Lebanon's Economy Thriving Thanks to Arab Neighbors and Conservative Capitalism

Beirut, a city all too familiar with bombings and resistance, is now booming and resilient.

As the rest of the world braces for a global economic dive, thousands of visitors (many from Arab Gulf countries) flood into Beirut to get down and dirty, or up and holy. Either way, the streets are crowded, shops are bustling and political chatter takes an unusual backseat to celebration in a country that's recent history is plagued with religious and political strife.

The electrician who came to help reroute the rusty circuits in my apartment told me after I complained to him about the traffic, "This is nothing. Starting this week, everyone in the world comes to Beirut. You'll see."

That same day, I was in a taxi coming back to Rauoche from Ain El Mreisseh and as we passed the Safir Heliopolitan Hotel the curiously giddy cab driver complained that he had been waiting downstairs for five hours for two Saudis visiting for the Eid holiday who had hired him for the entire day to be their personal chauffeur.

"Maybe they already left," I suggested. "They gave me $100," he replied. "Saudis are great about that. I trust them."

In a region where trust is lacking, oil is abundant and politics is perplexing, you can trust one thing, that Lebanon is confident it can rely on its oil-rich neighbors to keep paying to support (taxi drivers and) the central bank.

Kuwait and Saudi Arabia basically bankrolled Lebanon's Central Bank after 34 days of bombings during the summer war with Israel in 2006. In August a lone, Kuwait deposited $500 million dollars in Lebanon's Central Bank in addition to the $300 million dollars it gave as reconstruction aid.

ECONOMIC GROWTH IN LEBANON

Excluding remittances, tourism is the largest contributor to the country's growing GDP, which is expected to continue to grow in 2009. Tens of thousands of Kuwaitis travel to the luxurious mountains just north of Beirut to escape their scorching summers, and carouse in the many freedoms Lebanon offers.

More tourists means more hotels, more apartments, and enough entertainment to keep them coming back. It also means Saudi, Kuwaiti and Bahraini cars flood the streets, nearly doubling traffic. And unlike the two Saudis staying at the Safir hotel, these tourists have sent their pimped out cars packed with drivers and maids through Jordan and Syria before arriving.

Investors from the gulf are the largest real estate developers in Lebanon, where construction permits shot up 30.7% in the first nine months of this year. Cranes tower above the skyline, rebuilding, and remolding the Middle East's Mediterranean Riveria.

Lebanon's economy is expected to grow by 6% in 2008, compared with The International Monetary Fund projection that the U.S economy would grow only 0.8 percent in 2009, which was later lowered to minus 0.7 percent.

Ironically, the Lebanese people can thank their high risk political situation for the conservative approach to the nation's economic policies, not just the banking system, but the steady inflow of cash from Lebanese working abroad.

The constant fear and preparation for a worst case scenario, whether an internal political situation or attack from Israel, and the effect it would have on the economy has conditioned Lebanese to only borrow what they can due to strict lending laws.

By banning local lenders from buying debt packages and limiting the amounts of loans for real estate developments and steering clear of debt and risky international investments, Lebanese banks have been posting record deposit and both bankers and businessmen are predicting an unusually positive outlook for the country.

Lebanese Banks didn't have significant assets with the many Western banks that are now failing. So the central bank's foreign currency reserves jumped by 57% over the first nine months of this year.

For a country recently on the brink of a new civil war back in May, the news comes as further evidence that the turbulent political environment is stable enough, for now.

Riad Salameh, the governor of Lebanon's Central Bank told the BBC that he saw the crisis coming.

"I told the commercial banks in 2007 to get out of all international investments related to the international markets," he said.

Most people I run into, cab drivers, businessmen and students attribute Lebanon's ability to dodge a direct hit to Mr. Salameh and the banking system.

But Lebanon is far from free of all worry. Over the years, the government, unlike citizens and private companies, has accumulated serious debt to rebuild each time the country comes near being destroyed.

Still, the signature of the Doha Agreement in May, which coerced Lebanon's political factions to agree on electing a new president and form a national unity government has prompted Moody's Investors Service to change the outlook on Lebanon's sovereign ratings from stable to positive and also marks a shift from American intervention to direct intervention from Lebanon's gulf neighbors.

Yet even though the banking system is able to buy paper in local and foreign currencies, as always in Lebanon, there are still serious credit risks due to fears of another political disaster.

As the parliamentary elections near, even the optimists are anticipating a power struggle that could cause a withdrawal of bank deposits and pop the current bubble of optimism. And like many things in Lebanon (though no one wants to talk about it) religion plays its hefty role.

Saudi Arabia and Kuwait (Sunni countries) offered billions of dollars of aid while Hezbollah (a Shiite group) was working hard to head Lebanon's reconstruction efforts.

Whether Hezbollah won the war or not, that was the impression that resonated throughout the region. By offering immediate cash in the thousands of dollars for desperate families that lost their homes during the war, many credited Hezbollah as being a driving force to getting the economy jumpstarted, even with the $1.5 billion donation given by the Saudis and Kuwaitis to Lebanon's Central Bank.

Of course gulf countries have as serious a stake in Lebanon as anyone else. Companies from the gulf have been investing billions of dollars in real estate projects in Lebanon for years, so they can have their villas and vistas of Lebanon's beautiful coastline.

It isn't just the coastline and climate that attract the tourists, events such as the Beirut International Film Festival, which was held in 2006 despite the damage to the country's infrastructure following Israel's onslaught that summer, is an example of the success of cultural events in attracting tourists - and it seems to be working. This past summer was easily the most successful tourism year since 2004.

On my way back from Beirut Gate, a $600 million dollar project by Abu Dhabi Investment House that will be designed by four of the world's most famed architects, including Nabil Gholam of Lebanon and Chritian de Potzempark of France, I met a cab driver who was weary about all the development.

Samir, a taxi driver who has lived in Lebanon for over 50 years, says the Beirut he remembers is completely different today.

Watch a brief video of his comments below:

With the country's public debt having reached 44 billion dollars, most of it allotted to fund the high costs of reconstruction after its civil war and with more than a third of the country's workforce employed in the Gulf (estimated at over 400,000) a credit crisis in Arab Gulf countries will inevitably catch up to Lebanon's ability to withstand the economic crisis.

Inward remittances into Lebanon from their working citizens reached $6 billion in 2008, up from $5.5 billion in 2007, making Lebanon the 18th largest recipient of remittances according to the World Bank. The remittances made up 24.4% of GDP in 2007, the fifth highest in the world behind Honduras, Lesotho, Moldova, and Tajikistan. A former adviser to Prime Minister Rafiq Harriri told me that despite Lebanon's conservative banking policies, as jobs are cut in the Gulf, Lebanese who return home, will be returning with less money and fewer job opportunities in Lebanon.

If oil prices remain as low as they are, Gulf Cooperation Council's economies will weaken and the World Bank estimates remittances from the region back to Lebanon could fall by 9% in 2009 compared to the recently rise of almost 40% in 2008.

On our way back from a bar I asked a young banker who is one of several thousand young Lebanese who have reportedly come back to Beirut to look for jobs here about the situation.

"I left my job in Dubai, and some of my friends have too," he said. "We have a very conservative system that limited the exposure to the failing banks and investments."

In Beirut, he spends his days volunteering at a children's cancer center. At night he hits up Beirut's famed bars and nightclubs with his old high school buddies who are back for the holidays, capitalizing on the few weeks a year when they are all together witnessing yet another revival in Beirut.