By David Rosenberg

Beirut, Lebanon

Lebanon may finally have a new government, ending a nearly half-year political vacuum, but it's got a lot of catching up to do in order to set right an economy upset by regional turmoil and domestic uncertainty that has kept investors and tourists at bay.

Economists and investors are doubtful that the country's new leadership - a 30-member team of ministers dominated by the Shiite Islamist movement Hezbollah - has the political wherewithal to address the problems. Since Prime Minster Najib Mikati unveiled his cabinet June 13, analysts have been lowering the forecast for economic growth while market capitalization on the Beirut Stock Exchange has declined about 3 percent.

"Clearly there is skepticism, given the challenges the new government faces," Nassib Ghobril, chief economist at Beirut-based Byblos Bank, told The Media Line. "Whether it will be able to focus on the socio-economic and financial issues or be engulfed in the political scene, given what's happening in Syria and increasing likelihood of indictments related to the Special Tribunal for Lebanon, remains to be seen."

Democratic Lebanon escaped the unrest that has swept over much of the Middle East this year, but its $60 billion economy is reliant on foreign investment, tourism and regional trade. Just as the mass protests engulfed the region last January, Lebanon's government was forced to resign, leaving the country largely leaderless until Mikati assembled his coalition just two weeks ago.

As a result, the coincident indicator, a monthly estimate of Lebanon's gross domestic product pointed to real annualized growth of less than 1 percent in the first quarter of 2011 following strong performances in each of the previous two years. Barclays Capital last week cut its outlook for GDP growth this year to 3 percent from a previous estimate of 5.3 percent.

Barclays is among the more bullish estimates for the economy. The International Monetary Fund is predicting growth will slow to 2.5 percent for the year while the Economist Intelligence Unit is looking for just 1.3 percent. Economists are looking for some improvement in the second half of the year by virtue of the fact that now there is a government in power.

"It's better to have a government than the vacuum we had in last five months," said Ghobril.

Mikati is a billionaire businessman who enjoys the confidence of the business community, and both the economy and finance ministries are assigned to people close to him. But the power behind the scenes in his new government is Hezbollah, which the U.S. government has designated a terrorist organization.

Adding to his troubles, Mikati enters office at a particularly delicate time in Lebanon.

Next door in Syria, President Bashar Al-Assad is struggling to put down mass protests that have left more than 1,400 dead and sent refugees fleeing into Turkey and Lebanon. Syria is a conduit for Lebanese trade with the Arab world while Damascus plays the role of political kingpin in Lebanese politics, creating a source for stability or for chaos. Many Lebanese worry that Al-Assad may fan the flames of sectarian violence in Lebanon to prove to the U.S. and Israel that only his rule is capable of keeping the region quiet.

"The situation adds to the uncertainty of the environment. Investors delay investment decisions to have a clear outlook of the political situation," Marwan Barakat, chief economist, at Bank Audi, told The Media Line. "In the best-case scenario, it will be year of moderate growth given what happened in the first half and given the uncertainties prevailing even after the formation of new governments."

The most immediate political test facing Mikati, however, is the United Nations Special Tribunal for Lebanon (STL), which is probing the 2005 assassination of Saad Hariri, a former prime minister. Hezbollah engineered the fall of Lebanon's last government, led by Hariri's son Rafik, after he refused to reject the STL.

On Monday, pan-Arab newspaper Asharq Al-Awsat reported that the STL was expected to make a request to Lebanese authorities to question five Hezbollah members in the next few days. Other media reported that the three Lebanese judges on the tribunal were summoned to the STL's Hague headquarters three days ago in an effort to protect them ahead of the release of the indictment and in its aftermath.

The hardest hit segments of Lebanon's economy have been tourism, where a sharp 15.5 percent drop in tourist arrivals in the first quarter helped to create Lebanon's first current account deficit since 2005, according to the Barclays report. Foreign investment also declined and to a lesser extent so did the money that Lebanese expatriates send home, which is a key driver for the economy.

While Lebanon was a rare island of stability in the Middle East, the absence of a government meant it couldn't exploit the opportunities to lure tourists who had to cancel their Egyptian and Tunisian holidays, said Ghobril of Byblos Bank. Nor did it act to attract capital flowing out of the Gulf countries.

The tourism outlook will probably improve in the second half, but it will be constrained by Ramadan's timing this year in August, which will dent travel by Muslims. Consumer spending by Lebanese is also offsetting the adverse effects of the Arab Spring, added Barakat of Audi Bank.

Economists say that the Mikati government has a long list of structural and fiscal reforms to address, but at this point, Barakat said investors would be happy if Lebanon's leaders ensure peace and quiet.

"The main aim of the government should be to foster stability. Any political or economic action has to focus on maintaining stability in a difficult domestic and regional environment. This is the challenge, much more the structural reforms," Barakat said.


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