Country Risk in Lebanon and Turkey

Lebanon (LBN)

Lebanon’s overall risk is deemed high. On the political front, the country’s divided parliamentarians have been unable to choose a president since the end of former President Michel Aoun’s term in October 2022, partly due to personal ambitions and internal political disputes despite holding 12 electoral sessions. We think the parliament is fractured, with groups pursuing their own interests rather than the common good. Terrorism, armed conflict, and unrest are relatively common in Lebanon, which is evident from the current conflict between Israel and the Lebanon-based militant group Hezbollah. Consequently, political violence is a very high risk. In terms of legal and regulatory matters, which are also deemed a very high risk, the country has historically faced systemic corruption. Indeed, confidence in the national government was just 9% in 2023, according to a survey conducted by Gallup. The country also faces high risks from supply chain disruptions. For instance, Lebanese merchants have felt the impact of disrupted routes in the Red Sea, increased shipping costs, and cargo backlogs. Weak infrastructure—particularly limited electricity supply—massive civil service strikes, and persistent operational and logistical challenges discourage investing in Lebanon. The country’s economic situation is more than fragile, characterized by high public debt, a high risk of sovereign default, and a very high risk of the government’s inability to provide stimulus. Lebanon defaulted on its external debt in March 2020, it is pending debt restructuring, and the amended budget for 2024 has been criticized for not addressing key reforms required to recover from a prolonged financial crisis. The economic fallout from the Hamas-Israel war is expected to further depress tourism revenues and remittances. Persistent political instability and lack of fiscal reforms contribute to ongoing economic challenges, including high dollarization and inflation, with consumer prices rising by less than 60% annually as of April 2024. Despite the timely approval of the 2024 budget, significant reforms are still needed to strengthen public finances, improve tax collection, and provide essential services. Both the exchange transfer and the banking sector are deemed high risks. The Lebanese banking system collapsed in 2019 due to unsustainable public debt and pervasive corruption. Consequently, authorities restricted access to savings, triggering months of riot. The Lebanese pound has lost over 95% of its value after the crisis, collapsing the currency, and erasing savings both in exchange rates and actual deposits as banks claim they have no cash available. The lack of a credible and financially viable strategy for the banking system further stifles economic growth and deposit recovery. Given the context outlined above, the risk of doing business in Lebanon is classified as high.

Turkiye (TUR)

Turkiye’s overall risk level remains high when compared to previous risk analysis period, with no changes in any of risk levels in this reporting period. The local elections set the scene late Q1 and early Q2. Despite Justice and Development Party’s (AKP) main target to win back the major cities such as Istanbul, Ankara and Izmir, Republican People’s Party (CHP) became the first party in the elections, and won more local municipalities than any other parties. The main opposition party, CHP, won 35 out of 81 municipalities, including mayoral victories in Turkiye’s five largest cities: Istanbul, Ankara, Izmir, Bursa, and Antalya. AKP lost an election for the first time in the last 22 years, which led to a moderate political violence (currently at very high risk level), political interference risk (currently at medium high) and a deterioration in legal and regulatory risk, which is at medium-high. After the elections, the attention quickly turned to economic issues as the Turkish economy is under pressure due to high inflation, increasing budget deficit, and weakening Turkish Lira (TRY). Central Bank of Turkiye (CBRT) continues to regain credibility after the return towards traditional economic policies and continues to implement tight monetary policy to fight inflation. Despite the risk of doing business in Turkiye remaining at medium risk level and supply chain disruption risk at high level, increasing tourism revenues, decreasing current account deficit and manageable government debt/GDP trajectory continue to support the domestic economy and business activities. Additionally, the banking sector vulnerability is at medium low level, showing the relative strength of the banking system. Inflation remaining the core economic problem, we still foresee upside risks emanating from buoyant domestic demand, the stickiness of services inflation, deteriorated pricing behaviour, and geopolitical risks as monetary tightening is still feeding through. We envisage the disinflationary process can be supported partly by the public saving package revealed in May, aiming to promote savings and exercise expenditure control in the public sector but the impacts will likely be limited. On the political front, the conflicts in the region continue to affect the Turkish economy negatively particularly taking into account that the relations with the West are not at its best as Turkiye continues to implement trade restrictions against Israel due to Gaza conflict.