Gulf’s Crackdown on Hezbollah May Endanger Lebanon Cash Flow

Plans by Persian Gulf countries to crack down on Hezbollah may pose a bigger threat to Lebanon’s fragile public finances than to the Shiite militant group.

Officials from the Gulf Cooperation Council, which includes Saudi Arabia and the United Arab Emirates, met this month to coordinate action against Hezbollah supporters in the region, after labeling it a terrorist group last month, a move matched by the European Union yesterday. The Shiite Muslim Hezbollah and the mostly Sunni Muslim GCC are on opposite sides of the Syrian civil war, with the Lebanese group fighting alongside President Bashar al-Assad while Gulf countries finance his opponents.

The oil-rich GCC employs millions of Arabs from poorer countries, including Lebanese Shiites who may find it harder to get visas or renew residency permits under the proposed curbs. That would cut off some of the remittances that help Lebanon finance one of the world’s biggest debt burdens and keep its currency stable.

“Lebanon does depend on a free flow of people and capital and if this is a seriously applied restriction, then it’s bound to have some sort of effect,” said David Butter, Middle East analyst and associate fellow at foreign policy research group Chatham House in London.

Remittances Crucial

There are about 500,000 Lebanese in the Gulf. The money they send home, according to Raza Agha, London-based chief Middle East and Africa economist at VTB Capital Plc, has accounted for about 60 percent of remittances flowing to the country in the recent past. That’s about $4.6 billion, according to World Bank data, or more than a tenth of the nation’s $43.8 billion gross domestic product.

The GCC hasn’t said what concrete steps it will take against Hezbollah, which together with allies dominates Lebanon’s caretaker government. The EU yesterday designated the group’s military wing a terrorist organization, without proscribing the entire movement as the U.S. and Israel do.

In an e-mailed statement, Hezbollah rejected the EU decision, calling it “aggressive, unjust and not based on any justifications or evidence.”

“It looks like the decision was written by American hands and with Israeli ink,” the statement said. “The EU only had to add its signature in approval.”

‘Right Track’

Hezbollah, meanwhile, has shrugged off the GCC’s decision, saying it doesn’t have a presence in those countries. Leader Hassan Nasrallah said on June 14 the group has no “projects in the Gulf or anywhere else,” and the threatened measures “will only strengthen our conviction that we’re on the right track.”

A special GCC team will implement guidelines set out by the region’s interior ministers on issues including visas and assets, Kuwait’s state-run news agency KUNA reported on July 4. Qatar deported 18 Hezbollah supporters in June.

Hezbollah gets funds from Shiite-ruled Iran. It’s viewed by Gulf Arab states as “the henchman of the regional bogeyman,” yet it probably won’t be affected by their actions, said Taufiq Rahim, a Dubai-based political analyst at research company GlobeSight.

Broader Damage

The strains in Lebanon’s ties with the GCC may do broader damage to an economy already struggling with a slump in tourism, which accounts for about one-fifth of GDP. It dropped 20 percent in 2012 and an additional 13 percent in the first five months of this year, according to Tourism Minister Fadi Abboud, as the war in Syria spilled into Lebanon, which has a history of similar sectarian conflicts.

Abboud said Gulf nationals ordinarily make up 40 percent of visitors and account for 60 percent of tourism spending. Economic growth this year won’t exceed 2 percent, Lebanese Finance Minister Mohammad Safadi said last month.

“Blanket moves to restrict visa issuance to the Lebanese will be negative, and not just in terms of remittances,” VTB’s Agha said. The Gulf countries “also dominate foreign investment, tourism and exports.” He estimates they used to supply 60 percent of foreign direct investment.

The Lebanese diaspora transferred $7.6 billion home in 2011, according to the World Bank. Those working in the Gulf are more likely to save and send money back than compatriots elsewhere because wages are usually higher and taxes lower, according to Kamal Hamdan, managing director of the Consultation and Research Institute in Beirut.

Expat Savings Key

The expatriate savings are key to the financial system. Lebanon’s banks lure them with interest rates that have averaged about 5.5 percent for the past two years, according to central bank data, while the pound has been pegged at about 1,500 to the dollar since the 1990s. Non-residents held 5 trillion Lebanese pounds ($3.3 billion) of deposits in April.

Those deposits help finance the purchase of government bonds. Local banks held 54 percent of Lebanon’s public debt last year, Fitch Ratings said July 1. The country’s debt-to-GDP ratio was 128 percent at the end of 2012, and the CIA’s World Factbook ranked it as the sixth-highest globally.

It’s not clear how many Lebanese expat workers in the Gulf are Shiites, a group that makes up about one-third of Lebanon’s population.

Lebanese Shiites without any ties to Hezbollah “will suffer directly” from the GCC action, said Jihad Azour, a former Lebanese finance minister who’s now vice president of advisory firm Booz & Co. in Beirut.

That may already be happening. A Dubai-based human-resource executive said her company now struggles to secure or renew work visas for Lebanese Shiites. Even when applicants aren’t rejected, they have to wait at least five weeks to get residency compared with about four days for others, said Joumana, who declined to provide her last name or her company’s name, citing security concerns.

To contact the reporters on this story: Donna Abu-Nasr in Beirut at dabunasr@bloomberg.net; Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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