Low yield on local debt curbs banks’ enthusiasm

“Reluctance to buy government debt has nothing to do with exposure to sovereign risks”

Gross public debt stood at around $54 billion at the end of the first quarter, slightly up from end-2011. The Central Bank’s share of public debt grew to 35.7 percent, up from 33 percent at end- 2011, compared to commercial banks, whose share fell to 48.8 percent from 51 percent.

Lira-denominated debt rose by 2.3 percent to $33.4 billion, representing 62 percent of the total debt. Commercial banks were still the biggest subscribers to T-bills, at a 43 percent share, down from 45 percent.

According to Fouad Khalifeh, risk manager at Ahli International Bank, banks are cutting back their subscription to sovereign debt due to low interest rates, especially those offered on local currency bills.

Khalifeh said the banks’ reluctance to buy government debt has nothing to do with their exposure to sovereign risks: “If the State would offer a high interest rate on debt notes, banks would all hurry to subscribe.”

The disinclination of banks to buy local currency debt urged the Central Bank to intervene raising its share to 40 percent, ten percent higher than at end-2011.

“Though interests on Eurobonds are still higher than international levels, banks are often unwilling to invest in long term maturities, which offer a higher return,” said Khalifeh. Foreign currency debt totaled $20.6 billion at end-March, down by less than two percent from end-2011.

According to Ministry of Finance data, interest payments fell by 12 percent year-on-year in the first quarter. Domestic interest payments were down by nine percent. Khalifeh said lower interest rates have lowered profitability: “Banks are paying interests on deposits more than they are getting on T-bills.”

Khalifeh said banks would be interested in funding public projects rather than buying debt notes: “If the State starts Public-Private Partnership projects, like for example infrastructure development, banks will be willing to fund them.”

According to Khalifeh, banks are now focusing on lending as a way to use their liquidity. “Lately the number of people wanting to take loans hasn’t exactly been growing, which urged banks to pursue expansion overseas,” he said.

Reported by Hanadi Chami