<div class="ft-story-header"><h2>Lebanon counts the cost of war</h2><p>By Neil MacDonald in Beruit</p><p>Published: August 21 2006 18:50 | Last updated: August 21 2006 18:50</p></div><div class="ft-story-body"><p>Lebanese
shares have recovered strongly in the past few days, despite continued
uncertainty about the United Nations-brokered ceasefire, in place for
just over a week. </p><p>The Beirut Stock Exchange's market
capitalisation on July 11, the eve of the war, was $10.53bn. After
falling during the war to a low of $8.6bn on August 9, this had
recovered to $9.7bn by the end of trading on Monday. But an Israeli
commando raid at the weekend, allegedly to intercept weapons, appeared
to unsettle some investors. </p><p>"If
not for Israel's breach of the [UN] resolution, we would see much
stronger buying," says Nabil Chaya, head of capital markets at Bank
Audi SAL in Beirut.</p><p>The exchange closed for two weeks but resumed
trading with the war still on, albeit with shorter trading hours and
the daily limit on price fluctuations reduced to 5 per cent instead of
15. Most stocks gained the full 5 per cent on Friday August 11, when
the UN ceasefire resolution was announced. </p><p>Israeli attacks
caused $3.5bn of direct damage to buildings and infrastructure,
according to Lebanese officials. The 34-day war also ruined the tourism
summer, steering the economy from a promising first half towards zero
or even negative growth for the full year.</p><p>"Approximately $1.1bn
of economic activity that would have occurred now will not," JPMorgan
said in a report last week. "The economic cost of the crisis may total
$5-$6bn, or 23-27 per cent of gross domestic product."</p><p>The BSE
reeled from the impact, though perhaps not as much as it might have
done based on business fundamentals, says Philip Khoury, head of
research at EFG-Hermes, a regional investment bank. But two important
sectors – banking and downtown Beirut real estate – differed in their
behaviour. Solidere, the real estate development corporation that is
Lebanon's largest company, was hit hard, falling from $22 a share
before the war to a low of $14.93 on August 9. It has since recovered
to more than $19. </p><p>But the three big banks – Bank Audi, Blom
Bank and Byblos Bank – suffered limited losses. Liquidity in bank
stocks is lower, so price fluctuations happened on thin volume. </p><p>"With more liquidity in the stock market, I'd have expected [bank] stocks to be harder hit," as Solidere was, Mr Khoury says. </p><p>Still, the banks can look forward to an infusion of reconstruction payments.
</p><p>The
Saudi and Kuwaiti governments have promised humanitarian and
reconstruction packages worth a combined $1.1bn. The same two Gulf
states helped shore up the Lebanese pound through five-year deposits
worth $1.5bn during the war.</p><p>More commitments are expected at an
international donors' conference in Stockholm later this month. But
they will depend, at least partly, on the ceasefire's durability.</p><p>The
BSE was already trading at a discount because of political and economic
risk. Stocks had lower price/earnings ratios than those of other Middle
Eastern and North African non-oil markets, reflecting the country's
high public debt in addition to its lack of control over Hizbollah and
other militias, Mr Khoury says.</p><p>The last unspoiled year was 2004,
when growth reached 6 per cent. Local analysts say they had counted on
4-5 per cent this year. Growth stalled at 1 per cent last year after
the assassination of the prime minister and Solidere founder, Rafiq
Hariri.</p><p>Some analysts talk about how the economy and the BSE
bounced back after that shock. Protests after the Hariri assassination
produced changes, including the peaceful exit of Syrian troops. Armed
groups, especially Hizbollah, remained unintegrated but the Lebanese
state appeared to grow stronger. </p><p>Will the current ceasefire
produce further political progress? Signs of unity at the government
level are cause for optimism, Banque Audi analysts say.</p><p>At the same time, banks face a new upsurge in non-performing loans, while the public debt problem has worsened.</p><p>"Is the banking system going to collapse? No," Mr Khoury says. "But how is the country going to look in two years?"
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