FACTBOX-Key political risks to watch in Lebanon

BEIRUT Tue May 3, 2011 12:59pm EDT

BEIRUT May 3 (Reuters) - Deeply divided Lebanon, with no government since January, now faces extra risks from instability in its powerful neighbour Syria, where President Bashar al-Assad is staging a violent crackdown on pro-democracy protesters.

The domestic political crisis and the spillover effects of the turmoil in Syria are damaging the Lebanese economy, expected to grow only 2.5 percent this year, down from 7.5 percent in 2010, according to the International Monetary Fund.

Any conflict in Sunni-majority Syria, where Assad's minority Alawites have long held a disproportionate share of power, could fuel political and sectarian tensions in Lebanon, as well as disrupting trade, tourism and capital inflows.

Also hanging over Lebanon are possible indictments by a U.N.-backed special tribunal of Hezbollah members in the 2005 assassination of Lebanese ex-Prime Minister Rafik al-Hariri.

Here are some of the key risks to watch:

GOVERNMENT CRISIS

A political alliance dominated by Hezbollah, an armed Shi'ite Islamist movement backed by Syria and Iran, toppled the previous government led by Saad al-Hariri over his refusal to cut links with the tribunal seeking to try his father's killers.

Najib Mikati, a Sunni, was designated prime minister on Jan. 25. But disputes over cabinet posts involving Hezbollah and its Shi'ite and Christian allies, as well as President Michel Suleiman, have blocked his efforts to form a government.

One of the knottiest problems pits Suleiman against Michel Aoun, leader of the biggest Christian bloc in parliament, who wants to name the next interior minister as part of his share of cabinet posts. Suleiman insists on keeping his nominee, Ziad Baroud, in the job, whose mandate includes organising elections.

Mikati has yet to disclose how he would deal with the Hariri tribunal, which is now revising secret indictments issued in January. It is not clear when they will be made public.

Hezbollah, which denies any role in Hariri's killing, wants the next government to withdraw funding and Lebanese judges from the "politically motivated" court based in The Hague.

Enjoying Saudi and U.S. support, Saad al-Hariri, the main political voice of Lebanon's Sunni community, has become more outspoken in support of the tribunal since his government fell.

Israel, which fought a 34-day war with Hezbollah in 2006, has said it will target all of Lebanon in any new conflict because of the Shi'ite group's growing clout in government.

The upheaval across the Arab world has shoved Lebanon's problems out of the limelight. No foreign mediators have stepped in since joint Saudi-Syrian mediation collapsed late last year.

What to watch:

* Fate of Mikati's struggle to form cabinet

* Publication of indictments by special tribunal

FALLOUT FROM SYRIA

Lebanon's stability has long depended on Syria, which wields influence via Hezbollah and other local allies, even though it was forced to end a 29-year military presence in 2005.

The challenge to Assad family rule in Damascus is another complicating factor in Lebanon's already intricate politics. It may energise anti-Syrian Lebanese factions, or spur Hezbollah to tighten its own grip if it feels its Syrian ally is weakening.

Syria could easily stir strife in Lebanon, still recovering from its 1975-90 civil war, if it wanted to. It blames the unrest in Syria on Islamist groups and has accused pro-Hariri politicians of inciting and arming anti-Assad protesters.

Turmoil in Syria is already spilling over the border. Some Syrian dissidents, including a prominent blogger, are now in Lebanon. Hundreds of Syrians fled into northern Lebanon on April 28 after gunfire erupted on the Syrian side of the border.

The instability in Syria, Lebanon's only overland outlet, has also disrupted transport and trade.

What to watch:

* Tension between Syria's allies and foes in Lebanon

* Further border incidents, damage to trade and tourism

ECONOMIC REPERCUSSIONS

The prolonged political uncertainty in Lebanon, now coupled with turmoil in Syria and elsewhere, is taking its toll on an economy badly in need of reform and infrastructure investment.

Apart from lower growth, the IMF report also forecast that inflation would rise to 6.5 percent from 4.5 percent in 2010 and that the fiscal deficit would widen to 10.5 percent of Gross Domestic Product (GDP) from 7.2 percent last year.

The Central Bank has ample foreign reserves of $31 billion to help keep the Lebanese pound LBP= stable. But after three years of impressive GDP growth, warning signs are flashing.

Caretaker Finance Minister Raya al-Hassan said on April 28 that activity in all sectors, including tourism, real estate and retail, was down. A capital outflow of about 1 percent of bank deposits had occurred in January, when political tension spiked.

Many depositors have switched into dollars, despite higher interest rates offered on the Lebanese pound, prompting banks to conserve their local currency holdings, rather than buying the treasury bills on which government financing relies.

Lebanon's public debt is expected to rise to $55 billion in 2011 from $51 billion in 2010. Analysts say it could hit $65 billion in the next three to five years unless the government cuts spending and boosts revenues to cut the fiscal deficit.

But even if a proper government was in place, higher food and fuel prices have increased public discontent, making it harder to implement any austerity measures.

What to watch:

* Dollarisation, net capital outflows, hits to tourism

* Signs of popular protests against economic hardship

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