(MENAFN - Oxford Business Group) While Lebanons economy has performed soundly over the past year, there are lingering concerns that political instability could weaken investor confidence in the capital markets, unwinding economic progress made in the last year.
The political climate has become increasingly heated in the past few months due to a standoff between Shiite movement Hizbullah and the ruling March 14 coalition over the UN-backed inquiry into the killing of former premier Rafik Hariri - father of the current Prime Minister Saad Hariri - on February 14, 2005.
The Special Tribunal for Lebanon (STL) is preparing to announce initial indictments into the assassination, with expectations running high that members of Hizbullah will be formally accused of involvement in the plot.
Hizbullah officials, including the groups leader Sayyed Hassan Nasrallah, have called for the inquiry to be halted, warning that any move to implicate their members will result in a breakdown of national reconciliation. With two members in a cabinet grouping that has veto power, the movement potentially has the political clout to bring down Hariris government.
The political stability seen since the national unity government was formed in November 2009 has helped maintain economic performance, with GDP growth of 7% forecast for 2010 and the nations dramatically high debt levels dipping below 150% of GDP in the year.
There has, however, been less certainty in capital markets. Market capitalisation of the Beirut Stock Exchange decreased by 1.6% to 12.4bn over the first 11 months, of which 71% was in banking stocks and 24.8% in real estate stocks. However, the market has been more active, with total trading volume for same period hitting 161m shares, an increase of 62.2% on the same period last year. The combination of lower values and higher trading activity likely reflects a jittery atmosphere, say analysts.
Nassib Ghobril, the chief economist at Byblos Bank, cites concerns over the political outlook as cooling consumer and business confidence, with negative perceptions affecting the stock exchange.
We know there are some companies that had expansion plans but are now taking a wait-and-see approach, Ghobril said in an interview with Medialine on November 30. Theres been a decline in the stock market since the summer, which has reflected political sentiment more than underlying performance, he said.
Riad Salameh, the governor of the central bank, is confident that the countrys capital markets can ride out any storm.
From experience, we know what our country can encounter, he told the Financial Times in an interview on November 19. We have shown resilience because of measures put in place. Even in the worst days, Lebanon never defaulted.
Though Salameh acknowledged that a deterioration of the political situation could cause concerns, he said Lebanons financial stability was based on the strong balance sheets of the banking sector, minimising the risk and forming a powerful argument to the markets.
Markets have taken note, at least recently, with 725m worth of Eurobonds offered by the state in mid-November snapped up rapidly by both local and overseas investors. This despite the issue having the lowest market yields on any paper issued by Lebanon for fixed-rate bonds, with the weighted coupon average being just 5.44%.
The low rates, and the fact that the issue was oversubscribed more than three times, represented a vote of confidence in Lebanon, said Finance Minister Raya Haffar Hassan.
The interest rates on the new issue were the lowest in Lebanons history and the international bond markets with limited ceilings and foreign investors grabbed 26% of the entire Eurobond issue, she said on November 11. Indeed, the figures were a far cry from bonds issued in the early 1990s, when coupon rates at times were more than 30%.
The lead-up to the STL issuing indictments could see the fragile faith in capital markets further shaken, since the tribunal seems likely to reignite political and factional tensions. However, having seen similar crises come and go, fundamental economic confidence in Lebanon will most likely be maintained in the long term.