Lebanon Economic Forecast

The economy appears to be gradually recovering according to the latest data, with the private sector PMI reflecting the strongest improvement in private-sector operating conditions since June 2013 in July. Recovering tourism and trade are the key drivers: Visitor arrivals rose year on year by roughly a quarter in H1, while container activity in the Port of Beirut increased 14% in annual terms through May. However, falling construction activity, triple-digit inflation, a dysfunctional banking system, the government’s limited spending capacity and political paralysis continue to hold back the economic rebound. In August, several Gulf states, Germany and the UK advised their citizens against travelling to Lebanon or parts of the country following violence in a Palestinian refugee camp, which is likely to weigh on tourism in H2.

Inflation fell to 252% in July from 254% in June. Inflation will be by far the highest in the region this year, due to past currency devaluations, the elimination of fuel subsidies late last year and the weak black-market lira. Further devaluations and informal dollarization are upside risks, while the volatile parallel-market FX rate is a risk in both directions.