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Lebanon Most Exposed Among Syria's Neighbors From Ongoing Conflict

Standard & Poor's indicated that Lebanon is the most exposed sovereign among Syria's five neighbors to external,fiscal and political risks stemming from the Syrian conflict, as reported by Lebanon This Week, Byblos Bank newsletter.

It noted that the Syrian war would negatively affect the Lebanese economy and its sov- ereign ratings through three channels. The first channel consists of a disruption in cross-border trade and a reduction in external financial flows that could amplify external vulnerabilities; the second way would be damages to the fiscal balance that include reduced tax revenues and the escalating costs of hosting refugees; and the third channel is a rise in security and political risks that would affect the domestic policy environment. It pointed out that Lebanon is more exposed to these risks than Jordan, Iraq, Turkey and Israel due to its close political and economic links with Syria.

 

In terms of external risks, S&P said the Syrian conflict would affect Lebanon's external position and the sustainability of this position directly through trade linkages and, indirectly, by affecting its external financing. It added that Syria is among the top six export destinations for Lebanon and Jordan, but it noted that the Syrian market is a more important destination for Lebanese exports than it is for Jordan, while trade with Syria is no longer significant for Turkey. It said that Lebanon's current account receipts would decrease, given its export trade and transit links with Syria. Further, the agency considered that Lebanon's external financing needs would be affected if the turmoil in Syria significantly impacts risk perceptions of investors toward Lebanon.

It added that this could lead to a sudden reduction, stoppage or reversal in capital inflows in the form of bank deposits, portfolio flows, foreign direct investment, or tourism receipts. In comparison, it noted that Jordan's largest source of external financing is through official channels in the form of bilateral grants and concessional loans that are more reliant on international political support; while foreign investor confidence in Turkey and Israel is unlikely to be affected unless there is a much more serious spillover of violence.

 

In terms of fiscal risks, S&P said that the Syrian conflict is directly and indirectly weighing on the Lebanese economy, therefore depressing tax revenues and putting strain on public finances. Further, it considered that the scale of the violence would make the stay for some of the refugees in Lebanon, as well as in Jordan and Turkey, permanent. It added that this would represent a potential financial, political, and security liability for host countries. But it noted that the fiscal impact would be proportionate to the sovereign's size and fiscal resources, leading to a higher impact on Lebanon and Jordan. It noted that the cost of providing for the inflow of Syrian refugees would lead to additional government spending by the host country, which would affect its fiscal risks.

 

In terms of political risks, S&P said that the Syrian conflict is reducing the effectiveness, stability, and predictability of policy-mak- ing and political institutions in Lebanon, with such risks being lower in Jordan and Turkey. Last May, Standard & Poor's revised the outlook on Lebanon's long-term sovereign credit ratings to 'negative' from 'stable' on concerns that increased tensions from the ongoing turmoil in Syria have raised domestic and geopolitical risks. It said by depressing its transit trade, tourism revenues, and foreign inflows. It noted that the possibility of the Syrian conflict destabilizing Lebanese society and politics increased, despite the government's efforts to avoid getting drawn into neighboring conflicts

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