Lebanon’s Salamé stresses resilience and stability

Riad Salamé, the longstanding governor of Banque du Liban

So far, prime minister designate Tammam Salam has been unable to form a cabinet. How concerned are you about the negative impact this political stalemate will have on the Lebanese economy and banking sector if it persists?

We are confident that our economy and banking sector will be able to weather the negative impact of this political stalemate as they have weathered many other internal and external crises in the past few years. We became immune to such difficult conditions and this is shown in the positive results of our banking sector. Despite the challenging operating environment, the Lebanese banking sector is still reporting a healthy performance as revealed by a growth of 8% in total banking activity for the year 2012. Bank deposits are growing by 7% annually to reach $136 billion in May 2013. In parallel, lending activity is registering more than 10% annual growth, with bank credits to the private sector exceeding $45 billion in May 2013. Lebanese banks have high liquidity ratios and this has enabled them to maintain the flow of credit within the local market. Basle III capital adequacy among Lebanese banks has exceeded 10% at a time when many other countries have failed to reach a ratio of 7%.

Are you at all concerned about the impact the Gulf Cooperation Council’s and European Union’s decisions to blacklist the military wing of Hizbollah might have on the Lebanese economy?

Based on central bank circulars, Lebanese banks are taking all the necessary measures to abide by international regulations and implement sanctions decided by the international community, as well as regularly updating blacklists in their databases, whether they include Lebanese or foreigners. Lebanese banks are forbidden to deal with Hizbollah, and Hizbollah is not using the banking sector. They mostly deal with cash. Therefore, the Lebanese economy won’t be affected by the latest decision to blacklist the military wing of Hizbollah.

While Lebanon’s political instability and deteriorating security are weighing heavily on the real economy, government finances and, crucially, the banking sector’s ability to support them, appear to be fairly resilient. Why?

The Lebanese banking sector enjoys high levels of liquidity that enable the commercial banks and the central bank to continuously finance the government’s deficit in accord with a well-balanced and stable interest rate structure. It is very important for us to preserve Lebanon’s credibility in international markets and the central bank is ready to intervene, when necessary, to finance the needs of the state. Lebanon has never defaulted in any of its payments and has always been able to settle its cost of debt in a timely manner.

The Syrian conflict and its potential escalation is obviously a concern, yet so far the Lebanese banking system has remained resilient in the face of this. Indeed, the Lebanese banking sector has shown resilience to conflict over many years. But what, for you, are some of the chief risks to the Lebanese banking sector?

We have taken all the necessary and appropriate measures to better combat money laundering and terrorism in accordance with Lebanese laws, to regulate the activities of money dealers, to organize cross-border currency movement and to ensure that all banks are fully abiding by the guidelines. We consider that our banking sector has today the appropriate regulatory framework to face all the challenges related to the sanctions imposed on some countries in the region, in addition to its high levels of liquidity and strong capitalization, which altogether continue to shield the industry from the negative repercussions of the local and regional turmoil.

Earlier this year Banque du Liban said it would stimulate credit expansion to certain sectors (particularly to affordable housing construction and SMEs) by lowering the cost of borrowing. How successful has this been, and are you planning to introduce other measures to boost credit expansion?

It is true that there is liquidity in the banking sector, but it is expensive. That is why we put at the disposition of banks a stimulus package of $1.46 billion at a 1% rate so that banks can grant loans at low rates to different economic sectors. This package, which includes incentives to support housing, education, renewable energy projects, innovative projects, research & development, and other productive sectors, has been successful, as evidenced by the depletion of most of the funds, especially those intended for SMEs and business start-ups. As for renewing the stimulus package, the central bank is reassessing the financial facilities based on loan applications it has received. There is a significant demand for loans to environmentally friendly energy projects, and the central bank will give priority to such demand as it will contribute to the decline in the country’s energy imports.

How confident are you about Banque du Liban’s ability to defend the currency peg?

The central bank’s continuous commitment to maintain stability in the Lebanese pound exchange rate against the US dollar has become the cornerstone in maintaining financial stability. The central bank has all the means to achieve this task with its record level of assets in foreign currencies. Its strategy of accumulating over the years a high stock of assets in foreign currencies proved to be a buffer against any crisis that might hit the economy. The central bank is currently holding more than $37 billion in foreign-currency assets, in addition to gold reserves worth around $14 billion at current prices. As for addressing liquidity so that no pressure would arise from the excessive liquidity in Lebanese pounds, the central bank adopted two approaches earlier this year, through swapping certificates of deposit that mature in 2013 and 2014 with longer-maturity ones, and through selling more than $2.5 billion of its sovereign Eurobond portfolio, thus improving its liquidity position in foreign currency.

The recent discovery of recoverable gas reserves, combined with the promise of structural reforms, might lead to brighter economic prospects for Lebanon over the medium term. Is this more of a hope than a reality?

With the current regional and domestic political climate not being supportive of wide-ranging fiscal initiatives, government plans to establish a sovereign wealth fund from the expected proceeds of offshore oil and gas reserves would bring down the debt level and benefit the Lebanese economy over the medium term. Yet infrastructure development and the implementation of pending reforms in vital economic sectors are much needed for the Lebanese economy. Lebanon has the potential to do so with all the elements present in its economy: a well-capitalized and profitable banking sector, high levels of liquidity, a dynamic private sector and exceptional human capital potential. What is needed is a genuine political will for Lebanon to be able to build a modern, more diversified economy, capable of supporting productive investments and creating job opportunities for its skilled labour force.

Further reading Lebanon: Private-sector success cries out for public-sector reforms Lebanon’s lost opportunity Salamé’s stability strategy underpins Lebanon’s hopes Bankers keep their cool as Lebanese stand-off continues Lebanon: Salame upbeat on the country’s future Lebanon: Salame upbeat on the country’s future Central bank governor of the year 2006: Riad Salamé, Banque du Liban Lebanon: In search of a new role

What is your assessment of the likelihood that the US Federal Reserve, and potentially other central banks such as the Bank of England and the European Central Bank, will start scaling back quantitative easing later this year?

Referring to the latest Federal Open Market Committee statement, the Federal Reserve will remain committed to its stimulus programmes to boost the slow economic growth and job creation as the unemployment rate is still elevated and inflation below its 2% objective. In fact, the unusual activity of international primary central banks since 2008 and the quantitative easing policies undertaken to help stimulate the economy did not provide way outs of the repetitive crises hitting the markets. As long as banks are reluctant to lend money to businesses and individuals, quantitative easing will not achieve the desired effects.

What impact would you expect this to have on global financial markets?

A surge in international interest rates is not going to happen in the near future since the primary central banks are still injecting liquidity in the markets. The US expects interest rates to rise in 2015 and the Europeans in 2016.

Finally, if you were president of the Republic of Lebanon for one day, what changes would you make to help improve the country?

It depends on the conditions of the country on that day…