LEBANESE ECONOMY KICKS OFF 2017 ON STRONGER FOOTING

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1 N 53 February 2017 Page 3 Tourist arrivals surge through November, spending lags behind Page 4 New car sales will likely accelerate in 2017 Page 5 Real estate sales hit $8.5bn in 2016 despite headwinds Page 6 IMF urges immediate fiscal reforms, forecasts growth of 2% in 2017 Page 7 Latest data for Lebanon s key economic sectors Page 8 Key trends in the Lebanese economy LEBANESE ECONOMY KICKS OFF 2017 ON STRONGER FOOTING Balance of payments posts surplus of $1.3bn in 2016 Lebanese government resumes first oil and gas licensing round Consumers are upbeat over future economic developments The Lebanese economy kicked off 2017 on a stronger footing following a rare domestic political breakthrough in late 2016 and in the aftermath of the Central Bank s financial mechanism which beefed up its armada of foreign assets to $40.6bn by mid-january. The Central Bank s Coincident indicator, a composite measure of economic activity, rose by 4.5% yoy in the first 11 months of 2016, including an increase of 6.2% in November, signaling acceleration in economic activity at the end of The protracted conflict in Syria continues to dominate Lebanon s outlook, with registered refugees now comprising over a quarter of the population, but rejuvenated political processes following the election of a president and the appointment of a new prime minister may help push economic growth to 2% in 2017 from just 1% in 2016, according to the IMF. Tourism, exports, and real estate already closed 2016 on a high note. Tourist arrivals surged by 10.9% yoy to 1.55 million in the first 11 months of 2016, their highest level since 2010 and the third highest on record. A stable security and political situation helped assuage fears among foreigners who flocked to the country in November 2016 at their fastest pace in over 15 months. A thaw in political relations between Saudi Arabia and Lebanon may pave the way for the return of a sizeable number of tourists from Gulf Cooperation Council countries, many of which had warned their citizens against travel to Lebanon in recent years. The gross weight of goods exports increased by 10.7% to 1.74 million tons in Exports also picked up in 2016, a slight turnaround in activity after five years in decline. The gross weight of goods exports increased by 10.7% to 1.74 million tons, but the value of exports rose by just 0.8% to $3bn during the year, reflecting pricing pressure on exporters from a stronger US Dollar and more costly transportation. Positive export momentum may strengthen in coming months, with goods exports projected to increase by 6% in 2017 and by 5.5% in 2018, according to the IMF. Balance of payments () Exports () ext Source: BdL, Economena, SGBL Research Source: Customs, Economena, SGBL Research

2 Stable exports helped ease pressure on Lebanon s balance of payments, which swung to a $1.3bn surplus in 2016 after five consecutive years in deficit. However, the main impetus for a balance of payments surplus came from nearly $14bn in Central Bank swap operations aimed at attracting foreign currency, some of which from abroad. Private sector deposits rose by $7.6bn in the first 11 months of The operations also led to a rise in private sector deposits by $7.6bn in the first 11 months of 2016, compared with an increase of $5.4bn over the same period in. At the same time, real estate activity regained some momentum in 2016, despite an unsupportive domestic economic environment and challenging conditions in countries with large Lebanese expatriate populations. The value of sales transactions rose by 5.9% to $8.5bn during the year, equivalent to an increase of $472.7m, but the number of the transactions rose by just 1.4% to 64,248, pointing to faster growth in sales of larger or higher ticket properties. Cement deliveries, a proxy for construction works in process, also surged by 8.1% yoy to 5 million tons in the first 11 months of SIGNFICANT UPSIDE POTENTIAL IN 2017 AND BEYOND Prospects for the oil and gas sector received a boost at the start of 2017 after the government re-opened its first licensing round for offshore oil and gas. Lebanon opened five blocks for bidding by 46 companies that pre-qualified in 2013, and invited others to participate in another pre-qualification round that closes at the end of March. Pre-qualified companies, including Exxon and Total, would need to submit their bids to the Petroleum Administration by September 15. Domestic oil consumption grew by 10.8% to $3.7bn in 2016 as global oil prices bounced back. Lebanon s oil and gas reserves are estimated at 865 million barrels and 96 trillion cubic feet respectively, potentially worth several hundred billion dollars. The country s domestic oil consumption grew by 10.8% to $3.7bn in 2016 as global oil prices bounced back. And unlike in 2016, an improving political and economic backdrop should lend support to new vehicle sales in 2017, according to Business Monitor International (BMI), a London-based market research company. New vehicle registrations are projected to grow by 4.3% this year, with passenger car sales accelerating by 4.4% and commercial vehicles rising by 3.0%, stated BMI. The new car market had lost some momentum in 2016 as global and domestic factors lined up against it during the year. New car sales slid by 6.7% to 38,875 vehicles, their lowest level since 2013, with passenger cars in particular falling at a steeper pace of 7.7% to 36,326 vehicles. Confidence is already running high among consumers. An index of consumer confidence published by ARA Marketing Research & Consultancy rose by 66.5% yoy to 161 points in the fourth quarter of 2016, its highest level since the conflict Syria erupted five years earlier. The future economic situation sub-index more than doubled in the fourth quarter to the highest level since Consumers appear even more upbeat over upcoming economic developments with the future economic situation sub-index more than doubling in the fourth quarter to the highest level since the survey began in late Furthermore, if remaining political milestones are met quickly, the political breakthrough could pave the way for much needed reform and adjustment, boost the economy, and help correct macroeconomic imbalances, stated the IMF. A resolution of the Syria conflict would also significantly boost Lebanon s economy. Lebanon is uniquely placed to benefit from the reconstruction effort, as well as from the reestablishment of trade and an improvement in regional investor confidence, according to the IMF. Imports of mineral fuels and oils () CCI: future economic situation (average) Source: Customs, Economena, SGBL Research q11 4q12 4q13 4q14 4q15 4q16 Source: ARA, Economena, SGBL Research

3 TOURISM TOURIST ARRIVALS SURGE THROUGH NOVEMBER, SPENDING LAGS BEHIND Tourist arrivals jumped to a 6-year high through November 2016 Visitors from the GCC fell to a 15-year low, may pick up in 2017 Spending by tourists has yet to catch up to growing arrivals Tourist arrivals to Lebanon surged by 10.9% yoy to 1.55 million in the first 11 months of 2016, their highest level since 2010 and the third highest on record. A stable security and political situation helped assuage fears among foreigners who flocked to the country in November 2016 at their fastest pace in over 15 months. In fact, turnout hit a record high for the period when excluding visitors from the six Gulf Cooperation Council countries and Iran. The number of visitors from the ed States, Canada, and Australia, all reached record highs in the first 11 months of 2016, reflecting an improved perception of the security environment in the country. Depreciation in the Euro and the Sterling do not appear to have had a considerable impact on visitor traffic to Lebanon, as arrivals from France, Germany, and Great Britain all peaked in the first 11 months of Lebanon s tourism industry continued to be dominated by Iraqi visitors whose numbers jumped by 24.9% yoy to an all-time high of 221,209 through November, equivalent to 14.3% of total arrivals during the period. On the other hand, tourism activity from the Gulf has remained depressed as a result of travel warnings issued in The number of visitors from the GCC fell to a 15-year low of 74,282 in the first 11 months of 2016, compared with a peak of 363,158 visitors over the same period in More tourists from the GCC are expected in 2017 as a result of improved political relations with Lebanon, and deteriorating security at popular destinations such as Turkey. More tourists from the GCC are expected in 2017 as a result of improved political relations with Lebanon. TOURIST SPENDING IS STILL FALLING The uptick in tourist numbers has failed to revitalize spending, and delivered only a slight nudge to hotel performance in The value of tax refunds by Global Blue, considered a proxy for tourist spending, fell by 9% in 2016, but the drop appears to have tapered off to some extent in the last quarter of the year with a 3% yoy decline in refunded amounts. Spending by tourists from Saudi Arabia continued to decline into the fourth quarter, but visitors from other countries are estimated to have spent more in Lebanon. Tax refunds to residents of Kuwait and Qatar jumped by 70% yoy and 14% yoy respectively in the fourth quarter, according to Global Blue. Similarly, occupancy rates at Beirut s 4- and 5-star hotels improved to 58.8% in 2016, compared with 57.4% in, despite a massive increase in tourist numbers. Revenue per Available Room (RevPAR), a key performance indicator for hotels, fell by another 13.5% yoy to $81.7 during the year, as hotels adjusted their pricing to lure in tourists with tighter travel budgets. Tourist arrivals (12-month moving sum) Tourist arrivals (Jan-Nov, %yoy) Total (millions) GCC ('000) Nov-07 Nov-10 Nov-13 Nov-16 Iraq Australia Iran Germany USA Egypt Jordan TOTAL Canada Britain France KSA Kuwait UAE -74.7% -19.1% -25.1% 24.9% 24.8% 17.5% 16.5% 13.1% 11.9% 11.1% 10.9% 9.2% 8.8% 7.5% Source: CAS, Economena, SGBL Research Source: CAS, Economena, SGBL Research

4 TRANSPORTATION NEW CAR SALES WILL LIKELY ACCELERATE IN 2017 New car sales fell by 6.7% to 38,875 vehicles in 2016 American brands gained market share, Toyota sales slumped Car market may grow by 4.3% in 2017 as economic activity picks up - BMI The new car market lost some steam in 2016 as global and domestic factors lined up against it during the year. A sluggish economy, higher gas prices, tighter lending requirements, and appreciation in the Japanese and South Korean currencies proved difficult for new car dealers to offset after several years of successfully growing their market. New car sales slid by 6.7% to 38,875 vehicles, their lowest level since 2013, with passenger cars in particular falling at a steeper pace of 7.7% to 36,326 vehicles. On the other hand, commercial vehicles, which represent 6.6% of the new car market, surged by 11.2% during the year to a six-year high of 2,549 vehicles. Commercial vehicles sales, which represent 6.6% of the new car market, surged by 11.2% during the year. Lebanon s economy is estimated by the International Monetary Fund to have grown by just 1% in 2016, and consumer confidence had been broadly stagnant in the first 10 months of the year, ahead of the presidential elections in October and the cabinet formation in late December. Retail prices of gasoline also regained some ground in 2016, rising by 10% to $15 per 20 liters for the standard 95-octane grade at the end of the year, adding to pressure on disposable income, especially for low and middle-income consumers. Similarly, appreciation in the Yen and the Won throughout most of 2016 put upward pressure on pricing of Japanese and South Korean vehicles. As a result, the country s leading brands lost significant market share in 2016 with passenger car registrations at Toyota, Nissan, and Hyundai falling by 25.7%, 12.7%, and 11% respectively. Still, Kia remained the most popular new brand in Lebanon with 19.5% of the passenger car market, followed by Hyundai with a market share of 14.6%. Meanwhile, European brands showed mixed results, with Peugeot, Renault, and Mercedes making headway during the year, compared with a downturn in sales at BMW, Land Rover, and Audi. In contrast, American brands gained significant ground in Passenger car registrations at Chevrolet grew by 24.5% to 1,615 vehicles, while sales at GMC more than doubled during the year. American car brands gained significant ground in OUTLOOK CONSTRUCTIVE FOR 2017 Unlike in 2016, an improving political and economic backdrop should lend support to new vehicle sales in 2017, according to Business Monitor International (BMI), a London-based market research company. Real GDP growth is expected to reach 2% in 2017, twice as fast as in 2016, according to the IMF. As a result, new vehicle registrations are projected to grow by 4.3% in 2017, as new passenger car sales accelerate by 4.4% and commercial vehicles increase by 3.0%, stated BMI. New car sales (% change) CCI: durable goods purchases index (12m ma) 11.2% % -23.5% Passenger Commercial -7.7% Source: AIA, Economena, SGBL Research 75 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: ARA, Economena, SGBL Research

5 REAL ESTATE REAL ESTATE SALES HIT $8.5BN IN 2016 DESPITE HEADWINDS Property sales rose by 5.9% to $8.5bn, foreigners still kept away Cement deliveries surged as construction activity accelerated Central Bank stimulus and regulations to stimulate property market Real estate activity regained some momentum in 2016, despite an unsupportive domestic economic environment and challenging conditions in countries with large Lebanese expatriate populations. The value of sales transactions rose by 5.9% to $8.5bn during the year, equivalent to an increase of $472.7m, but the number of the transactions rose by just 1.4% to 64,248, pointing to faster growth in sales of larger or higher ticket properties. The market has likely remained afloat largely as a result of fundamental demand by residents. Foreign investors, particularly from the Gulf Cooperation Council, have been shying away from Lebanese property after relations with Lebanon soured in early Sales to foreigners fell to 1,124 transactions, equivalent to 1.75% of total transactions in 2016, compared with 2.2% in, data by land registry and cadastre via Economena Analytics showed. Sales to foreigners fell to 1,124 transactions, equivalent to 1.75% of total transactions in Similarly, property demand from Lebanese expatriates has softened as a result of slowing economic activity in oil-exporting host countries including Saudi Arabia and Nigeria. A weaker Euro may have also partially weighed on real estate prices as well as demand from Lebanon s European expatriate population. Nevertheless, the real estate market continues to be supported by a series of government initiatives, including up to $600m in low-interest stimulus funds allocated by the Central Bank for residential loans in The Housing Bank, a joint venture between the government and commercial banks, announced in early 2017 a decrease in interest rates on housing loans to 3% from 5%, which may further help prop up demand for housing loans. In addition to reducing the cost of financing for homebuyers, the Central Bank is encouraging investment in the property market through Circular 427. The latter allows commercial banks to provide financing to real estate investment companies looking to acquire mortgaged properties from developers. By helping developers offload their current stock and reduce debt exposure, Circular 427 may help reinvigorate construction activity in coming years. That would add to already more buoyant construction activity in Cement deliveries, a proxy for construction works in process, surged by 8.1% yoy to 5 million tons in the first 11 months of Cement deliveries, a proxy for construction works in process, surged by 8.1% yoy to 5 million tons in the first 11 months of In the meantime, developer appetite for new projects remained broadly unchanged in Construction permits, a leading indicator of construction activity, fell by a slight 0.9% yoy to 12.2 million square meters, their lowest level in a decade. Beirut and Mount Lebanon bore the brunt of falling construction demand, while permits in the rest of the country, particularly Tripoli and the Bekaa, sprung back. Real estate sales () Cement deliveries (Jan-Nov, mtons) Source: Land Registry & Cadastre, Economena, SGBL Research Source: BdL, Economena, SGBL Research

6 IMF URGES IMMEDIATE FISCAL REFORMS, FORECASTS GROWTH OF 2% IN 2017 Syria conflict dominates growth outlook, but security conditions holding up well Salary scale adjustment for the public sector poses challenges BdL should raise rates, if necessary, to protect the peg The protracted conflict in Syria continues to dominate Lebanon s outlook, with registered refugees now comprising over a quarter of the population, stated the International Monetary Fund at the conclusion of its Article IV consultations. Syrian refugees are straining local communities, adding to poverty and unemployment, and placing further pressure on the economy s already-weak public finances and infrastructure, according to the IMF. Economic growth, however, is still projected to accelerate to 2% in 2017 from just 1% in 2016, riding largely on rejuvenated political processes following the election of a president and the appointment of a new prime minister. Despite the slight uptick in economic activity, growth is unlikely to return to its estimated potential of 4% in the absence of a turnaround in confidence, or a resolution of the Syrian conflict, stated the IMF. Meanwhile, the IMF called on the international community to be more supportive of Lebanon s efforts of hosting Syrian refugees to help alleviate some of the burden on the country s infrastructure and public finances. NO ALTERNATIVE TO FISCAL ADJUSTMENT Nonetheless, increased support by the international community is no substitute for upfront fiscal adjustment, as neither donor assistance, resolution of the Syrian conflict, nor any prospective revenue from oil and gas would, in itself, sustainably resolve Lebanon s debt dynamics, according to the IMF. To that end, Directors at the IMF urged passage of a budget for 2017, and urged immediate reforms in the electricity sector, which remains a large drain on the budget and a key bottleneck to improved competitiveness and equity. The IMF called on authorities to put an immediate stop to growth in public debt, which is estimated at 144% of GDP at the end of 2016, but acknowledged that the government will need to borrow an additional $5.1bn in 2017 to cover the deficit, in the absence of fiscal reforms to bolster revenues. The IMF suggested concrete measures to increase state revenues and help put the public debt back on a downward path. Among the measures is an increase in the corporate income tax rate from 15% to 17%, the introduction of a capital gains tax on real estate, an increase in the rate on interest income tax from 5% to 7%, and an increase in the VAT rate from 10% to at least 11%. The VAT on diesel, which was suspended in 2011, needs to be restored, and electricity tariffs should be raised to eliminate state transfers to Electricité du Liban, according to the IMF. On the spending side, the IMF stated that a long-standing salary scale adjustment for the public sector poses challenges. If passed, its budgetary costs need to be fully offset to preserve the targeted fiscal adjustment, and at a minimum, salary increases should be phased in without retroactive payments. EXCHANGE RATE PEG IS APPROPRIATE ANCHOR The IMF threw its support behind BdL s policy of an exchange rate peg to the US Dollar, calling on the latter to stand ready to increase interest rates, if necessary, to support inflows. BdL s recent financial operation has successfully bolstered its gross international reserves and banks capital, but it is not a sustainable solution to Lebanon s funding needs, stated the IMF. With the operation now closed, and under a baseline assumption of no adjustment and reform, financial inflows are projected to return to the levels seen in the early half of short of the levels needed to fund the economy over the medium term, according to the IMF. UPSIDE POTENTIAL IS SIGNIFICANT Despite a gloomy outlook emanating from regional risks and stretched public finances, Lebanon maintains significant upside potential. Domestically, if remaining political milestones are met quickly, the recent election of a president and appointment of a prime minister could pave the way for much needed reform and adjustment, boost the economy, and help correct macroeconomic imbalances, stated the IMF. Regionally, a resolution of the Syria conflict would also significantly boost Lebanon s economy, and in the event of an early resolution, Lebanon would be uniquely placed to benefit from the reconstruction effort, as well as from the reestablishment of trade and an improvement in regional investor confidence, according to the IMF. Real GDP growth (%) 12% 10% 8% 6% 4% 2% 10.3% 0% -2% -0.8% % Source: IMF, Economena, SGBL Research

7 Key indicators Cleared cheques Real estate transactions Construction permits Cement deliveries Tourist arrivals Airport traffic Balance of payments Money supply: M3 BSE volumes Passenger car sales Hotel occupancy (average) Sqm, m Tons, m m m m % , Oct , Nov , Dec , YTD , PYTD , Indices Consumer Confidence Index - ARA Consumer Price Index Purchasing Managers' Index BdL Coincident Indicator Oct Nov Dec %YTD Trade Imports Exports Trade balance Port of Beirut volumes TEUs, m Sep Oct Nov YTD PYTD Financial and monetary Commercial bank assets Claims on the resident private sector Claims on the non-resident private sector Claims on the public sector Resident private sector deposits Dollarization rate (average) Non-resident private sector deposits Dollarization rate (average) Private sector deposits with commercial banks Private loans / deposits Public sector deposits BdL foreign assets BSE market capitalization Gross public debt % % % Sep Oct Nov YTD %YTD Public finance Revenues Value Added Tax Telecommunications Income taxes Customs taxes Expenditures Transfers to EdL Debt service Primary balance Fiscal balance Jun Jul Aug YTD: year-to-date, PYTD: previous year-to-date. Source: MoF, BdL, BSE, ARA, Customs, Markit, EY, RHIA, CAS, Economena, SGBL Research YTD PYTD

8 Consumer confidence: future economic situation index Expectations of an economic boom surged in late 2016 following the announcement of a political breakthrough among rival parties. The future economic situation consumer confidence index jumped by 59.6% yoy to 142 pts in December 2016, according to ARA Marketing Research & Consultancy Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Source: ARA, Economena, SGBL Research Tourist arrivals to Lebanon (Jan-Nov, 000) Tourist arrivals to Lebanon from Europe and USA hit a record high in the first 11 months of The combined number of visitors from the two regions increased by 11.2% yoy to 789,541 through November, equivalent to 79,743 more visitors over the period USA 506 Europe Source: CAS, Economena, SGBL Research Construction permits area in 2016 (msqm, % change) Real GDP growth forecasts for 2017 The area of construction permits fell by 0.9% yoy to 12.2 million square meters in 2016, largely as a result of falling demand in the traditional Beirut and Mount Lebanon areas. The rest of the country s regions saw stronger demand by developers during the year. Nabatieh % Bekaa % S. Lebanon % Beirut % Tripoli % N. Lebanon % Mt. Lebanon % Source: OEAB, OEAT, Economena, SGBL Research Economic growth in the Middle East and North Africa region is projected to rebound to 3.1% in 2017, up from 2.7% in 2016, according to the World Bank. Growth in Lebanon is expected to accelerate to 2.2%, but will likely remain among the slowest in the region, ahead of only Bahrain, Saudi Arabia, and Iraq. Djibouti Iran Egypt Morocco Qatar MENA Tunisia Oman Algeria Jordan UAE Kuwait Lebanon Bahrain KSA Iraq 5.2% 4.4% 4.0% 3.6% 3.1% 3.0% 2.9% 2.9% 2.6% 2.5% 2.4% 2.2% 1.8% 1.6% 1.1% 7.0% Source: World Bank, Economena, SGBL Research