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Middle EastMay 1 2012

Lebanon's central bank governor looks to maintain stability

The Lebanese banking sector witnessed slow growth in the first half of 2011, as political paralysis gripped the entire economy. The re-election of Riad Salameh as central bank governor helped boost activity in the latter half of the year, but with the country's political situation and the global economic climate still threatening to trouble Lebanese banks, how does he intend to stimulate growth throughout 2012?
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Lebanon's central bank governor looks to maintain stability

The general consensus among the Lebanese banking community is that 2011 was a year of two halves. One of the most comprehensive illustrations of this is the indicative measure of economic activity of Lebanon’s central bank – the Banque du Liban – which grew by a mere 1.7% in the first six months of 2011, before rising by 3.3% in the second half of the year. The anaemic growth between January and June 2011 is mainly attributed to the country’s political paralysis.

Lebanon was run by a caretaker government for the first six months of 2011, until political life resumed in July with the formation of a new cabinet. The cabinet unanimously reappointed Riad Salameh as governor of Banque du Liban for a fourth consecutive six-year term and this helped boost growth in the second half of the year. However, economic growth in the country went from 7.5% in 2010 to just 2% in 2011, the slowest growth in the country since 2006. In turn, activity in the Lebanese banking sector also shifted into a lower gear.

Banking slump

Lebanese banks’ total assets growth fell from 11.9% in 2010 to 9% in 2011, with total assets at $140.6bn by the end of 2011. Deposit growth was also more subdued at 7.9%, taking total deposits to $115.7bn. The increase in deposits was 26% lower than in 2010. Meanwhile, banks’ net profits registered a 3.4% annual decline in 2011 – the first negative growth rate in earnings in nine years. However, against a backdrop of domestic uncertainty, regional instability in light of the Arab Spring uprisings and the prevailing global financial crisis, Mr Salameh remains stoical. 

The banking sector in 2011 performed according to our expectations,” he says. “Profitability was in line with 2010, while deposit growth was lower than previous years. This was partly due to the political environment and the decline in interest rates for deposits. Even so, [the banking sectors] growth was sufficient to fund both the public and private sector.”

System-wide lending grew 12% in 2011 – fuelled to a large extent by credits to the housing sector and consumer loans on the back of incentives introduced by the central bank to stimulate greater lending to the private sector. In May 2010 – for the first time in the country’s history – loans allocated to the private sector overtook those to the public sector. Total loans extended to the private sector in Lebanon and to Lebanese expatriates reached $41bn in 2011, representing 34% of total customer deposits. Public sector loans stood at roughly $28bn.

It is important for the government to keep the markets confident and therefore to introduce reforms that will bring down the deficit in the budget

Riad Salameh

“We have exempted the banks from holding obligatory reserves so that they can allocate more funds for new projects such as housing, education and renewable energy loans,” says Mr Salameh. To date, housing loans have reached $4.5bn while subsidised loans to industry, agriculture and other productive sectors stand at $2bn.

The incentives have also helped stabilise the Lebanese pound – the percentage of deposits denominated in the currency has risen substantially in the past three years from 26% in 2008 to 37% in 2011.

“This represents a very important increase and shows the confidence in the policies that we have introduced. And we are seeing a continued conversion from US dollars to the Lebanese pound because banks are at ease with their liquidity due to the rise in deposits,” he says. “Increased lending is essential seeing as growth here in Lebanon relies on credit from the banks.”

Growth driver

Indeed, Lebanon's banking sector remains the driving force for economic growth in the country, as has been the case since the 1990s. With banks’ loans to the government having reached $30bn – or 77% of the country’s gross domestic product – the diversification of their lending portfolios is a significant step forward. Furthermore, as the central bank governor points out, banks have been reducing their exposure to sovereign debt.

“If you look back over the past 10 years, banks have allocated less to buying public paper, whether in Lebanese pounds or US dollars. Rather, the central bank has been filling this gap,” says Mr Salameh.

While still weighing on banks’ activity, the aggregate portfolio of foreign currency sovereign bonds held by banks fell to 118.2% of their equity base in 2011, compared to 126.8% in 2010, and a notable improvement from levels exceeding the 200% mark only a few years ago. Even so, Lebanon’s indebtedness ratio remains in the top decile of countries around the world. Mr Salameh says that the country’s deteriorating external balance ranks as his main concern in 2012, and he is looking to stimulate money transfer to the country. Standing at more than $2.5bn, the balance of payments recorded its first deficit in 10 years in 2011 amid rising import prices, stagnation in exports and contracting inflows. 

“It is important for the government to keep the markets confident and therefore to introduce reforms that will bring down the deficit in the budget,” says Mr Salameh. “Banks’ concerns are related to this issue. The political situation is not yet at a point where there can be a reform of the public finances but there is an awareness of the necessity to do it. I hope things will change in the next few years.” 

After 18 years of steering the banking sector through myriad financial obstacles, it is no surprise that a cautious optimism has come to characterise Mr Salameh’s stance. From the south-east Asian economic collapse and the Argentinean currency crisis to the US subprime mortgage woes, the 2008 global financial crisis and the current eurozone default woes, Mr Salameh has experienced a wide range of economic challenges, not to mention many obstacles on the domestic front. 

“Lebanon’s economy could grow at more than 4% in 2012 if both the country and the region don’t experience further political upheaval," says Mr Salameh. "We have started [2012] with a good performance – deposits have increased by 2.5% in the first quarter. Banks should achieve a deposit growth of 8% and credit growth of 10%. We are looking at stable profits as more provisions are constituted for.” 

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