BoA Merrill Lynch optimistic about lower oil prices

US rate normalization could put pressure on deposits

Lower oil prices help narrow Lebanon’s macro imbalances. The continued regional geopolitical tensions are still likely to weigh on macro performance, according to a report by Bank of America Merrill Lynch, issued on February 5.

The report expects economic performance to remain weak, following the steady deterioration in fundamentals since 2012. Economic growth is likely to hover around 2.5 percent this year, versus a likely potential growth of four to five percent, weighed down by political uncertainty and direct and indirect effects of the Syrian civil war.

“Although Lebanon’s economy is still resilient and is not registering negative growth, it is still performing below its potential,” said Jean-Michel Saliba, the London-based Middle East and North Africa Economist at Bank of America Merrill Lynch, in an exclusive interview with businessnews.com.lb. “Weaker growth is expected to prevail in the economy as long as the country suffers from weak demand and regional turmoil,” he said.

Lower domestic fuel prices should provide some support to the consumption outlook while external demand from the GCC, which represents 28 percent of total exports by destination, should moderate going forward.

“GCC countries are expected to register slower growth due to lower oil prices, and, broadly, their governments are likely to spend somewhat less as they earn less,” said Saliba. “This may negatively impact exporters to these economies, including Lebanon,” he said.

Lower oil prices should help narrow the large current account deficit but the financial linkages to the GCC still warrant caution, the report said.

“Lower oil prices would reduce the current account deficit, but it will remain large to the size of the economy,” said Saliba.

Oil at $50/bbl would lead to savings of 4.3 percent of the Gross Domestic Product (GDP), bringing the current account deficit closer to eight percent of GDP. However, a delay of six to nine months is likely before the trade balance reflects the lower energy prices, the report said.

The current account deficit has generally been adequately covered by sustained Foreign Direct Investment (FDI) flows and other private sector sources of external finance, leaving nonresident deposits as a potentially volatile swing factor. A portion of these flows could likely originate from the GCC and would thus be at risk of a slowdown.

Furthermore, deposit growth appears correlated with LL and USD deposit interest rate differential in commercial banks and could thus come under pressure, following eventual Fed interest rate normalization.

“Lebanese banks usually pay high interest rates on deposits. Fed rate normalization could lead to slowing flow of deposits to Lebanon,” said Saliba.

The fiscal deficit is likely to ease on lower oil prices but reform remains needed to decrease vulnerabilities.