Lebanon Central Bank: Riad Salameh

The list of challenges that Lebanon faces is immense. But for four of the last five years, its economy has remained resilient, despite a sectarian political system ruled by warlords, and the detritus of a fifteen-year civil war that ended in 1990. In 2005, there was the assassination of former prime minister Rafiq Hariri, followed by a series of killings that targeted politicians, journalists and figures from the security establishment.

In 2006, there was a month-long war with Israel. In 2008, sectarian clashes killed at least 80 people and, more recently, fighting has erupted in the northern town of Tripoli. And then there was the collapse of Saad Hariri’s government last year, followed by a wave of popular uprisings in the Arab world. All of the above serve as a reminder of the country’s underlying fault lines and how easy it is for violence to break out.

None of this, of course, bodes well for investor confidence. Yet the service-oriented economy grew by an average of eight percent per year from 2007 to 2010. A decision, in 2004, by the country’s central bank governor, Riad Salameh, proved instrumental in shielding Lebanon from the credit crisis, attracting a deposit inflow that boosted foreign currency reserves and helped service the nation’s burgeoning public debt.

Salameh’s directive forbidding domestic banks from investing in exotic derivatives and subprime lending shielded the country’s banking system from the fallout after Lehman Brothers went under. A prudent monetary policy, coupled with interest rates as high as seven percent on bank deposits in Lebanese pounds, increased liquidity and contributed to bank deposits growing as much as 15 percent annually.

However, the economy lost its momentum last year, slowing down to 1.5 percent, the slowest since 2006 when Hezbollah and Israel went to war. Domestic political and regional uncertainty brought on by popular uprisings that toppled four Arab leaders have contributed to the slowdown and loss of confidence.

The popular uprising in neighbouring Syria against the regime of president Bashar Al Assad that began a year and half ago, has hurt banks in Lebanon and is likely to affect their profitability this year, Salameh says.

“The Lebanese banking sector has been negatively affected by the events in Syria. Their balance of exposure has declined in the past sixteen months by 45 percent.”

Seven Lebanese banks, including the country’s largest players, Blom Bank, Bank Audi SAL-Audi Saradar Group and Byblos Bank that operate in Syria had an overall exposure of $4.9bn, according to Salameh. The banks have taken general provisions based on stress tests of about $380m in anticipation of loans that could not be repaid, Salameh says.

“The effect of these events have of course impacted the growth in the profits of banks in Lebanon,” Salameh says, “We expect profits to be even or three percent lower than last year.”

Deposits at all Lebanese banks are forecast to grow eight percent this year, the same as 2011, while loans should increase by more than ten percent, he says. Lebanese economic growth will accelerate to about three percent this year in line with the International Monetary Fund’s forecast, according to Salameh.

“Lebanon is a country that has volatile security and political situation that usually affects the economy, but I think this level of growth could be realistic,” he says.

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