Lebanon-Israel ceasefire deal: Will there be an immediate economic rebound?

Tourism, construction and retail expected to receive boost but other economic scars will take longer to heal

Despite the ceasefire, Lebanon has deep-rooted economic problems that its leaders must confront. AFP

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The ceasefire agreement between Hezbollah and Israel is expected to stop direct and indirect losses to Lebanese economy, with tourism, hospitality and construction among sectors set for a rapid rebound.

But deeper economic scars will take longer to heal - and the need to elect a president to oversee major structural reform is increasingly stark.

“The Lebanese economy breathed a collective sigh of relief when the ceasefire went into effect,” said Nassib Ghobril, chief economist at Beirut's Byblos Bank. “The sectors that will rebound most are the sectors that have been the most affected, starting with tourism and hospitality, retail and the education sector.

Tourism was one of the worst-hit sectors after the war began in Lebanon on October 8, 2023, when Hezbollah intervened in Israel’s war on Gaza after the Hamas-led attacks of October 7.

Tourist arrivals in the country dropped by 24 per cent in the first eight months of this year, compared to a rise of 25 per cent in the same period of 2023, translating into “a trickle-down effect on 14 sectors that feed off tourism activity”, Mr Ghobril said.

“I expect the tourism to rebound during the end-of-year holidays period, with an influx of expatriates who are used to spending the Christmas and New Year holidays in Lebanon. This should extend into 2025 with the resumption of flights of foreign airlines to Beirut and the slow but steady return of Arab and European visitors, especially after the 60-day interim period of the ceasefire.”

An immediate impact is expected in sectors such as education, which has been severely disrupted by the closure of schools and some universities, as well as the construction and contracting sector, “given the massive reconstruction needs in the country”, Mr Ghobril said.

Even before the war began, Lebanon was grappling with what the World Bank has called one of the worst global financial crises since the mid-19th century.

The country’s economy struggled after the government defaulted on about $31 billion of Eurobonds in March 2020, with its currency sinking more than 90 per cent against the dollar on the black market. It has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors.

It has a caretaker cabinet led by Prime Minister Najib Mikati but with limited powers. It needs to elect a president after the six-year term of Michel Aoun finished at the end of October 2022 but this requires the agreement of the political elite.

The cost of physical damages and economic losses due to the conflict in Lebanon is estimated at $8.5 billion in the past 12 months, according to a World Bank report this month. Damage to physical structures alone amount to $3.4 billion and economic losses have reached $5.1 billion, the report said.

The commerce sector suffered losses worth $1.6 billion, followed by agriculture at $1.1 billion, while tourism and hospitality’s losses amounted to $1 billion, World Bank data shows.

Lebanon's real GDP is projected to contract by 5.7 per cent this year, compared to a pre-conflict growth estimate of 0.9 per cent.

Heavy costs

“The ceasefire will enable the gradual return of residents to the south since basic infrastructure has been destroyed, but the scale of destruction dictates substantial reconstruction costs,” said Nasser Saidi, a former economy minister and deputy governor of Lebanon's central bank.

Reconstruction costs are estimated to exceed $25 billion.

“Compared to the post-civil war period [1975 to 90] in Lebanon, this time round the country is not only poorer but also facing multiple crises and with limited international support,” Mr Saidi said. “It needs to have the capacity to manage reconstruction and get the required funding – not a minor task.”

Lebanon needs to urgently elect a new president and form a national emergency government with extraordinary powers to introduce reforms and speed up reconstruction.

Impact on Israel

Meanwhile, Israel's economy continues to face challenges as the war in Gaza continues. In September, Credit rating agency Moody's downgraded Israel’s long-term local and foreign-currency issuer ratings to Baa1 from A2 and maintained its negative outlook on intensified geopolitical risk in the region. The country, which had a credit rating of A1, had been downgraded to A2 in February.

S&P Global Ratings also lowered Israel's long-term foreign and local currency sovereign credit ratings on Israel to 'A' from 'A+', with a ‘negative’ outlook on the long-term ratings.

The agencies attributed the downgrades to expectations that the military conflict will dampen consumer and investor confidence, while tourism, construction and agricultural sectors will remain affected, which will have material negative consequences for Israel's creditworthiness in the near and long term.

Israel's economy grew more than expected in the third quarter, bouncing back somewhat from a weak spell since the start of war in Gaza last October, Reuters reported.

Last week, the Central Bureau of Statistics said in an initial estimate that GDP grew by an annualised 3.8 per cent in the July to September period amid higher consumer spending.

Israel's inflation rate was steady at 3.5 per cent in September but remained above the government's annual inflation target of 1 per cent to 3 per cent amid supply-related issues caused by the war.

“A durable peace agreement will allow the transfer of resources from military purposes back to more productive private sector uses, which will help the economy to grow more rapidly in 2025 and especially from 2026 onwards, and may also help to dampen inflation – particularly for wages,” said Peter Dixon, head of EMEA country risk at BMI.