Lebanon: Banks perk up as Hariri picks cabinet

By:
Olivier Holmey
Published on:

End to multi-year political impasse; factions jostle for ministerial roles.

Saad Hariri-R-600
Prime minister Saad Hariri, whose family plays a big role in the local and
regional banking sector


The political crisis in Lebanon, which left the country without an elected president or a cabinet for more than two years, was partially resolved late in 2016 with the election of a president and the appointment of a prime minister. The changes lifted investor sentiment about Lebanon, but the country’s bankers say there is still a long way to go before the situation is normalized.

Lebanon’s banks weathered the political crisis relatively well, experiencing no large rise in non-performing loans and registering strong revenues, despite the added challenges of the Syrian refugee crisis. But bankers were also keenly aware that growth was stunted by investor uncertainty about the country’s overall prospects, including its domestic political problems.

Freddie Baz, vice-chairman and group strategy director of Bank Audi, told Euromoney last year that Lebanon’s GDP is 25% lower than it could be, an annual shortfall of $15 billion. That stunted growth means bank performance, although relatively strong, is far less than it could be.

According to Baz: "It means Audi, which is the largest bank in the country today, could [if GDP growth was as it had been in 2010] nearly double its revenue, with very limited marginal costs."

Potential

Now, with the election of former general Michael Aoun as president on October 31 and Aoun’s appointment on November 3 of Saad Hariri as prime minister, bankers think they may be able to achieve their potential more fully once again.

"It definitely is positive," says Fadi Osseiran, general manager of Blominvest Bank: "If you asked any banker 'Would you rather be two months ago?’ they would say, 'No, of course not; it is much better now’."

However, Nassib Ghobril, chief economist of Byblos Bank, notes that the improvement in economic and banking conditions was not as sudden as many had hoped. He says the Byblos Bank Consumer Confidence Index increased by 3.5% in October, to reach 39.3 – "Still a very low level". In May 2008, on the signing of the Doha Agreement, which resolved a previous political crisis in Lebanon, the index immediately rose by 103%, he says.   

We thought that the arrival of a new president would pave the way directly to solving economic issues. At this moment, it doesn’t seem like it yet 
 - Fadi Osseiran, Blominvest Bank

The difference in consumer reaction reflects  the fact that in 2008 the agreement clearly ended a stand-off between the government and the Shiite group Hezbollah, whereas after Aoun’s election in October many issues remain unresolved.

"It’s much better than if we didn’t have a government," says Osseiran. "But we thought that the arrival of a new president would pave the way directly to solving economic issues. At this moment, it doesn’t seem like it yet." That is because Hariri, whose family plays a big role in the local and regional banking sector through BankMed and Arab Bank, has yet to form a cabinet. This is a difficult task given the many different factions jostling for ministerial positions and the fact that a parliamentary election is due in May.

Bankers are keen to see a working cabinet and parliament in place, not just to give the international investor community a sense of political stability, but also because they say specific reforms need to be pushed through to make the economy work better for the private sector.

Osseiran says: "When the government is there, there are actions that need to be taken, laws that need to be passed. Banks will be happy with that. We haven’t had a budget for years now; we have to have a budget. With a budget, you decide how to spend, how to borrow money, how to issue debt, how to manage your affairs."

According to Ghobril, the politicians who are taking charge have the right agenda: "The president’s slogan is reform and change, and the prime minister understands the need for the private sector. The important thing is to put the reforms on track and to give them priority in the cabinet."

Stagnation

Above all, bankers say, the new political leadership must tackle Lebanon’s infrastructure.

"The Lebanese economy has been stagnant not just because of the political vacuum at the presidential level and the powerlessness of decision-making at public institutions," says Ghobril. "It’s because of the operating costs on the private sector and the decline in the competitiveness of the economy."

Bankers hope foreign investment and tourism will grow once government starts to tackle these issues, lifting the economy and banks’ prospects along with it. For now, Aoun and Hariri’s priorities are elsewhere. Beyond forming a cabinet, they are also hoping to bring in a new electoral law introducing proportional representation before the May election.

Not everyone is convinced that Lebanese banks’ prospects have improved.

In a note after the election of Aoun, Standard & Poor’s called the political developments "positive", but added that the economic risk facing Lebanon’s banks had in fact increased, because of continued pressures on real estate prices and the tourism sector. According to S&P, direct and indirect exposure to the real estate sector accounted for 35.6% of the banks' loan book at the end of 2015.