Banks cautious on sovereign risk

President of ABL urges government to put a ceiling for budget deficit

The President of the Association of Banks in Lebanon (ABL), Joseph Torbey, warned the government against the consequences of not having a limit for the deficit in the 2012 budget.

The fiscal deficit reached $976 million over the first eight months of 2011. The 2012 draft budget, proposed by the Minister of Finance Mohamad Safadi, involves an increase in government spending by around six percent (to $13.9 billion).

Torbey said that banks are not willing to risk their portfolios of sovereign credit. Addressing the government, he said that although Lebanon is known to have a good ability to respect its debt obligations, this assessment should not be overrated.

According to Standard & Poor’s Rating Service Agency, Lebanese banks’ exposure to sovereign debt constitutes the main systemic risk, as it accounts for around 54 percent of the sector’s consolidated assets.

Gross public debt reached $53.4 billion at the end of August 2011. Banks hold around 67 percent of the foreign currency denominated debt, and around 48 percent of lira denominated debt.

The ABL President also voiced concern for the persistence of instability in the Arab region. “If the crisis in the Arab region persists, the impact of the Arab spring might turn out to be a harsh winter,” he said.

Torbey said that the effect of the Arab uprisings on the banking sectors of countries that were not directly involved in revolts varied from one country to another. He said that Lebanon’s banking sector grew by seven percent during the first eight months of the year, compared to a growth of 11.8 percent for the whole of 2010.