Lebanon: A safe port in politically turbulent times

The Financial Times

It feels a long time since Beirut’s heyday in the 1960s, when it was a free-wheeling financial capital for an underserviced region. Lebanon’s 1975-90 civil war left Beirut trailing other regional centres, such as Dubai.

The conservatively managed banks have continued to attract deposits from the country’s large and wealthy diaspora, however, and have developed a reputation as a safe port in economically and politically turbulent times. “We have an original customer base from the early 1960s … they know how to deal with us and they trust us,” says Makram Sader, head of the Association of Banks in Lebanon (ABL). “Nobody lost a dollar in the last four to five decades dealing with the Lebanese banking sector.”


The sector has high liquidity buffers, particularly when it comes to foreign currency, and has pursued cautious lending policies. As a result, it has come through not only the global financial crisis but the turbulence of the Arab uprisings, relatively unscathed. Profits have slowed, but are continuing to be posted, while deposits and loans have continued to increase, albeit at a slower rate than a couple of years ago.

The hopes of some in the industry that pressures on the economy seen in 2011 would ease in 2012 have proved optimistic, however.

The turmoil in neighbouring Syria has turned out not to be a temporary shock, but an escalating civil war that, combined with its polarising effect on Lebanese politics, has resulted in an economic slowdown.

Riad Salameh, the central bank governor, said in a recent interview with a local newspaper that events next door were affecting the Lebanese economy and banking activity.

Tourism, an important contributor to gross domestic product, has declined, and lending opportunities both in the region and in an already overcrowded domestic market have fallen, contributing to a squeeze on banks’ profit margins.

Nassib Ghobril, chief economist at Byblos Bank, says he expects current trends to continue “until we see a positive shock politically that would raise investor and consumer confidence”.

The government’s response is constrained by its increasingly entrenched internal divisions, exacerbated by the crisis in Syria.

The regional head of the International Monetary Fund even argued in a recent interview that the dysfunctionality of Lebanon’s domestic politics had more of an impact on the economy than the regional turmoil.

“Our outlook for Lebanon is that it is more affected by the fact that there has been some slowdown in investment within Lebanon due to policy paralysis there, and less so from the direct effect from Syria,” Masood Ahmed told Reuters.

The failure of the government to tackle the widening fiscal deficit is a particular concern for the domestic banking sector, which is the main holder of government securities. Last month, the Institute for International Finance predicted the public debt level would increase to 138.6 per cent of GDP by the end of 2012.

“[Banks] don’t want to lend to government indefinitely without seeing government implement reforms that will reduce its borrowing needs,” says Mr Ghobril. “The banks are willing to roll over existing maturities but this is a concern for the banking sector, especially in this environment of stagnation.”

The sector faces an additional headache in the form of the intense scrutiny following accusations by the US Treasury in 2011 that one of its banks was being used for money laundering by the Iran-backed militant group Hizbollah. A US-based campaign group has even begun to call for finance groups to divest in Lebanese securities.

The ABL’s Makram Sader dismisses the US campaign as having a “marginal” impact, and insists the sector enjoys a “very good relationship” with the US Treasury, characterising the scandal over the bank accused of money laundering as a one-off case.

But the fact that the ABL has recently hired a Washington lobbying group of its own indicates some concern about the potential for reputational problems to develop and complicate relationships. “We have to fight back,” says one industry representative.

Though Mr Ghobril cautions against viewing the sector too much as an “island” industry, representatives say the banks’ high liquidity and the famed resilience of Lebanese depositors will enable them to continue to weather pressures. Equally, however, there is little to feel positive about in the immediate future.

“The banking sector is doing OK compared to other sectors in Lebanon but compared to its own recent history, its doing just OK at best,” says Nadim Kabbara at FFA private bank. “The banks are not really looking to add new branches ... they’re waiting to see what’s going to happen.”


Source: Financial Times