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Bombed economies
Published in Al-Ahram Weekly on 20 - 07 - 2006

Affecting the Israeli as much as the Lebanese economy, Sherine Abdel-Razek contends, the escalating violence has implications for the entire region
Both Lebanon and Israel were planning a five per cent economic growth rate for this year. While Israel was much closer to achieving the goal thanks to a sound economic recovery over the past three years, the outbreak of violent attacks last week makes the ambitious goal a far-fetched one for both countries.
However, Lebanon's shaky economy is believed to shoulder the heaviest toll. While it is still difficult to assess the value of losses as Israeli attacks continue, Lebanon's Finance Minister Jihad Azour on Tuesday put the losses in infrastructure at around $1.5-2 billion, as the attacks targeted roads, bridges, telecommunications, electricity, ports, airports and even private sector facilities, including a milk factory and food warehouses. Southern cities, strongholds of Hizbullah, were levelled to the ground.
Lebanon has opened an account to raise funds from the Arab countries and individuals to rebuild the devastated areas. Saudi Arabia offered a $50 million relief aid to spend on basic services while the Kuwaiti government allocated $20 million for the same reason.
Long queues of tourists on the Syrian borders few hours after the initial attacks were clear signs of the heavy losses Lebanon's critical tourism sector will shoulder. After more than a decade of civil war, Lebanon has finally succeeded in positioning itself as a popular holiday destination in the Middle East, especially for tourists from the Gulf. The United Nations estimates Lebanon's tourism sector contribution to the economy to be around 12 to 15 per cent of gross domestic product. This year was expected to produce the highest growth in Lebanese tourism since the end of the civil war in 1990, with the government projecting a figure of 1.6 million visitors.
"The tourism sector is not only important as a main foreign currency winner in the Lebanese economy but as a main attraction for foreign direct investments as well," said Magdy Sobhi, an economic expert at the Al-Ahram Centre for Political and Strategic Studies.
Commenting on the economic implications of the attacks on Lebanon, Business Monitor International (BMI) warned that they will be worse than after the assassination of former prime minister Rafik Al-Hariri. While the previous crisis was short- lived, BMI believes that this current situation involves a lot more uncertainty.
BMI noted that while the Lebanese Lira peg to the dollar is not yet in danger, the reserve cushion may be hard hit in the coming weeks. Nonetheless, Banque du Liban Governor Riad Salameh has reassured markets that the bank has sufficient reserves, at $13 billion, to withstand any outflows without putting the currency in danger.
Credit Agencies are also concerned. Standard & Poor's issued a negative outlook on the country's sovereign rating of B- immediately after the attacks. The Beirut Stock Exchange has been closed since Friday after its main benchmark index, BLOM, lost 14 per cent of its value.
Tourism revenues in Israel are also expected to fall. Israel was just recovering from a 50 per cent decline in visitors' numbers following the Palestinian Antiradar in 2000. However, the Israeli economic fundamentals are much better than those of Lebanon. In a report launched early this week, Fitch Ratings said that although confidence in Israel will take a short-term knock due to the recent escalation of violence, the economy starts from a buoyant position that, together with a robust policy framework, will help limit the economic fallout.
"Before the escalation of violence, Israel's economy was set to grow by over five per cent this year with the current account in surplus, foreign investment strong and inflation heading back within the one to three per cent target band," said Richard Fox, head of the Middle East and Africa Sovereign ratings at Fitch in London.
Fox believes that even if the economy slows down, Israel's public debt dynamics have improved to the extent that the debt to GDP ratio will continue to fall in all but the worst, and unlikely, scenarios.
This view seems to give credence to a mantra of a former finance minister that Israel's high-tech, export-based economy is more sensitive to the US NASDAQ stock market than to violence in the West Bank city of Nablus.
Moving to the neighbouring countries, the effect of the conflict results on mixed impact. "While the conflict-fed rise in oil prices will add to the wealth of the oil exporting countries of the Gulf, the resulting tension might strip the region of needed FDIs, tourism and portfolio investments," said Sobhi.
Being in an area that contains about two-thirds of the world's oil reserve, the conflict is affecting the already soaring oil prices amid fears that a further increase in the crude value would slow down economic growth worldwide.
The strife has pushed oil crude prices to a record $78.40 per barrel on Friday, and while rumours of a possible ceasefire pushed it down 1.7 per cent on Monday it rose again on Tuesday to reach $74. Analysts expect it to reach $100 if the strife widens to include Iran, the second largest oil producer in OPEC.
"Tourists fleeing the Lebanese borders will hardly head to another country in the region," Said Nashwa Saleh, head of research at HC Securities. "The whole region will be affected, including Egypt -- Europeans and other nationalities might not discern between different countries -- some of them think of research at HC Securities."
The conflict will take its toll on the regional stock markets as well. In the week's early transactions, the regional stock markets from Cairo to Doha fell in doldrums with some losing up to 10 per cent like those of Riyadh and Cairo's which halted trading for one hour on Sunday after the market recorded its highest one-day loss since August 2005. While the markets gained some ground by mid-week, Saleh believes that the harm will last for some time.
The conflict means higher political risk for the whole region. In turn, investors will need higher returns as compared to before to compensate for these new risks. This translates to an increase in overall required return and hence a drop in the region's stock markets. The regional stock markets' loss of appeal, even to local investors, might lead to more investments in the region's real estate sector, according to Saleh. Amidst the current ongoing conflict, all one can do is to hold one's breath and hope losses in the region will not be as grave as some predict.


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