FOUR MONTHS ON and the tent city that Hizbollah, the Shia militant group, set up last year in Beirut, the Lebanese capital, is still blocking the city’s administrative centre. The positioning of the tents in the heart of the reconstruction zone near the seat of government is a calculated show of defiance.
Near the tents, Lebanese soldiers, protected by armoured personnel carriers mounted with machine guns, have laid miles of razor wire to guard the Serai, the Ottoman-era palace that houses the government of prime minister Fouad Siniora.
True, the tents are for the most part deserted and the bedrolls inside are rolled up. The only signs of life are a few teenagers kicking a football around under an awning. But Hizbollah showed on December 1 2006 that it could bring 800,000 of its supporters into the centre of Beirut and choke economic and governmental activity out of the city.
Just ahead of the rally, Moody’s downgraded the financial strength rating of the three banks it rates in Lebanon to D–.
And as finance minister Jihad Azour, interviewed in his office in the Serai, says, every minister still serving in the Lebanese government is the subject of a death threat from Hizbollah.
So it’s scarcely the most relaxing atmosphere in which to reform an economy and develop its capital markets.
Bankers in Beirut, though, are phlegmatic when it comes to the stand-off between "the opposition", effectively Hizbollah and a motley collection of opportunistic Christian allies, and the Siniora government. To survive in Lebanon, it seems, you have to be an optimist. But in the perspective of Lebanon’s extremely troubled history, the current stand-off, death threats and all, can seem like a little local difficulty.
"We have passed through very difficult times. We have seen wars, we have seen the assassination of the most important leader in Lebanon. The banks have managed to cope. And I must say that there is no panic. The people are used to seeing a situation that is not very stable," says Saad al-Azhari, deputy chairman of Blom Bank and vice-chairman of the Lebanese bankers’ association.
The insouciance is all the more remarkable because the government-Hizbollah stand-off came in the wake of a 34-day blitz by the Israeli airforce in July and August last year that destroyed many of Lebanon’s roads and bridges.
"There isn’t even a whiff of a crisis in the financial market," says Khater Abi Habib of Kafalat, a government-backed body that makes loans to small and medium-sized enterprises. "I know this is a bit incredible. Basically it’s because people have survived through thick and thin – and sometimes prospered – for so long that you can sell the concept."
Bankers in Beirut say that only 6% of the banking system’s loan book was extended to areas hit in the Israeli bombing campaign. Although the Israelis targeted roads and bridges up and down the country they concentrated their attacks on houses and businesses in southern Beirut, in the far south of Lebanon, and in the Bekaa valley, where several factories were destroyed. The government and international donors are taking care of the infrastructure, leaving the private sector banks relatively unscathed.
For example, only 61 out of 3,200 loans made by Kafalat were impaired as a result of the Israeli bombing campaign, according to Abi Habib.
Riad Salamé, the governor of the Banque du Liban, and Euromoney’s central bank governor of the year in 2006, says that the banks have recorded about $100 million in provisions on a combined loan book of $17 billion.
Indeed 2006, although far from being the bumper year that had been promised before the Israeli attacks, panned out as business as usual for the banks. Customer deposits increased by 6.5% year on year in 2006 to L£91.5 trillion ($61 billion) and total assets grew to L£114.84 trillion.
The Lebanese banking system is large relative to the size and wealth of the country and it funds a government that is, by most measures, profligate. GDP is not high but when GNP, which factors in the contribution of the large Lebanese diaspora, is considered, things look a lot healthier, if not exactly robust.
It is not incidentally just Lebanon’s Christian community that has widespread links overseas. The Shia are particularly strong in west Africa where they fill a commercial middlemen role and, it is whispered, partly finance Hizbollah.
The Banque du Liban has reserves of about $13 billion and a further $6.5 billion in gold, according to Salamé, and was able to maintain the Lebanese pound at 1,500 to the dollar through the crisis – even if it meant raising overnight rates to 30% at one point, according to Banque Audi. "So far the situation has remained stable. The central bank is committed to stability," the governor says in his office in Hamra Street.
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"So far the situation has remained stable. The central bank is committed to stability" Riad Salamé, Banque du Liban |
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Salamé says that Lebanon recorded a $2.8 billion current account surplus in 2006, helped by $500 million in the form of concession loans from Kuwait and $1 billion from Saudi Arabia. But once inflation of about 7% is factored in, GDP for the year was flat. Others, notably Banque Audi, say that GDP for the full year contracted.
Dollarization of deposits increased – Lebanon is effectively a dollarized economy – to nearly 80% but did not reach the levels seen in the aftermath of the assassination of iconic former prime minister Rafiq al-Hariri, according to Banque Audi.
Hariri, a Sunni Muslim with strong links to Saudi Arabia, was almost single-handedly responsible for the continuing reconstruction of central Beirut. His assassination in February 2005 was the immediate catalyst of the current round of political instability.
What concerns the bankers is the indirect effect on their country. Tourism, for example, was a big foreign currency earner: 2006 was set to be the best year yet since 1975 when the 15-year Lebanese civil war officially kicked off. Now the outlook is uncertain.