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French Version

Political bickering is measured in billions of...- The Daily Star

Political bickering is measured in billions of dollars - What politicians do and say impacts on economic health - The Daily Star

Study suggests lawmakers should take more responsibility for their words, as statements may boost - or depress - country's finances.

'Success - pending reforms.' That's how one should describe the 'Paris II' donor conference - at least it's a second chance.

Over the past couple of months, the Lebanese have experienced a period of internal political stability - something they are not used to - and have witnessed an unprecedented summit aimed at helping the country's $16 billion economy and organized by a powerful European country.

The fruits of political stability could be potential economic prosperity, or at least averting economic and financial disaster. Everyone agrees that Lebanon had passed through very tough times during the civil war years. These years of destruction dragged Lebanon from a leading country in the Middle East in all aspects to a simple country that is struggling to revive its economy and deal with its mounting debt.

Alan Greenspan, the chairman of the US Federal Reserve, recently outlined the path followed by emerging economies and went as far as naming the politically driven economic problems of emerging economies as the main threat to the effectiveness of their monetary policy and financial system.

If history provides a lesson, the path followed by most emerging markets often ends painfully. What drives this painful progression almost always is the greed of politicians and their constant manipulation of the system to further their personal economic agenda, which is always disguised as their public political agenda. As a matter of fact, politicians engage in true public service as a matter of necessity, not of possibility. Some Lebanese politicians are qualified to supervise doctoral dissertations in this area.

What most Lebanese don't realize is the cost they are still paying nowadays as a result of political instability in the country and in the region in general. This article, based on the findings of our study, is an attempt to measure the effects that 'Lebanese politics' is having on the economy in general and in particular on the capital markets in Lebanon (stock and bond markets).

The biggest problem the country has faced over the past 10 years is the increasing amount of debt. It has been growing at an average rate of 27 percent for the past ten years, but has slowed down to 10 percent in the past five years. Currently, the net public debt represents around 170 percent of the total gross domestic product (GDP), the highest level among all rated sovereigns.

With Paris II, monetary policy gets significant relief. The fact that this country was able to schedule a date is a tremendous success, regardless of how much it got in loan guarantees at reduced interest rates. Unfortunately, it looks like monetary policy is getting more support from outside the country than from inside.

Monetary policy at this critical moment represents the future of this country and the financial health. The idea behind this study is to shed some light on the real cost of political bickering and hope that the Lebanese do not fall into the same trap that has been pulling them further down into more uncertainty.

A significant part of the success of the Francophone summit and the positive image that Lebanon was able to convey to the world was partly attributed to the calm political scene. The hope is that after Lebanon scores another historic success, politicians do not ruin it to expand selfish personal agendas.

It is crucial that one compare Lebanon to similar states, which are facing the same problem and have managed to get out of it, and try to follow their steps.

In 1998, Jamaica's debt burden was 132 percent of GDP, where Lebanon's deficit was fairly similar at 107 percent. Both Jamaica and Lebanon had witnessed little or zero growth from 1995 to 2000. The story of the two countries facing similar fiscal problems diverged recently when the Jamaican government undertook a fiscal correction program, including cutting expenditures and privatizing a number of public entities.

The result was that the debt burden stabilized and started to decline in 1999. It reached 115 percent of the GDP in 2000 and it is expected to decline further to less than 100 percent this year if the Jamaican government continues with its privatization plans and continues to cut expenditures. Unfortunately this was not the case for Lebanon. Over the same period, the government oversaw a ballooning deficit. Why is it so difficult here to cut expenditures and reduce the budget deficit? Is there any implicit cost Lebanon is paying for political bickering, and is it possible to quantify it?

This year, the Fed (the US central bank) lowered its key interest rate from 6 percent to 1.25 percent, a 475 basis point decrease for 2002. Banks in Lebanon couldn't follow the trend as they were trying to keep deposits in their hands.

Interest rates were lowered, but not in the same magnitude, and interest rates on the Lebanese pound were not lowered at all while it was lowered internationally by most central banks. The Fed is still holding interest rates at 1.75 percent, but the increase in rates here in Lebanon on US deposits is mainly to avoid or try to minimize the capital outflow that the country faced recently, for reasons that can be attributed to Lebanon directly and to the political instability that the region as a whole is facing.

Banks are not the only institution raising interest rates. The government has also been hiking its interest rates. Over the last year, the government increased the yield on two-year Treasury bills from 14.14 percent to 16.14 percent. After Paris II, investors' confidence and that of the banking sector got a big boost. On Monday, the yield on the two-year notes dropped to 13.48 percent, indicating a real shift in sentiment. Our study has gathered data for Solidere stock over four years and collected significant news that happened for the same period from Bloomberg financial services.

The Bloomberg database classifies important events into two categories: economic and political. These classifications were then measured by the impact of the news on the price of Solidere stock. Those findings are summarized in the table below. If one looks at the cumulative 5-day return in the last column, one sees that positive political events - for example, in September 2000 when Prime Minister Rafik Hariri won the parliamentary elections - have a smaller impact on the stock price than positive economic events. On the other hand, the impact of negative political events - for example, when Speaker Nabih Berri held a news conference to oppose some appointments - have a greater negative impact on the stock price than a negative economic event: -7.20 percent compared to -5.61 percent.

Politics and unstable regional conditions also hold costs for the debt market. Lebanon has around $10 billion in foreign debt, most of which is in the form of eurobonds held mainly by Lebanese commercial banks.

There is a difference of around 332 basis points, or 3.32 percent, between the cost of the $10 billion from the last eurobond-issue date to the weeks before the Paris II conference. Translating this percentage into dollars, one has an additional $332 million in cost that the Lebanese government is paying on the $10 billion in foreign debt.

Over the years of our study, the economic situation, as measured by figures issued by the Central Bank, did not change that much. If one takes the Central Bank number for GDP growth, one has a positive 2 percent growth compared to flat to negative growth in the past couple of years. There has also been 0 percent inflation according to Central Bank statistics.

The idea is that even though there has been a deterioration in the sovereign debt rating over the past couple of years (and part of the rise in yield is attributed to that), the downgrade does not explain all of the yield difference and the remainder can be attributed to political instability. Lebanon is paying a very high price for political maneuvering which is motivated by personal agendas and comes at the expense of the future stability of both monetary and economic policies. Unfortunately in Lebanon, public service is an opportunity to get rich. Paris II is a golden opportunity to fix the country's monetary problems, and for the government to do so it needs cooperation. What the country also needs is the same level of help and confidence that it recently received from foreign friends from those at home.

Counting the costs

Event3-day return 4-day return 5-day return
Political positive 3.76 %6.36 %8.77 %
Economic positive 1.67 %6.35 %12.37 %
Political negative - 3.87 %- 5.26 %- 7.20 %
Economic negative - 4.37 %- 5.61 %- 5.61 %

Beirut 02-12-2002
Assem Safieddine and Ahmad Jarouche
The Daily Star

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