Political Risk Analysis - Crisis Averted, But It Will Leave Scars - FEB 2018

BMI View: Prime Minister Saad Hariri's decision to suspend his resignation will limit the scope for a power vacuum in Lebanon, mitigating some of the most significant risks to economic and social stability. That said, recent events are likely to weigh on investor sentiment toward the country, shedding light on the deep-seated political fragmentation and on Lebanon's exposure to Iran-Saudi regional tensions.

The decision of Lebanon's Prime Minister Saad Hariri to put his resignation 'on hold' will prevent the country's plunge back into a full-scale political crisis. On November 4, Hariri had announced, from Riyadh, that he would leave office owing to Iran's interference in the country's domestic affairs and fears of assassination (his father, Rafic, was assassinated in 2005 by Hizbullah sympathisers). Given the suddenness of the announcement and the location from which the Lebanese leader made his declaration, many international observers read this decision as coming due to interference from Saudi Arabia, in an attempt to counter Iran's growing influence in Lebanon. However, Hariri has since returned to Lebanon as of November 22, declaring that he would suspend his resignation, in order to provide some political stability in the country which we believe has come, in part, due to Saudi 'Arabia's reluctance to escalate the situation and the intervention of Western governments to prevent a destabilisation of the region. While this will temper the immediate risk of political instability, the recent events have shed light on the precarious state of the current government, and have put a halt to a year of positive political momentum. Lebanon will remain vulnerable to the influence of Saudi Arabia and Iran, which are competing for religious and political hegemony across the Middle East, suggesting that we could see further interference lead to renewed political instability.

Improving Trajectory On Hold
Lebanon - Short-Term Political Risk Index
Note: 0 = highest risk; 100 = lowest risk. Source: BMI

Political Chaos Avoided...

Saad Hariri's unexpected decision to reverse his resignation as Lebanese Prime Minister bodes well for political and social stability in the country. We had previously argued that Hariri's resignation could plunge the country back into a state of political paralysis ( see 'On The Brink Of Political Paralysis After Hariri's Resignation', November 7 2017). Given Lebanon's confessional institutions, where the president has to be Christian Maronite, the prime minister a Sunni Muslim and the speaker of parliament a Shi'a Muslim, forming a government tends to be a daunting task, which often stretches over several months. As such, the absence of government would have severely affected the policy-making process and deterred investors. Hariri's decision will therefore provide some breathing space to the different political parties. Although Hariri said that he was putting his resignation 'on hold', we believe that he will remain prime minister over the coming months and that rival parties will accommodate some of his demands to prevent the collapse of the government. It will also reassure investor by providing some continuity, especially after Hariri said on November 23 that the licensing round for oil and gas exploration would be one of his priorities.

Cautiousness To Remain
Lebanon - 12Y 2022 USD Bond Yield, %
Source: Bloomberg, BMI

... But Crisis Will Have A Lasting Impact

That said, we believe that the recent events will leave some lasting impact on the political environment and investor sentiment towards the country. After a year of positive political momentum, which saw the election of a new president, formation of a government, and adoption of a new electoral law, Hariri's resignation acted as a reminder that there are still deep political and sectarian fractures affecting the country. Therefore, while we expect some improvement in investor sentiment compared with the past few weeks, we do not expect a return to confidence levels seen before Hariri's resignation. Underpinning this view, yields on Lebanese bonds, which spiked following the initial resignation decision, have eased in recent days, but are still well above pre-crisis levels.

Exposure To Iran-Saudi Regional Tensions Here To Stay
Middle East - Sunni Population & US Military Bases
Source: Pew Research Centre, BMI

Regional Tensions To Remain In The Background

Meanwhile, we believe that the regional tensions between Saudi Arabia and Iran will continue to weigh on political stability in Lebanon. At this stage, an escalation is somewhat unlikely, especially given Saudi Arabia's appearing reluctance to go beyond tough rhetoric in the recent crisis and to intervene militarily against Hizbullah, and efforts by Western powers to ease recent tensions. However, additional political pressure and/or the introduction of economic sanctions by Saudi Arabia would increase the risk of instability. Given that Saudi Arabia and Iran continue to vie for political and religious leadership in the Middle East, we maintain our view that tensions between the two regional powers will remain elevated, and that they will continue to confront each other through proxy groups, especially in Lebanon.