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.

Foreign direct investment to Lebanon, which traditionally goes into real estate, shopping malls or hotels, declined about 25 percent last year to $3.2bn from 2010, according to the United Nations Conference on Trade and Development (UNCTAD).

“The economy continues to be affected by the turmoil in Syria and the security breaches [in Tripoli] we saw in May and June aggravated the economic slowdown and negatively affected the tourism seasons,” says Nassib Ghobril, chief economist at Beirut-based Byblos Bank SAL. “I expect economic activity to remain stagnant this year given that consumer confidence and investor sentiment remain low and there doesn’t seem to be an end to the turmoil in Syria.”

About 79 percent of economic activity on the expenditure side is now private sector consumption primarily household consumption, according to Byblos Bank’s consumer confidence index.

“Consumers remain very wary of conditions in the country and therefore are holding back on unnecessary spending,” Ghobril says. “We can see this by the overall slowdown at the retail level and real estate sector. The fact that consumer confidence remains so low in the first quarter of the year is an indication of where things stand.”

Political upheaval in the region and, in particular, the uprising in neighbouring Syria put a big dent into Lebanon’s tourism industry, given that this sector generates as much as $8bn a year. Though some local media have reported the number of visitors dwindling by as much as 20 to 25 percent, tourism minister Fadi Abboud tells Arabian Business that the number of tourists to the country, excluding Lebanese expatriates and Syrians, dropped about seven percent in the first half.

The violence in Syria has seeped into the northern city of Tripoli with on-and-off fighting claiming the lives of more than 20 people. Saudi Arabia, Bahrain, Qatar and the UAE have all issued travel warnings advising their citizens against travelling to Lebanon this year and the country has lost about 300,000 tourists who travel overland through Syria.

“Indeed they have affected us,” Abboud says when asked if the travel warnings have dissuaded people from visiting.

“I think it’s all politics, it has nothing to do with security issues. That is very clear. The Americans are not worried about the security of their people, the Brits, the French, and the Europeans in general.”

Gulf tourists, who account for about ten percent of the number of visitors, represent 40 percent of spending by tourists, Abboud says. Gulf, Jordanian and Iranian tourists have been replaced by visitors from Iraq, Europe, Syria and Lebanese expats, he says.

He projects about 1.45 million tourists, 10 percent lower than last year, will visit the country in 2012. That’s well below the record of 2.2 million visitors in 2010. Abboud is in talks with low-cost carriers including EasyJet, Ryanair and Monarch Airlines about the possibility of starting operations to the country to help boost tourism. So far, that’s been a tough sell to Lebanon’s politicians.

Public debt, among the highest in the world, reached $55bn at the end of May this year, according to the Association of Banks in Lebanon. The country amassed the debt in the reconstruction phase following the end of civil war in 1990 and the conflict with Israel in 2006. Lebanese banks have decreased their exposure to the country’s public debt. Total exposure in Lebanese currency and foreign currency stands at around $28bn, while the bank’s exposure to the private sector is around $42bn, Salameh says.

Though debt-to-GDP ratio has declined to 136.2 percent in 2011 from about 180 percent in 2006 and prime minister Najib Mikati says he wants reduce the ratio to 100 percent of GDP over the coming five years, the government needs to instil confidence. Five-year issues of Lebanon's credit default swaps (CDS), a proxy for a country's default risk, widened to 478.1 bps at the end of the second quarter this year from 446.3 bps in the first three months of the year. That compares with Saudi Arabia and Dubai CDS which reached 126.3 bps and 357.6 bps respectively in the same period, according to CMA.

The government needs to implement strong domestic policies by maintaining fiscal discipline and targeting a primary surplus, which would keep the country's debt-to-gross domestic product ratio on a downward path, Nemat Shafik, International Monetary Fund deputy managing director said in May.

Allegations published by American media outlets of money-laundering by Lebanese banks for Hezbollah, Iran and Syria have certainly not helped. The accusations are unfounded, Salameh says.

“Lebanon has laws and we have issued the circulars to reinforce the application of international norms in our country,” Salameh says. “The Lebanese financial sector is abiding by these norms,” he says, adding that Lebanese banks have respected sanctions drafted by the US, Europe and Arab countries.

“I believe what has been written lately is exaggerated,” Salameh says. “The central bank does not hold any funds or have any relations with the central bank of Iran or the central bank in Syria. I can also confirm that the Lebanese banks are not dealing with institutions or persons that are on the sanctions list in the US, Europe or in the Arab countries.”

The EU put more than 50 Syrian individuals on its sanctions list, including officials at Commercial Bank of Syria, the country’s largest, along with mobile phone operator Syriatel, and giant private firm Cham Holding.

Last year, the US formally accused the Lebanese Canadian Bank of money laundering and links to the Hezbollah movement, which the US designates as a terrorist organisation. The case was unnerving to Lebanese banks, which provide a strong financing base for the government. Salameh took over LCB and structured a deal that saw its acquisition by France’s Societe Generale’s Lebanese unit.

Unemployment and social inequality persist and inflation may rise to six percent this year higher than the IMF’s forecast of four percent on the back of higher wage increases, but Salameh remains bullish. In June, the government exchanged local currency debt the central bank was holding with $2bn in denominated bonds, boosting its foreign currency reserves. It has amassed a record $35bn in foreign currency reserves in addition to $15bn in gold, Salameh says confidently. The bank has bought $1.5bn from the market so far this year.  The appetite for Lebanese debt hasn’t wavered and the country’s sovereign ratings (B1 by Moody’s Investors Service and B at Standard & Poor’s) have been maintained, the former Merrill Lynch banker says.

“The auctions and offerings whether in Lebanese treasury bills, US dollars or foreign currency euro bonds are being oversubscribed,” he says, adding: “The appetite is there.”