BEIRUT May 3 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:
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
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