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WorldMay 1 2014

Lebanon's central bank governor anticipates economic rebound

Lebanon has endured a difficult few years of domestic and regional uncertainty, which have weighed heavily on its economy. But now the governor of the central bank Riad Salameh, is preparing for the prospect of renewed growth. 
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Lebanon's central bank governor anticipates economic rebound

As the conflict in Syria continues, its impact on neighbouring Lebanon's economy is intensifying. The steady flow of refugees, accompanied by cross-border violence, has dented the country’s growth rate while stretching limited public finances. According to the World Bank, the conflict is expected to wipe off $1.5bn from Lebanon’s government revenues between 2012 and 2014, as diminishing consumer and investor confidence, as well as depleted bilateral trade, take their toll.  

For Riad Salameh, governor of Lebanon’s central bank, Banque du Liban, the preceding years have been among the most challenging since he assumed the role in 1993. “The negative influence on Lebanon of the Syrian war has been profound, particularly in terms of refugees. As long as this conflict continues, investment and consumption will be substantially reduced. For example, Gulf country citizens have been prohibited by their governments from visiting Lebanon, and they are important investors and consumers in the domestic economy,” says Mr Salameh.

A kick-start

The role of the Banque du Liban, and the experienced hand of Mr Salameh, has been vital in steering the country through this period of sustained regional and domestic uncertainty. The central bank’s 2013 stimulus package, which promoted commercial lending through the provision of loans to domestic lenders at 1%, galvanised a recovery in the real estate, renewable energy and small and medium-sized enterprises markets for that year. It also contributed 1.5% to estimated real gross domestic product growth of 2.5%, according to figures from Banque du Liban.

“In 2014, we are going to have a stimulus package of $800m dedicated to the same sectors. But over and above that, we are launching a package this year whereby banks can invest [up to 3% of their capital] in technology start-ups. So there will be about $400m available in equity investment as a potential for start-ups. We hope that this new package will help Lebanon create a new technology sector, a sector that will create jobs and benefit existing sectors by improving efficiency. We are, as a central bank, trying to take advantage of the high liquidity of Lebanese banks to support growth in the country,” says Mr Salameh.

For the banking sector, these stimulus efforts led to sustained credit activity of about 10% last year, while strong deposit inflows from the global diaspora increased the country’s deposit base by 8%. The $1.4bn allocated as part of Banque du Liban’s 2013 incentives package accounted for 40% of the total credit in the country. Strong deposit inflows in conjunction with stringent capital requirements, which exceed Basel III requirements, have strengthened Lebanon’s position from the perspective of the global market. This means that, despite the problems posed by the ongoing crisis in Syria, Lebanon’s risk profile remains relatively positive.

“Effectively what is happening is that the markets are not showing signs of nervousness and not anticipating a downgrade because the country is selling its debt paper at rates that you could encounter at the level of BB+ while we are quoted at B-. The possibility of a downgrade is really too far from the assessment of the markets of Lebanon’s risk profile,” says Mr Salameh. 

Well positioned

Lebanon recently rolled over about $771m in Eurobonds that were due in April, and exchanged close to $882m due in May this year at market rates. This figure represented most of the loans due in 2014 denominated in foreign currency, both reducing the country’s exposure to market volatility and strengthening the government’s position with respect to continued financing.

Banque du Liban successfully met its inflation targets for 2013, which reached 3.5%, while the stability of the Lebanese pound has also helped to enforce confidence in the financial sector. Taken together, the medium-term outlook for the Lebanese economy, and the banks that underpin it, appears increasingly positive despite the growing economic challenges fuelled by Syria’s civil war.

“The banking sector’s results should improve in the coming two years because it is already well capitalised and exceeds Basel III requirements," says Mr Salameh. "On the whole, the banking sector has already endured the worst of the security crisis in Syria and Egypt, as well as the financial crisis in Cyprus. The potential of the sector is vast. I think that if we anticipate that the Syrian crisis is going to end in the coming two years, along with the potential returns from the country’s oil and gas, the prospects for Lebanon could drastically change. Markets work on anticipation.” 

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Read more about:  Global economies , Middle East , Lebanon , Policy