Lebanon's business conditions deteriorate further as political crisis deepens

Country's PMI drops to a four-month low as business conditions worsen amid fall in output and new orders

A man counts Lebanese pounds. Continued weakening of the Lebanese currency against the US dollar is increasing cost pressures for businesses. Reuters

Lebanon's private sector continued to shrink in July, with business conditions deteriorating to a four-month low as a fall in output and new orders quickened during deepening political turmoil.

The Blom Lebanon PMI, which measures operating conditions in the country's private sector, slipped to 47 in July, down from 47.5 in June and its lowest level since March. A reading below the 50 neutral mark indicates a contraction.

The latest data signals a sharper deterioration in the health of the country’s private sector, as the headline PMI reading moves farther away from May's 19-month high.

Trends in output and new orders were negative again as domestic demand was hit by eroding purchasing power and unfavourable economic conditions. Liquidity issues on the back of continued weakening of the Lebanese currency resulted in further cost pressures, causing businesses to increase their output charges.

Lebanon is facing its worst economic crisis since independence in 1943 after defaulting on about $31 billion of eurobonds last year. Talks with the International Monetary Fund for a $10bn aid package stalled as a result of political disputes among the country's governing class.

The country's economic collapse ranks it among the world’s top 10 crises – possibly even the top three – since the mid-19th century, according to the World Bank. An explosion at the Port of Beirut in August last year, which killed more than 200 people and destroyed large parts of the capital, further compounded the country's economic woes.

Overall, the July PMI results signalled a stronger and accelerated decline in the country’s economic conditions, although it was weaker than that seen on average over the survey’s history.

The drop in PMI readings is “a surprising result, given the intensity of tourist activity this summer”, said Ali Bolbol, chief economist and head of research at Blom Bank. However, combined with the political deadlock that led to prime minister-designate Saad Hariri withdrawing his nomination, and the deterioration in the currency exchange rate that followed, “the result becomes much more understandable”, Mr Bolbol said.

“Unfortunately, it shows yet again the subservience of the economy to the politics in the life of this country."

The nomination of Najib Mikati as prime minister-designate last month has done little to bridge the political divide. Mr Mikati, who previously twice served as prime minister before this latest nomination, is the third prime minister-designate in less than a year seeking to form a new government.

Lebanon's prices data pointed to intensifying inflationary pressures during July, however, new export orders rose for the first time since mid-2015.

“The only silver lining from the July PMI results is the notable increase in exports, which perhaps reveals that it is the ‘outside world’ that remains the saviour of Lebanon,” Mr Bolbol said.