The outlook for Lebanon's banking system remains negative, as the country's economy remains weak as a result of the effects of the two year conflict in neighbouring Syria, which has contributed to a decline in bank profitability as institutions take on higher provisions, the rating agency Moody's Investors Service said.
"The ongoing conflict in Syria and factious domestic politics will continue to adversely affect key sectors of the Lebanese economy over the 12- to 18-month outlook period, including trade, tourism, real estate and construction," the rating agency said in a statement today.
Lebanon will record "muted credit growth in 2013 (of 8 percent to 10 percent nominally, against projected inflation of 5.7 percent), while the government's weak fiscal position implies that it will remain reliant on the domestic banking sector to finance its large fiscal deficit," it added.
Moody's said it believes Lebanese banks face a high likelihood of further asset-quality deterioration as a result of regional instability, declining tourism flows, lower consumer confidence, and that reported non-performing loans in the system will rise above 6.5 percent of gross loans, from 4.4 percent in 2011.
Bank profitability will come under pressure due to rising credit charges, declining fee income generation, and losses arising from Lebanese banks' operations in Syria, the agency said. Lebanese though highly liquid and help finance the country's large public debt, banks have had a negative outlook since 2011.
Lebanon's public debt rose 8 percent to $58bn at the end of January from the same month a year earlier, according to data from the Association of Banks in Lebanon.
The country has one of the highest public debt stocks in the world, of about 140 percent of gross domestic product at the end of 2012, amassed in the reconstruction phase that followed the end of a 15-year civil war in 1990 and after a month long war with Israel in 2006.
The debt to GDP ratio fell gradually from over 180 percent in 2006 to about 130 percent in 2011 before it began to increase again.
A two-year rebellion against the Syrian regime of President Bashar Al-Assad has slowed Lebanon's economy. Gross domestic product has ebbed to about 0.6 percent last year from 1.8 percent in 2011, after an aggregate of 8 percent growth over a three-year period starting in 2007. The number of tourists has declined by 3.7 percent, and construction permits fell by 10.8 percent, according to official figures.
Foreign direct investment in Lebanon plunged by 68 percent to $1.1bn in 2012 compared with the previous year, the second highest decline among emerging markets, according to data from the Institute of International Finance. FDI inflows accounted for about 2.7 percent of the country's gross domestic product.
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