Special country risk survey: Lebanon on the ropes after Beirut explosion

The destroyed port in Beirut

The impromptu special survey shows Lebanon’s total risk score downgraded further to less than 22 points out of a maximum 100, pushing the country deeper into the lowest of the five tiers containing the world’s worst default risks, to 164th out of 174 countries.

That puts it on a par with Yemen, Venezuela and Sudan in the global risk rankings:

Lebanon’s fall from grace is nothing short of dramatic for a country with such huge potential in a region where failed states are now becoming only too commonplace.

The risk score has fallen by more than 13 points in the survey this year and more than 22 during the past decade, highlighting the country’s long-term decline.

Before the explosions, or even the true extent of the Covid-19 shock was known, the IMF was predicting GDP would decline in real terms by 12% this year, marking a third and even worse year of contraction, with inflation shooting up to 17% and the fiscal deficit widening to 15% of GDP.

Covid-19 cases are expected to increase in the country in the coming weeks, driven by the massive interactions between the injured from the blast and doctors and nurses 

 - Rafah Toubia Farah

Those indicators could now be much worse.

The Beirut incident alone has created an economic, political, social and humanitarian crisis, adding to pre-existing concerns about corruption and institutional failings, currency stability, and government finances and payments, with more than half the city damaged, at least 171 people killed and nearly 6,000 injured.

“The healthcare sector, which was already struggling due to the economic crisis and the surge in the number of Covid-19 cases in the country, has been severely impacted,” says survey contributor Rafah Toubia Farah, a local country and financial institutions risk management expert.

“The blast turned the already existing challenging situation in this sector into complete disorder. Two major hospitals near the port have been devastated and their patients were transferred to other health structures that were rapidly overloaded with the increased flow of patients, and consequently quickly experienced shortage in supplies.”

She adds: “In addition, Covid-19 cases are expected to increase in the country in the coming weeks, driven by the massive interactions between the injured from the blast and doctors and nurses, without adopting protective measures because of the emergency.”

With the failure to pay off foreign debt, the collapse of the currency and foreign reserves, hyperinflation and the repercussions of the coronavirus, the Beirut explosion will make things worse 

 - Fadi Haddadin, FPA

Fadi Haddadin, an economist at the US Foreign Policy Association (FPA), says: “Lebanon continued to navigate its political and economic realities on the basis of a fragile balance among the local power brokers.

“With the failure to pay off foreign debt, the collapse of the currency and foreign reserves, hyperinflation and the repercussions of the coronavirus, the Beirut explosion will make things worse.”

Shrinking GDP

Richard Abdallah, a Beirut-based market risk analyst, says: “Total damages from the explosion could easily surpass $15 billion.

“Every year, around 73% of total trade is channelled through the port of Beirut. This makes it the country’s largest by far, translating into a significant loss of value of imports that cannot be delivered and exports that can no longer be shipped.”

He adds: “The value of total exports out of the Beirut port amounted to $1.4 billion in 2019 and $533 million as of May 2020. In addition, the port hosts the country’s main grain silo, which held around 85% of Lebanon’s wheat and cereals that are used to make flatbread, a principal food in most Lebanese households.

“For a country that imports most of its needs, including 80% of its foodstuff, the loss of the port comes as a huge blow. Thousands of businesses will suffer and more than a third of the population will be jobless.”

Abdallah concludes: “The garbage crisis, continuous power cuts and increases in the prices of basic goods will be present. With the complexity of problems, succession of crises, and double-digit billions of dollars of losses on the civilian and infrastructural fronts, Lebanese GDP might shrink by more than 20%.”

Lebanon may encounter little sympathy when it turns to creditors for finances to reconstruct Beirut and address the deepening crisis 

 - Richard Abdallah

The government has been in talks with the IMF to try to secure a multi-billion-dollar rescue package. However, constant bickering over the country’s assessment of losses and the general reluctance of those in power to enact reforms have stalled a breakthrough.

“Lebanon, once known as ‘the Switzerland of the Middle East’, may encounter little sympathy when it turns to creditors for finances to reconstruct Beirut and address the deepening crisis,” says Abdallah.

“The funds needed would go far beyond the $298 million in humanitarian aid pledged so far by several countries and international organizations.”

The FPA’s Haddadin states that any upcoming international conference seeking to mobilize financial assistance for supporting Lebanon’s basic needs, including food and medicine, protecting its sectors such as health and education, and boosting reconstruction efforts might help in the short run.

“But we are in an age when miracles are no longer available,” he adds.

Uncertain future

So, what now for a country that always seemed to be in investors’ sights?

Haddadin paints a dismal picture, noting that as Lebanon has endured financial bankruptcy, social unrest and bloody insecurity, it traditionally leads to three possibilities: a never-ending civil war, the intervention of local forces – such as the army or militias with popular support – or military intervention of a regional force or international forces, eg UN or Nato intervention.

He says Lebanon has “a weak government that lacks legitimacy and does not enjoy a monopoly on the means of violence, extreme political and societal fragmentation, and severe economic weakness”.

The devastating explosion will also push internal disintegration “into a kind of vicious circle”, adds Haddadin, primarily because of Lebanon’s identity politics.

If Lebanon continuous with this gradual path into a failed state, it will also have implications for the Levant, the Mediterranean and the wider region.

“The country would become a big generator of humanitarian crises, displaced people and refugees, thus endangering regime stability in neighbouring states, if not destabilizing regional social order,” says Haddadin.

The Lebanese people must be hoping and praying these worst cases do not play out, but time is running out and investors must gauge whether they have sufficient risk appetite.