New Lebanon govt faces struggle for investor confidence

BEIRUT — Lebanon's Prime Minister Fouad Siniora faces a difficult task in trying to build investor confidence in his new government, the first since Syria ended its 29 year military presence.

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Published: Fri 15 Jul 2005, 12:44 PM

Last updated: Thu 2 Apr 2015, 4:40 PM

He needs to convince investors that the same politicians who set up a welfare state widely seen as corrupt and inefficient can reform the system they created.

And with public debt hitting almost twice Lebanonís gross domestic product, Siniora has little time to embark on reforms to avert a financial crisis and revive an economy that has stagnated for most of the past decade.

Power struggles have already delayed the formation of a government for two weeks. But Siniora said on Thursday that an agreement has been reached with President Emile Lahoud to form a cabinet composed of people who are not members of political parties.

Financiers expressed scepticism about new ministers enjoying independence from a political class divided along sectarian lines, which has resisted fiscal reform and cuts in spending for more than a decade.

''No one doubts Siniora's diligence, integrity and intent to reform,'' leading financier Joe Sarrouh of Fransabank told Reuters.

''The problem is that even technocrats reflect a political composition. Will they be able to take decisions without referring to their political leaders?''

Most prominent Lebanese politicians were groomed by Syria and only turned against Damascus after the assassination of Siniora's mentor, Rafik Al Hariri, prime minister for most of the period after the 1975-1990 civil war.

Hariri's killing prompted the withdrawal of Syrian forces from the country after a 30 year presence and lessened foreign interference in the general elections that brought Siniora to power, raising hopes of an end to a political vacuum since Hariri's killing.

The financial authorities have been pulling every trick in the book during this time to defend the currency and maintain confidence, including relying on dollar deposits from commercial banks and hiking interest rates.

To their delight, Lebanon has not seen a mass flight of capital, although the balance of payments deficit widened to $1.42 billion in the four months to April compared a surplus of $168 million for the whole of 2004.

''What is sustaining Lebanon is capital inflows that kept coming despite everything,'' a senior financial official said.

''It is going to be hard to convince the market that after playing a major part in the system that got us into this mess, Siniora can reform. The more we keep buying time the more costly the crisis will be,'' he said.

Siniora, a senior confidante of Hariri, is also confronted by violence as car bomb attacks against politicians have continued to hit Beirut since Hariri was killed.

While no one is expecting a return to civil war, the attacks could mean chronic instability in the country.

This could harm Siniora's efforts to engineer what Marwan Barakat, head of research at Lebanon's Banque Audi, describes as a ''soft landing'' for the economy.

Such a scenario envisages international aide and moves to streamline the government resulting in economic growth and falling debt ratios while maintaining monetary stability.

The central bank has relentlessly intervened in the market since Hariri first took power in 1992 to maintain the Lebanese pound exchange rate at 1,507.50 to the dollar. This has cost the government billions of dollars and kept interest rates high.

Average yields on Lebanese pound treasury bills stands at 7.5 per cent and 6.9 percent on Lebanon's foreign paper. The government raised half the $36 billion public debt on the international market.

Barakat says the political changes and sympathy generated by Hariri's assassination would ease Lebanon's transformation into a modern, market oriented system with people less reliant on costly government handouts and high deposit rates.

''The prospects of better debt management and structural adjustment reform, such as privatisation and cutting political spending, are bigger than any time before,'' Barakat said. ''We can look forward to a soft landing. Lebanon has already rebuilt its infrastructure and production capacities, which could enable it to achieve almost double digit growth, once the reform agenda is on the right track,'' he said. Hariri borrowed steadily to rebuild Lebanon and pay for a ballooning public payroll and security apparatus. He tried unsuccessfully to grow the economy out of the debt and decrease the debt to GDP ratio.

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