Sectarian Tensions Flaring Up

BMI View: Sectarian tensions will continue to increase in Lebanon over the coming quarters, mainly as a result of the ongoing civil war in neighbouring Syria. This will ensure that the political process remains slow, while the army will find it increasingly difficult to maintain security. Political instability will result in a significant deterioration of the country's macroeconomic outlook.

Sectarian tensions continue to rise in Lebanon. As we highlighted in our latest Syrian conflict crib sheet ( see 'Conflict Crib Sheet And FAQ ', August 16), Lebanon is the country most at risk of experiencing a prolonged period of instability as a result of the civil war in neighbouring Syria, due to its entrenched confessional political system and the strong historical ties between the two countries. Tensions between Sunni and Shi'a communities in Lebanon have indeed risen noticeably over the past few months. In the latest major developments, a pair of car bombs exploded near two mosques on August 23 in the largely Sunni northern Lebanese city of Tripoli, killing at least 47 people - the deadliest attack since the end of the civil war in 1990. Earlier, a car bomb which ripped through the southern Beirut stronghold of Shi'a militant group and political party Hizbullah killed at least 24 on August 16. As a result, the US State Department on September 6 ordered nonessential US diplomats to leave Lebanon due to security concerns, and urged private US citizens to depart the country. The increasing number of refugees from Syria is exhacerbating an already highly unstable political situation. According to the UN, over 731,000 Syrian refugees have fled to Lebanon since the onset of the civil war as of September 11 2013, a very significant burden for a population of approximately 4.3mn.

The Syrian crisis has recently taken a turn away from US military action, following Damascus' acceptance on September 10 of a Russian proposal that Syria gives up its chemical weapons ( see 'Chemical Weapons 'Deal' Offers Exit, But War Risks Remain', September 11). Risks of a potentially dramatic intensification of the conflict resulting from an American attack have therefore abated over the short term. However, Syria will remain reluctant to abandon its chemical weapons. In addition, even if Syrian President Bashar al-Assad appears to cooperate by letting international inspectors into Syria to monitor and remove its chemical weapons, huge logistical challenges could hamper the implementation of the plan. As a result, Washington will keep the military option on the table, and strikes could well take place at a later stage. Risks of a further intensification of the conflict remain therefore significant, which could result in a further deterioration of the political situation in Lebanon.

Curve Could Steepen Further
Lebanon - Registered Syrian Refugees

BMI View: Sectarian tensions will continue to increase in Lebanon over the coming quarters, mainly as a result of the ongoing civil war in neighbouring Syria. This will ensure that the political process remains slow, while the army will find it increasingly difficult to maintain security. Political instability will result in a significant deterioration of the country's macroeconomic outlook.

Sectarian tensions continue to rise in Lebanon. As we highlighted in our latest Syrian conflict crib sheet ( see 'Conflict Crib Sheet And FAQ ', August 16), Lebanon is the country most at risk of experiencing a prolonged period of instability as a result of the civil war in neighbouring Syria, due to its entrenched confessional political system and the strong historical ties between the two countries. Tensions between Sunni and Shi'a communities in Lebanon have indeed risen noticeably over the past few months. In the latest major developments, a pair of car bombs exploded near two mosques on August 23 in the largely Sunni northern Lebanese city of Tripoli, killing at least 47 people - the deadliest attack since the end of the civil war in 1990. Earlier, a car bomb which ripped through the southern Beirut stronghold of Shi'a militant group and political party Hizbullah killed at least 24 on August 16. As a result, the US State Department on September 6 ordered nonessential US diplomats to leave Lebanon due to security concerns, and urged private US citizens to depart the country. The increasing number of refugees from Syria is exhacerbating an already highly unstable political situation. According to the UN, over 731,000 Syrian refugees have fled to Lebanon since the onset of the civil war as of September 11 2013, a very significant burden for a population of approximately 4.3mn.

Curve Could Steepen Further
Lebanon - Registered Syrian Refugees

The Syrian crisis has recently taken a turn away from US military action, following Damascus' acceptance on September 10 of a Russian proposal that Syria gives up its chemical weapons ( see 'Chemical Weapons 'Deal' Offers Exit, But War Risks Remain', September 11). Risks of a potentially dramatic intensification of the conflict resulting from an American attack have therefore abated over the short term. However, Syria will remain reluctant to abandon its chemical weapons. In addition, even if Syrian President Bashar al-Assad appears to cooperate by letting international inspectors into Syria to monitor and remove its chemical weapons, huge logistical challenges could hamper the implementation of the plan. As a result, Washington will keep the military option on the table, and strikes could well take place at a later stage. Risks of a further intensification of the conflict remain therefore significant, which could result in a further deterioration of the political situation in Lebanon.

Further Militarisation Could Ensue

Growing sectarian tensions are making it increasingly difficult for the Lebanese Armed Forces (LAF) to administer security. The army, with around 70,000 active military personnel, has one of the highest ratios of personnel to civilians in the Middle East and North Africa region, and it possesses the technical capabilities and financial resources to contend with escalating violence. However, while until recently the army was virtually seen as the only independent institution in Lebanon, it has come under increasing criticism for being biased towards Hizbullah. As a result, deployments in Sunni-dominated areas of the country are increasingly difficult. At the same time, Hizbullah's militants are often in charge of maintaining order in Shi'a-dominated areas, further hindering the LAF's ability to de-escalate the conflict.

The security situation in the country is further jeopardised by increasingly porous borders with Syria, where weapons are smuggled and fighters go inside the neighbouring country to support both the Assad's regime and the rebels. According to anecdotal reports, while there are currently only five active official border crossings into Syria, approximately 178 other illegal crossings exist. More weapons are being piled into Lebanon as well, increasing the potential for sectarian tensions to flare up.

Risks Elevated
MENA - Short-term and Long-term Political Risk Rating, Out of 100

Political Process In A Deadlock

Disagreements among Lebanese political blocs for and against Assad's regime are also contributing to the country's ongoing political deadlock. Prime minister-designate Tammam Salam, a prominent Sunni politician, was nominated in April 2013 to form a new coalition government. However, his efforts have subsequently hit a dead end due to the competing conditions demanded by opposing factions. The March 14 alliance, a coalition of political parties and independents united by their anti-Syrian regime stance, calls for forming a neutral Lebanese government which focuses on addressing key economic and political issues, while referring disputed issues, such as Hizbollah's military activities, to a National Dialogue committee. On the other side, Hizbullah argues that Syria's civil war requires the formation of a national unity government in which all parties are represented. As a result of such a situation, the policy-making process has remained slow over the past few quarters. As an illustration, the parliament has so far failed to approve a key across-the-board adjustment to the salary scale of public sector employees, which had been passed by the government in March. Despite calls by Lebanese President Michel Sleiman and religious leaders in September for the formation of a new government comprising all the political parties to meet security challenges and prevent the country's drift toward sectarian strife, we do not see the impasse ending anytime soon.

In A Soft Patch
Lebanon - Components Of GDP (LBPbn) & Real GDP Growth, % chg y-o-y

Macroeconomic Outlook Uninspiring

Elevated security risks are having a detrimental impact on the country's economy. With parliamentary elections set to take place in 2014, the administration will remain unable to make much headway on any reform of the economy. In addition, political uncertainty and the disruption of supply routes will continue to hinder production, while foreign investment will be increasingly unwilling to enter the Lebanese market. The all-important tourism sector is also in the midst of a crisis. 753,786 tourists came to Lebanon in the first seven months of 2013, a 43.15% decline compared to the same period in 2010 - before the beginning of the civil war in Syria. We project real GDP growth in Lebanon of 1.4% in 2013 and 3.2% in 2014, compared to growth of 2.0% in 2012 ( see ' In A Soft Patch ', July 19).

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Sector: Defence & Security
Geography: Lebanon, Lebanon
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