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Lebanon: Losing the Peace?

Nadine Windsor - 27th July 2017
Lebanon: Losing the Peace?

A generation after the end of Lebanon’s civil war, the country still faces enormous internal and external challenges which continue to hold it back from fulfilling its potential. There is little reason to suppose that things are about to change for the better; indeed, the risks appear to be heavily skewed to the downside. This is a chapter from the e-book 'The Future of the Middle East' co-produced by Global Policy and Arab Digest, and edited by Hugh Miles and Alastair Newton. Freely available chapters will be serialised here and collected into a final downloadable publication in the spring.

Plus ça change…

“There is nothing like returning to a place that remains unchanged to find the ways in which you yourself have altered.” Nelson Mandela

“Is the country still at war?” is the question Lebanese are most often asked when they meet other people, especially when living outside the region. While the answer is naturally “of course not, the war ended in 1990!”, it is arguable that the events that have taken place ever since have left me and quite a few of my fellow citizens to wonder.

The Taif Agreement, also known as the National Reconciliation Accord, was signed to give back the country its sovereignty in the south and to ensure Syria would withdraw within two years. If one looks back 28 years later what actually triggered the Syrian troops withdrawal from Lebanon was not the signed agreement but the Lebanese people’s mobilization after the killing of former Prime Minister Rafic Hariri by a car bomb in February 2005.

Then what is commonly called the "Arab Spring" started in December 2010 and, with no real warning, civil war erupted in Syria a few weeks later. As a result, the Syrians came back to Lebanon but, this time, civilians. According to Amnesty International, no less than one-in-five people in Lebanon today is a Syrian refugee.

The very fabric of society is under severe stress…

Even before the refugee crisis, the infrastructure of Lebanon was barely sufficient to provide for the needs of the country’s citizens. The inflow has now created significant imbalances from the infrastructure perspective and as well as from an economic and financial angle. Furthermore, it is not at all clear that these people will ever return home even if the civil war in Syria were to end. A reasonable assumption, in my view, is that the longer the war goes on, the fewer Syrians will ultimately go home. And, even though the intensity of the fighting may decline in the foreseeable future as Islamic State is ousted from its last strongholds in the country, peace and stability in a reunified nation state still seem to be a very long way off indeed. Thus, the demographics of Lebanon have likely been significantly changed by the Syria conflict more or less in perpetuity.

…exacerbated by economic woes

For anyone not familiar with the Lebanese financial system, let me put it simply as follows. It is almost a miracle the country has not gone bankrupt even once over the last 74 years (independence was declared on 22 November 1943). It is a known fact that there are more Lebanese citizens living outside Lebanon than in Lebanon itself and remittances have been a significant factor in strengthening the local banking sector. In 2008, after Lehman Brothers filed for bankruptcy, the country saw a historic surge of cash coming in, as demonstrated by the World Bank data

Being a financier, I feel obliged to note that Lebanon is credit rated B-, along with Ukraine and Ghana just to name a few. Credit agencies use letters to evaluate the risk of a country defaulting on its financial obligations. A single-B rating, as it is the case for Lebanon, implies investors will look at Lebanon financial debt as “junk” with a relatively high risk of default. As was very well flagged by Steve Johnson in his FT article dated 9 June 2017, Lebanon has “the third most indebted public sector in the world” behind Greece and by 2022; it will beat Greece as the debt continues to grow. The key to the sustainability of high indebtedness (ie avoiding a default) almost certainly lies in ensuring strong continuing inflows of remittances from overseas.

Anyone who has worked with Lebanese in the financial sector will most likely agree if I say these people are usually pretty good at what they do and enjoy a high degree of creativity.  After the 2008 events, the Banque Du Liban (“BdL”) had to come out with something to boost remittances and foreign deposits. As accurately summarized in a Fitch recent report on Lebanon(2), the financial engineering operation launched by the BdL highly incentivized Lebanese banks in seeking non-resident deposits. And it worked. This was a successful operation; but the risk is that the resultant benefits end up disappearing.

Despite the undoubted challenges, I believe that Lebanon will find a way to continue to boost its foreign remittances into the country. However, what is unsure at this point is whether this will suffice to keep the country’s financially situation from deteriorating to the point where something close to the status quo can be maintained, especially in the face of the additional pressures inherent in the refugee crisis. Failure on this count stands to have a profound negative impact on the already stressed politics of the country.

Offshore gas could be key…

In principle, there is an obvious route by which Lebanon could significantly ease its economic predicament, ie gas.

When the first offshore gas fields were discovered in in 2009, there seemed to be light at the end of the tunnel for the small (10,452km2 — and, yes, every “good” Lebanese citizen will know the figure by heart!) but very highly indebted country (the debt represents ~147% of the country’s GDP].) The first wave of bids/tender offers was organized; and then…well nothing happened. No oil and gas auction actually took place although 46 companies had pre-qualified in 2013.

Corruption is engrained in the country and, as sad as it is to admit, such discoveries, even if they are successfully exploited, are hardly going to change the endgame, in my view. The country as a whole could end up being richer, more prosperous; but, as is so often the case in the Byzantine world of Lebanese politics, it is not that simple.

…or another source of potential conflict

As if the domestic challenges were not daunting enough, Israel is also keen to benefit from what could be one of the largest gas discoveries of the decade.  The total reserves are estimated at 850m barrels of oil and 96trn cubic feet of gas, according to a recent article in the Economist and Israel is now disputing one of the Southern blocks that is due to be auctioned by Beirut.

That said, I would like to flag an article published in the FT by John Reed and Erika Solomon dated 28 March 2017 (“Israel and Lebanon clash over maritime border amid oil interest – FT premium access only). I thought that this article was particularly interesting for two reasons, ie: (a) it mentions how the Israelis say that “they aim to resolve [the dispute] through dialogue and mediation” which is something usually (and I do underline usually) unheard of when it comes to conflicts or disagreements in the region, especially when it comes to defining frontiers, whether these are maritime or not; and (b) Israel excluded the disputed area from an ongoing bidding process launched last year.

The question that naturally follows is how far Israel would really be ready to go to get a share of these gas discoveries in the event that mediation failed.

Water also poses risks

Access to water resources has long been recognised as a major cause of violent conflict and perhaps nowhere more so than in the Middle East. This too is very pertinent to Israel/Lebanon relations.

My personal view is that the regional hydro issues are an important angle that needs to be monitored much more closely, not least as a potential trigger for war. According to the International Institute for Sustainable Development Israel is one of several countries in the region which “falls well below the accepted threshold for water scarcity of 1,000 cubic meters of water per person per year”, while Lebanon and Syria both enjoy a water surplus. The situation is expected to worsen, with water needs increasing at a very fast pace. Another good reason, perhaps not the main one but certainly one not to overlook, to trigger a serious escalation in tensions.

Is another war inevitable in any case?

The so called ‘July War’ of 2006 remains very much in Lebanese people’s minds. The general consensus is that neither the Israeli Defence Force nor Hezbollah emerged as the victor; certainly, the former failed to achieve its stated objective of neutralising the latter.. However, Israel made it very clear in the aftermath that, in the event of a recurrence, a much more intensive and destructive ground war would be launched into at least the south of Lebanon. Equally — and despite huge Israeli investment in missile defence systems, Hezbollah is now much more able to strike at Israel than was the case in 2006 and could be boosted still further if Iran is successful in its ongoing efforts to take advantage of the chaos in Syria to secure a land corridor from Tehran to Beirut.

One might imagine that these two factors would weigh heavily against the probability of renewed conflict beyond low intensity occasional cross-border clashes. However, tensions are certainly not easing and no-one would put a zero percent probability on history not repeating itself. Is such a conflict close to happening? It is impossible to tell. But one thing we know for sure is that, if it does come, there will be little or no prior warning — it will just happen.

All this being said, if a war between Lebanon and Israel were to break out (again), I think there would be more than one reason behind it, albeit probably with a single ‘proximate cause’ acting as a trigger. At that point in time, however, the ‘why?’ may be of little consequence. All eyes will be on ‘how?’, ‘for how long?’ and ‘how damaging?’ — with the added complication, to judge from the ongoing conflict in Syria at least, that third countries could get drawn in.

Is there any cause for optimism?

 “If you don’t know where you are going, every road will get you nowhere”. Henry Kissinger

Quite a lot of noise is being made around the changes to the Lebanese electoral system, the hope being that it could drag the country out of its deeply ingrained sectarianism.

At the risk of oversimplifying, the key changes have been a shift to a proportional representation system combined with a reduced number of electoral districts. (For those interested in more detail the rating agency Fitch recently published a useful summary of the main changes.) The next general election is expected to take place in May 2018, having been postponed (again) from 20 June 2017.

If (and it is a big ‘IF’, in my view) the new system implemented properly then there is a high likelihood that small, independent and cross-religious parties such as “Madinati” (translate “My City”) could establish a stronger foothold and presence in forthcoming elections. However, I struggle to see how even sweeping alterations to the electoral system will structurally change a country where 18 different confessions are trying (or, in some cases, appear to have stopped trying) to cohabit harmoniously. The established political parties have traditionally been built around power families and passed on from generation to generation; despite the likes of Madinati, there is no sign that this is about to change, at least in the short- to medium-term. In the longer-term, one can only hope that the Lebanese next generation throws up a new wave of younger leaders who have the willingness and freedom to free the country from its vested interests and in-depth corruption.

Conclusions

While there are many other issues I could have explored in this essay, I selected the ones that I think most likely meaningfully to shape the landscape of Lebanon in the coming years.  Based on these, my ‘best case’ scenario for this tiny but colourful country of 18 different confessionals is that, ten years down the line, we will look back and realize that, despite everything that could have been achieved, Lebanon will be in much the same shape as it is today.  And the reality could be much worse even if “the war” as such is really over rather than simply in abeyance.

I shall therefore close with a quote of Winston Churchill that sums up extremely well, in my view, the fate of the Lebanese people:  “If we open a quarrel between past and present, we shall find that we have lost the future”.

 

 

 

 

Nadine Windsor is currently the Head of Credit Trading and Investments at First Abu Dhabi Bank, which is the second largest bank in the Middle East by assets. She has more than 12 years of experience in the Finance industry and started her career working for Lehman Brothers in London before moving to the United Arab Emirates in 2009. Nadine is French-Lebanese and lives in Abu Dhabi. She has a Masters, specialized in Accounting and Market Finance from HEC Paris, a leading European Business School. Nadine speaks, reads and writes fluently French, English and Arabic.

Photo credit: Ahmad Moose via Foter.com / CC BY