Clouds over Lebanon’s banking sector

Friday 21/08/2015
Feeling the brunt of regional instability.

Beirut - Lebanon’s banks, which hold much of the govern­ment’s debt and help keep the country’s economy going, are starting to feel the brunt of political instability at home and the continued fallout from Syria’s war. At least that is what Moody’s warns, although the banks seem confident about their resilience.
“Despite signs of stabilisation in the economy, including a slight rebound in tourism and a net posi­tive impact from low oil prices and the depreciation of the euro, the subdued operating environment will continue to weigh on Lebanese banks’ performance over the next 12-18 months,” Moody’s Investors Service said in a report published on July 30th.
As a result, the rating agency’s outlook on Lebanon’s banking sys­tem remains negative.
“Despite signs of stabilisation in certain sectors of the economy, GDP [gross domestic product] growth will remain subdued, as political un­certainty will hinder private invest­ment and impair the government’s ability to enact structural reforms,” according to the rating agency, which projects real GDP growth will pick up in 2015 to 2.5%, compared with 2% in 2014, but will remain at less than historical trends.
Moody’s also expects Lebanon’s government to continue to rely on the domestic banking sector for fi­nancing, while weakening in real estate and construction. Soften­ing housing prices could lead to re­newed asset-quality pressure.
In the meantime, Lebanon’s banks seem confident. “Lebanon’s banking system has proven to be re­silient enough to fend off any trou­ble,” a leading banking source told The Arab Weekly, recalling “harder times” during the 1975-90 civil war and rounds of war with Israel in the 1990s.
“We don’t see in Moody’s report anything too worrying but we’re continuing to pressure the politi­cal elite to speed up the promulga­tion of much-needed legislative re­forms,” the source said, speaking on condition of anonymity. The Associ­ation of Banks in Lebanon called on parliament to ratify three draft laws, approved by the cabinet three years ago, to combat money laundering. It also called for approving Lebanon’s adherence to the UN 1999 Interna­tional Convention for the Suppres­sion of the Financing of Terrorism.
Legislative work is in practical paralysis due to political tug-of-war over how parliament and the cabi­net should operate while the presi­dent’s post remains vacant. Due to a lack of political agreement since former president Michel Suleiman’s term ended in May 2014, parliament has failed to elect a successor.
“Moody’s is a respectful rating agency. Their analysis of the situ­ation in Lebanon is sound and ac­ceptable,” Thoukaa Khalidi, a Bei­rut-based business analyst, said. “Heavy reliance on the banking sector to finance government debt has been the subject of criticism for a long time because it crowds out lending to the private sector and encourages more government bor­rowing.”
“Though their rating of the bank­ing sector continues to be negative — they are usually very strict — due to the political pressure and the heavy reliance on bank deposits to finance government debt, they are admitting that the banks are apply­ing internationally agreed rules and standards, such as Basel III,” Khalidi said. Lebanon is planning to issue a US dollar-denominated bond in 2015 to raise up to $1.5 billion, the central bank governor said August 7th, wel­coming a move that would avoid the government using foreign reserves to repay debt.
Bank of Lebanon Governor Riad Salameh said he expected Lebanon would issue an economic stimulus package in 2016 worth about $1 bil­lion because the political and secu­rity situation in the region is ham­pering Lebanon’s ability to generate growth.
Lebanon issued its largest US dol­lar-denominated Eurobond in Feb­ruary, raising $2.2 billion. The war in Syria has hurt Lebanon’s exports, Salameh told Reuters, while conflict in the wider region as well as lower oil prices had driven down demand for consumption and investment.
Turmoil in Syria has hit Lebanon especially hard. The violence since 2011 has driven more than 1 million refugees into the country of only 4.5 million, increasing the burden on its already shaky infrastructure.
Credit was growing at a rate of 3-4% on an annualised basis while deposits were growing at 6-7% in 2015, according to Salameh, who said internal factors had also af­fected the economy, which he said would record 0-2% growth in 2015. Lebanon’s GDP growth was about 2% in 2014, according to an Interna­tional Monetary Fund (IMF) report in June, which predicted a similar level for 2015.
Over the short term, authorities should look beyond the temporary effects of lower oil prices and deliver a credible policy mix with sustained adjustment and a falling public debt ratio, the IMF said.
The price of gasoline and fuel oil in Lebanon fell more than 40% in 2014, thanks to a sharp drop in oil prices on international markets. This decline significantly reduced allocations to state-owned Electric­ity of Lebanon, allowing the Finance Ministry to reduce the budget deficit in 2014.
Relying on data from the 2004- 11 period and supplemented with projections for more recent years, a World Bank report issued in July laments that Lebanon’s political development since independence, which was influenced by its evolv­ing confessional system, is imped­ing the rise of more effective govern­ance mechanisms.
In the case of electricity, the cu­mulative cost of the company’s transfers from 1992 to 2013 stood at a “staggering 55.4% of 2013 GDP”, which placed “Lebanon’s public debt-to-GDP ratio at 143.1%,” the World Bank said. The country’s debt-to-GDP ratio would have been 87.8%, instead of 143.1%, if this one problem was resolved, it said.