The Shooting Starts, And Lebanon Stops

Its revival falls victim to Israel's battle with Hezbollah

Building for the future, a swarm of trucks, cranes, and other machines are reconstructing Beirut's city center on the rubble of Lebanon's 16-year civil war. But hopes for recovery are being undermined by fears that Beirut could revert to the violence of the past. What changed the mood from optimism to despair were the air strikes by Israel against Lebanese-based Hezbollah guerrillas in April, which crippled a brand-new power plant near Beirut and caused an estimated $200 million total damage.

Far more costly may be the psychological impact. After the bombings, deep gloom shrouded the city, emptying usually thriving restaurants and nightclubs. The peace Beirut has enjoyed for five years now seems precarious.

The mood swing is wrenching. Over the past four years, the city--once the financial capital of the Middle East--had been enjoying a boomlet. Aid flowed in from the World Bank, Persian Gulf states, and France to help finance the rebuilding of roads and other infrastructure and the renovation of the ravaged downtown. The stock market reopened. And the recovery attracted overseas investors as well as thousands of moneyed Lebanese who returned from havens abroad.

What the bombings underscored, though, is the harsh lesson that without Middle East peace, there is a limit to what Lebanon--the favorite whipping boy of Syria and Israel--can do for itself. "We are at a standstill," says Elias Saba, an economist running for Parliament in the August elections. "Everyone is marking time." That attitude is evident in the stock market, which opened in January but so far has only five listings. Amid the uncertainty, Lebanon's mostly family-run companies are reluctant to dilute control by selling shares. Most trading is in Solidere, set up by the government as a private company in 1994 to rebuild the downtown. In the past year, as the political scenario worsened, its share price has dropped from $175 to $110.

The immediate problem, though most Lebanese won't say so publicly, is Hezbollah, the guerrilla group that is fighting to evict Israeli troops from southern Lebanon. The Israeli air attacks have made it clear, the Lebanese believe, that Israel will not let the country prosper as long as Hezbollah remains. But Hezbollah is entrenched, with Syrian and Iranian support. It is also popular in some quarters of Beirut, mainly for the social services it provides. But it scares potential investors. "Everybody is afraid to invest in Lebanon, even the Lebanese people, because of Hezbollah," says one financial executive.

Even real estate development, Beirut's main lure for investors, is losing appeal, as shown by Solidere's skidding stock price. With many Lebanese and Persian Gulf investors having second thoughts, real estate is "plunging into a chasm," says economist Kamal Hamdan.

Lebanon is also unlikely to attract much investment from the U.S. anytime soon. For more than a decade, the U.S. has barred travel by Americans to Lebanon. Only a few U.S. companies such as Citibank, which reopened a branch in March, and Merrill Lynch & Co. have small offices in Beirut. "U.S. investors would make a big difference," says Bassam Yammine, a Lebanese-born investment banker who gave up a lucrative job in the U.S. to help start investment company Lebanon Invest. "They have the biggest funds." But hopes that the U.S. will lift its travel ban are fading.

MORE CLASHES. Lebanese are encouraged, however, by small amounts of investment that have continued to flow in since the bombings, mostly from Lebanese and Persian Gulf investors. Lebanon Invest managed to complete its $45 million offering of shares in the Phoenicia Hotel. The government sold a $100 million Eurobond offering, while Credit Libanais, a commercial bank, sold $60 million worth of bonds with help from Merrill Lynch. And Lebanon's banks, once the powerhouse of the economy, are preparing to go public with the recent easing of government rules to allow the sale of up to 30% of equity. Observers expect six or seven banks to be listed on the exchange within a year.

But stepped-up clashes between Hezbollah and Israeli troops in the south in recent weeks have raised fears of yet another Israeli raid on Beirut--a chilling reminder that the city's future remains a hostage to Middle East peace.