ANALYSIS-New Beirut govt to face limited options on economy

* New govt not seen charting new economic course

* Reform commitment seen decisive in donor stance

* Resilient economy, banks provide cushion

BEIRUT, June 3 - A win for Hezbollah and its allies in a Lebanese parliamentary election is unlikely to lead to major changes in economic policy by the next government, whose hands will be tied by the state's hefty public debt.

Reducing the debt burden, one of the largest in the world, will be a central challenge, whatever the shape of the government that emerges from Sunday's election. Many expect a coalition cabinet similar to the outgoing administration.

"Reality is very constraining for any minister of finance," said Georges Corm, who held the post from 1998 to 2000.

Hezbollah, a political party with a guerrilla army, is a major player in a coalition that aims to overturn the parliamentary majority of a rival alliance backed by western and Arab states that has led government since 2005.

Backed by Syria and Iran, Hezbollah is listed as a terrorist group by the United States. The Shi'ite faction entered cabinet for the first time in 2005, running two ministries. Its allies include Christian leader Michel Aoun.

A sectarian power-sharing system means no single group can control government, increasing the chances of coalition rule.

"A Hezbollah-led victory might have a short-term impact on foreign and non-resident Lebanese confidence," said Simon Kitchen, a senior economist with EFG-Hermes in Cairo.

"But signs are that Hezbollah and its allies would not adopt radically different policies on economic policy," he said. "Donors would likely continue to support the Lebanese government."

Prime Minister Fouad Siniora's cabinet has enjoyed financial and political support from backers including the United States and Saudi Arabia. Donors pledged some $7.5 billion in grants and soft loans to Lebanon in 2007.

The United States has linked future aid to the shape and policies of the next government and some observers speculate that Saudi Arabia, concerned about Iranian influence, could cut future aid to Lebanon were Hezbollah and its allies to win.

STALLED REFORMS

However, former finance minister Jihad Azour said international backing would be decided by the next government's stance on economic reform, not its political hue.

"What will determine their position will be the policies they implement and how serious they are in accelerating the reforms," said Azour, who headed the ministry from 2005 to 2008. "The playing field is limited," he said.

A long-stalled Lebanese structural reform agenda includes privatisation in the telecoms and energy sectors -- measures that would help put state finances on a sustainable path.

While it faces a deficit projected at more than 12 percent of gross domestic product (GDP) this year, the next government can take some comfort in the resilience the economy and banking sector have shown in the face of the financial crisis.

The central bank is forecasting economic growth of 4 percent this year and banking sector deposit growth of 12 percent -- a level which policymakers say will allow the state to meet its borrowing needs.

The debt-to-GDP ratio has also fallen to 162 percent from 180 percent two years ago. "They've struggled through some pretty tough times," said Richard Fox, head of the Middle East and Africa sovereign team at Fitch Ratings.

"The debt burden has been creeping down a little bit. The thing is they could do a lot better were they able to get a comprehensive policy programme through," he said.

Lebanon accumulated the debt, which stood at around $48 billion in March, from the costs of rebuilding after the 1975-90 civil war. "It's difficult to see them making enormous tracks in reducing the debt stock without pushing through reform," said Ben Faulks, associate direct at Standard & Poors.

"Is the current debt stock sustainable without reform? Yes ... provided you have a constant inflow of deposits into the banking sector, and Lebanon has always had that," he said.

"In the medium-term, it would be good for the country to reduce that debt stock and it would give us more security about the government's ability to support the debt stock should there be some kind of problem," he said. For more on the Lebanese election, click [ID:nL0281797]