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Cablegate: Lebanon: Economy Demonstrates Resilience (Economic Week In

VZCZCXRO7688
RR RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #0722/01 1401301
ZNR UUUUU ZZH
R 191301Z MAY 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 1949
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 000722

SENSITIVE

SIPDIS

STATE FOR NEA/ELA
STATE PASS USTR
TREASURY FOR MNUGENT AND SBLEIWEISS
USDOC FOR 4520/ITA/MAC/ONE
NSC FOR ABRAMS/SINGH/YERGER/DEMOPOLOUS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV LE
SUBJECT: LEBANON: ECONOMY DEMONSTRATES RESILIENCE (ECONOMIC WEEK IN
REVIEW, MAY 12 - 18, 2008)

CONTENTS
--------

-- POLITICAL AGREEMENT TO HOLD NATIONAL DIALOGUE BOOSTS ECONOMIC
ACTIVITY
-- ECONOMY DEMONSTRATES RESILIENCE
-- CENTRAL BANK GOVERNOR STRESSES MARKET STABILITY;
FINANCE MINISTER DISMISSES SAUDI DEPOSIT
-- NEW EPCA BENCHMARKS NOT FINAL YET; IMF GIVES POSITIVE EVALUATION
OF FORMER EPCA
-- BALANCE OF PAYMENTS DEFICIT IN FIRST QUARTER 2008
-- PRESS REPORT ON SAUDI INVESTMENTS FLEEING LEBANON
-- AGRICULTURE HIT BY CLOSURE OF MASNA BORDER CROSSING
-- CONSUMER PRICES ROSE BY OVER THREE PERCENT FOR FIRST QUARTER
2008
-- MOODY'S MAINTAINS LEBANON'S CREDIT RATING DESPITE CURRENT CRISIS

POLITICAL AGREEMENT TO HOLD
NATIONAL DIALOGUE
BOOSTS ECONOMIC ACTIVITY
--------------------

1. (U) Following the endorsement of the Arab Ministerial Committee
agreement by all political leaders on May 15, all roads that were
blocked since May 7 immediately reopened, including the road leading
to Beirut International Airport (BIA) and the Masna (Biqa') border
crossing; national and international air carriers resumed
operations; and business activity returned to normal in all regions,
including those where violent clashes occurred. The Ministry of
Economy and Trade and the Beirut Stock Exchange (BSE) were
accessible to staff, who resumed work in their Beirut downtown
offices.

2. (SBU) BSE trading substantially picked up on May 16, with total
value of trading of approximately $22 million, "about ten times the
average traded daily value before the outbreak of violence," BSE
Chairman Fadi Khalaf told us. Prices of all Lebanese papers rose,
reflecting investors' optimism. Trading in real estate company
Solidere shares reached $19 million, accounting for 86 percent of
total trading value, and closed at $28.75 per share. During the
crisis, trading remained relatively normal, with no substantial drop
in prices of Lebanese papers -- an indication that investors were
holding on to these papers, and some even tried to increase their
holdings, Khalaf said.

ECONOMY DEMONSTRATES
RESILIENCE
----------

3. (U) In spite of the fighting that erupted in several regions on
May 7-15, business activity continued, although at a slower pace, in
areas that did not witness violence. The Central Bank of Lebanon's
(CBL) branches and commercial banks remained operational, conducting
all services. The volume of cash withdrawal from banks was normal,
with small conversions from LL to USD deposits, and no capital
outflows. Banks have ample liquidity in LL and USD, and there was
"no panic" in the market, banking sources told us.

4. (SBU) The Beirut Port continued to operate and activity at the
container terminal was more-or-less normal throughout the crisis
period, contacts told us, refuting press reports that the port was
closed. Although BIA remained officially open and opeational,
there were no commercial flights until My 17. Private aircraft
continued to fly in and ut of BIA, and some travel agents picked up
on business opportunities, and advertised daily private Beirut-Amman
flights, or vessels operating between Larnaca (Cyprus) and Jounieh
(Port North of Beirut), while others advertised daily bus services
to Damascus and Amman. As of May 21 all commercial service is
expected to return to normal. Major carriers (Lufthansa, Air
France, British Air, among others) have already returned to normal
schedules, although passenger loads are below normal for this time
of year.

5. (SBU) There was no fear of shortage of strategic reserves during
the crisis. Wheat quantities at Beirut Port silos are sufficient to
cover needs for five to six months, Advisor to the Minister of
Economy and Trade told us on May 13. Fuel oil reserves for running
national power utility EDL plants were sufficient for three weeks,
and more fuel tankers were expected, Ministry of Energy sources told
us. Quantities of gasoline and diesel were sufficient to cover

BEIRUT 00000722 002 OF 003


market needs for 20 and 30 days respectively, a leading business
source told us.

CENTRAL BANK GOVERNOR STRESSES MARKET STABILITY;
FINANCE MINISTER DISMISSES SAUDI DEPOSIT
--------------------

6. (U) CBL Governor Riad Salameh stated on May 15 that the most
recent crisis did not lead to any pressure on the Lebanese currency.
Dollarization of deposits remained stable at around 77.5 percent,
while interest rates remained unchanged, he said. Salameh predicted
that annual inflation may reach over ten percent due to
international inflationary pressures.

7. (U) Meanwhile, the local press reported Finance Minister Jihad
Azour's statements of May 13, asserting that liquidity in Lebanese
pounds is available amounting to over $1.5 billion. Azour stated
that this crisis will have a negative effect on investments,
especially foreign investments. In addition, Azour noted that the
promised Saudi $1 billion deposit at the CBL can no longer be
expected, due to the deterioration of the situation in Lebanon.
(Comment: CBL sources told us they never had any indication of such
a deposit, officially or otherwise. End comment.)

NEW EPCA BENCHMARKS NOT FINAL YET,
IMF GIVES POSITIVE EVALUATION OF FORMER EPCA
--------------------

8. (SBU) The IMF mission that arrived in Beirut on April 29 to
discuss a new Emergency Post-Conflict Assistance (EPCA) program for
Lebanon "was finally able to leave on May 14," IMF Resident Rep told
us. The mission "started to discuss new benchmarks" with GOL
officials, but did not get to finalize the discussion. The mission
is willing to come back anytime, but it is not clear when such
discussions can resume, he remarked.

9. (U) In the meantime, in the latest evaluation of Lebanon's
performance under the former EPCA, the IMF noted that the primary
balance and net debt targets for end-December 2007 were met with
significant margins. This was mostly due to strong overall
revenues, which counterbalanced losses from gas excise, expenditure
savings, and lower than expected transfers to municipalities and the
Electricity du Liban (EDL). Also, GOL net debt declined from 173
percent to 165 percent ofP1Q~P4Iand demand, deteriorating political and security situation, and
increased inflation.

BALANCE OF PAYMENTS DEFICIT
IN FIRST QUARTER 2008
--------------------

10. (U) According to the Central Bank of Lebanon (CBL), Lebanon's
cumulative balance of payments registered a $213.9 million deficit
in the first quarter of 2008. This was attributed to a $497.4
million deficit in March 2008, which offset the cumulative surplus
prevailing over the first two months of 2008. The 2008 first
quarter deficit is more than two times that of the first quarter of
2007, mostly due to the expanding trade deficit.

PRESS REPORT ON SAUDI
INVESTMENTS FLEEING LEBANON
--------------------

11. (U) On May 14, French language daily L'Orient le Jour quoted
Saudi newspaper Al-Riyad as saying that the current crisis in
Lebanon "affected" Saudi investments in Lebanon, estimated at around
$4 billion. President of the Council of Lebanese-Saudi Businessmen
was quoted as saying that some investments, mostly in the tourism
sector, have been stopped, while he fears that Saudi investments
will flee Lebanon.

AGRICULTURE HIT BY CLOSURE
OF MASNA BORDER CROSSING
--------------------

12. (U) According to head of the Syndicate of Farmers of the Biqa'
Ibrahim Tarchichi, the closure of the road leading to the Masna

BEIRUT 00000722 003 OF 003


border crossing from May 8-15, resulted in around $3.5 million in
losses for Biqa' farmers. Tarchichi noted that an average of 30
trucks with 850 tons of produce go through the Masna crossing each
day, intended as exports to Syria and other regional and Gulf
countries. Even though the road has already been cleared, it will
take five additional days for trucks to come to Lebanon and be
loaded with produce, which will result in even more losses to the
local farmers, he said.

CONSUMER PRICES ROSE BY OVER
THREE PERCENT FOR FIRST QUARTER 2008
--------------------

13. (U) Reputed private consultancy firm Consultation and Research
Institute (CRI) estimated that the Consumer Price Index (CPI) rose
by 3.2 percent during the first quarter of 2008. According to CRI,
this represents an 8.87 percent increase in consumer prices as
compared to the first quarter of 2007. The current rise in prices
was mostly attributed to the rise in the prices of personal care and
other products, food, and housing prices in January 2008.

MOODY'S MAINTAINS LEBANON'S CREDIT
RATING DESPITE CURRENT CRISIS
--------------------

14. (U) Moody's Investors Services stated on May 13 that Lebanon's
foreign and local currency government bond ratings remained at B3
with a stable outlook despite the recent armed clashes. Moody's
recognized Lebanon's resilience and the fact that it has never
defaulted, although it noted that a downgrade may be necessary if
default and loss to creditors is imminent. B3 is the lowest rating
possible for governments that are not in default, or at imminent
risk of default, and denotes a very poor creditworthiness and a high
probability of government difficulties.

SISON

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