by the reopening of the southern front after the Hamas attack on Israel on October 7. Consequently, most economic gains made by various sectors during the summer dissipated in the fall.
The report indicates that the tourism sector, which was a key driver of growth in the first nine months, has suffered a setback since October due to the negative impacts of the war on tourist influx and Lebanese expatriates returning to the country. Visitor numbers decreased by 18% in the last quarter of 2023 compared to the same period the previous year.
Real sector indicators were mixed throughout 2023, reflecting the overall economic performance. Positive growth was observed in some real sector indicators, including the number of tourists (+17.1%) in the first eleven months, travelers passing through Beirut airport (+12.1%) for the entire year, cement deliveries (+10.7%) in the first six months, and goods volume at the Port of Beirut (+6.5%) in the first ten months.
However, some indicators contracted in 2023, such as cashed checks (-6.3%) in the first eleven months, building permits (-40.8%) for the entire year, exports (-24.0%) in the first seven months, electricity production (-13.9%) in the first six months, and imports (-9.3%) in the first seven months.
Despite the relative stability of the Lebanese pound since March, inflation has remained above 100%. The report indicates that inflation reached 204% in December 2023 on an annual basis, thus leading to a cumulative inflation of around 5,000% since the crisis began in October 2019. Notably, there was an accumulated inflation in US dollars of 47% in 2023.
Regarding monetary policy, the Lebanese Central Bank (BDL) aims to preserve the remainder of its foreign exchange reserves, which have increased by $0.7 billion since the end of July.
In the financial sector, the government approved the budget for 2024 within constitutional deadlines and submitted it to parliament for approval. The budget estimated expenses at about 295.1 billion pounds or $3.3 billion, with revenues of 277.9 billion pounds or $3.1 billion, resulting in a financial deficit of approximately 17.2 trillion pounds or $191 million.
In the banking sector, three separate budgets are adopted by banks: a budget in LBP, a budget in local dollars (lollars), and a budget in fresh dollars. The report highlights an increase in cash deposits, estimated at around $3.5 billion, compared to $2 billion a year ago. Thus, normalizing banking activity and strengthening operational conditions require authorities to adopt a comprehensive recovery plan to reduce the financial deficit caused by state imbalances.
As for the Lebanese capital markets, the stock market continued its upward trend, with the price index rising by 41.2% in 2023, following a 37.2% growth in 2022, driven by the increase in Solidere's stock prices.
The report notes that the war between Israel and Hamas, along with exchanges of fire in southern Lebanon between Hezbollah and the Israeli Army, slowed down the rise of the tertiary sector (commerce and services) with a significant slowdown when several countries advised their citizens against traveling to Lebanon, leading to a decrease in foreign visitors.
On the external front, the balance of payments recorded a surplus of $1.6 billion in the first eleven months of the year, compared to a deficit of $3.2 billion for the entire year 2022. This surplus, despite the decrease in the net external assets of the BDL by $0.9 billion, is due to an increase in the net external assets of banks by $2.6 billion.
Regarding foreign trade, the latest available figures (for the first seven months of the year) show that Lebanese imports decreased by 9% while exports declined by 24% compared to the first seven months of 2022, resulting in a 6% contraction in the external deficit between these two periods.
Foreign currency bank liquidity abroad reached $4.3 billion, in addition to $0.8 billion in foreign currency liquidity in local treasuries.
As for 2024 forecasts, the report outlines three scenarios: a positive scenario with a 25% implementation probability, a negative scenario with about 25%, and an intermediate scenario with 50%.
In regards to the positive scenario, it all depends on the end of war, upcoming presidential elections, the formation of an effective government, the launch of reforms, the conclusion of a final agreement with the International Monetary Fund, and securing foreign aid. In such case, Bank Audi estimates that the real growth rate will exceed 7%, inflation will decrease, the exchange rate will stabilize, the reserves of the BDL will strengthen, and the balance of payments will show a $5 billion surplus.
As for the negative scenario, it is focused on the expansion of the conflict in Lebanese territory, a prolonged presidential vacuum (and thus the continuation of a government without full powers), the absence of economic reforms, and no agreement with the IMF. This would result in a negative GDP growth rate of about -20%, an inflation increase to 400%, a decrease in the reserves of the BDL, and a balance of payments deficit of at least $5 billion.
The intermediate scenario assumes that the conflict in the south will remain limited and that there will be no internal political breakthroughs leading to economic reforms. In this intermediate scenario, the growth rate could hover around zero and the inflation rate could near 100%, with a slight decrease in the reserves of the BDL and an almost fair balance of payments.
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