Lebanon vote eases some investor concern

BEIRUT (Reuters) - The victory of a U.S.-backed bloc in Lebanon's parliamentary election has boosted short-term confidence in the economy and reassured investors who had been worried about a possible triumph for Hezbollah and its allies.

But with Lebanon's economic fortunes closely tied to political stability, consensus between the rival factions on a new cabinet is needed to avoid another government crisis that would harm the economy's strong performance over the last year.

"The worst-case scenario has been averted. That's positive in the short term," said Turker Hamzaoglu, an emerging markets economist with Merrill Lynch, referring to concerns that a win for the Iran- and Syria backed coalition would hit confidence.

"But the next question people will ask is what about the future?" he said. "If there's going to be a consensus government, everything should be fine. We should expect a smooth continuation of the current positive business environment."

The "March 14" alliance, led by Saudi-backed billionaire Saad al-Hariri, defended its parliamentary majority in Sunday's election, beating a rival coalition including Hezbollah, which is listed as a terrorist group by the United States.

The United States, among the donors who pledged some $7.5 billion in grants and soft loans to Lebanon in 2007, had said it would review future assistance based on the shape and policies of the next government. Some analysts also speculated that Saudi Arabia, concerned about growing Iranian influence, might have cut financial support to Lebanon had Hariri and his allies been defeated.

"People were worried that if the opposition had won, then donors would have been more reluctant to support the government," said Simon Kitchen, a Cairo-based economist with EFG-Hermes. "I think those concerns were probably overstated."

REFORM AGENDA

Lebanon's economy, held back by war and political crises in the past four years, enjoyed growth of more than 8 percent in 2008, thanks in part to confidence generated by a power-sharing deal that ended a conflict between the rival alliances.

The International Monetary Fund (IMF) in April described the Lebanese economy's resilience in the face of the global financial crisis as remarkable. The central bank projects 2009 growth at 4 percent.

Remittances are central to the economy's health and account for a fifth of GDP. Transfers to Lebanon's banking sector, the main financier of the heavily indebted state, are seen as a vital pillar for state finances.

Measured at around 162 percent of gross domestic product, the public debt is one of the heftiest in the world.

International donor support has aimed partly at helping Lebanon deal with the debt, much of which was accumulated from rebuilding after the 1975-90 civil war.

Outgoing Prime Minister Fouad Siniora promised action on long-stalled economic reforms, including an overhaul of the state-subsidized energy sector, at the 2007 "Paris 3" donors' conference for Lebanon. But the political crisis held up the reform program.

The IMF has said progress on the structural reform agenda, especially in the energy sector, "will warrant heightened attention in the period ahead."

Another March 14-led government would mean "less doubt about economic policies," former Finance Minister Jihad Azour said.

"I think markets will react positively," he said. "They will consider this as the continuation of what Lebanon has started with Paris 3, the relationship with the IMF, the reform agenda," he said. "This will definitely reduce uncertainties and improve investment confidence."

(Editing by Alistair Lyon and Stephen Nisbet)