Lebanon Real Estate Newsletter Vol. 4, Issue 1 - January, 2008

BEIRUT: The Economist Intelligence Unit (EIU) estimates that real GDP in Lebanon went up by 1.7 percent in 2007, noting that this growth could have been higher had it not been for political uncertainty. In a new report, the EIU says it does not see a near end to the stalemate in the country and for this reason it expects domestic demand to remain sluggish in 2008, with real GDP growth of around 1.3 percent, before rising to 2.5 percent in 2009, driven by increased private consumption and fixed investment.

The report, which was published by Audi Bank's Lebanon Weekly Monitor, also addressed inflation, finding that the ongoing political uncertainty, as well as shortages related to reconstruction in the wake of the 2006 war with Israel, kept average consumer inflation at around 4 percent in 2007, on the back of imported inflationary pressures, especially from oil prices.

These pressures are expected to persist in 2008, as the dollar and, by extension, the Lebanese pound, continue to weaken. It added that petroleum imports will remain expensive in the upcoming two years, despite continued subsidies. Also, a planned increase in the VAT rate in 2008 may push consumer prices up in the months immediately following its execution.

"As a result, inflation is anticipated to average 5 percent in 2008, before falling back below 4 percent in 2009," the EIU said The study also cited the Central Bank's commitment to defend the peg of the Lebanese pound to the US dollar, and thus projected that the exchange rate will remain fixed over the outlook period. The EIU added the Central Bank has the ability to control the peg and strong support from commercial banks, which cannot withstand a collapse of the peg, as they hold most of Lebanon's foreign debt.

Nevertheless, the EIU stressed the role of foreign currency depositors, which could expose banks to a liquidity drain, should there be a shift in international sentiment.