Lebanon: Salameh fights spillover from Syria crisis
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Lebanon: Salameh fights spillover from Syria crisis

New central bank stimulus; banks’ Syria exposure cut by 60%

Lebanon’s central bank governor, Riad Salameh
Lebanon’s central bank governor, Riad Salameh

Lebanon’s central bank governor Riad Salameh says he is acting to soften the impact of civil war in neighbouring Syria, implementing new monetary stimulus, and securing banking stability. Lebanon is dealing with a growing refugee crisis, and its land borders are now effectively closed as legitimate export routes. In 2012, GCC states also advised their citizens – who are vital for Lebanese tourism – against travelling to Lebanon, largely because of security concerns about Syria.

In an interview in London, Salameh says the regional political crisis, above all in Syria, took around two percentage points off Lebanon’s growth rate in 2012. "Lebanon has been able to maintain positive growth [in 2012], around 2%," he says. "We had hoped for 4% or 5%."

Credit to the private sector in Lebanon grew around 10% in 2012, according to Salameh. But he hopes to stimulate private credit growth further in 2013 by offering cheaper funding from the central bank’s window specifically for loans to housing, energy, and such sectors as industry, agriculture, and tourism.

"Our objective is to help growth by creating internal demand that could match the absence of regional demand," he says.

Despite the crisis in Syriaand its consequent pressure on the sovereign, Salameh says the move towards a greater percentage of bank lending to the private sector rather than the government has continued: partly thanks to banks being able to use mandatory reserves to fund projects in housing and other sectors.

Debt burden

But Lebanon’s balance of payments is likely to continue to suffer from the Syria crisis. Tourists from Gulf states previously contributed around 40% of Lebanese consumption in such areas as shopping, hotel occupancy and restaurants, according to Salameh. He says: "It is an important part of the Lebanese economy."

Buyers from the GCC are also an important part of Lebanon’s property market, where sales to foreigners dropped last year, according to research from Bank Audi. Furthermore, refugees from Syria – numbering around 100,000, and rising – are "a responsibility and a weight on Lebanon", according to Salameh.

Salameh says Lebanon’s debt-to-GDP ratio, around 136%, is stable. "There was some expectation of salary increases in the public sector, which would increase indebtedness of the government and bring the debt ratios up again," he says. "These decisions have not been adopted yet by the government, and have been postponed for the time being."

Salameh further points out that in November the sovereign managed to exchange 46% of its bonds in dollars maturing in 2013 for bonds with later maturities. With bank deposits increasing 7% in 2012, he says demand for local government debt remains strong too. "Liquidity is high in the country, so we don’t see a crisis coming that would not allow funds to go into sovereign paper," he says.

Another problem, however, is Lebanese banks’ Syrian operations. Lebanon’s banks expanded regionally during the past decade, particularly in Syria and Egypt. Salameh says the Arab Spring is "now warranting a careful study" of their international strategy.

Late last year, Bank Audi, one of the biggest private banks in Syria, said it would launch operations in Iraq in 2013. Byblos Bank has said it plans to start an operation in Libya, according to Reuters.

But Salameh says that in total Lebanese banks have taken around $400 million in provisions against their operations in Syria, taking around 20 percentage points off their potential profit growth for 2012 (which in early December he says would be between 2% and 4%).

"The banks have constituted the necessary provisions," he says. In total, following stress tests initiated by the central bank, Lebanese banks reduced their exposure to Syria by 60% in 2012, according to Salameh. He says the remaining exposure is in local currency.

"The situation is under control. The banks have absorbed the entire situation without going into the red. This will create more confidence and allow more profit growth in 2013."

Under scrutiny

Lebanese banks have also been under pressure after a report in the Wall Street Journal last year said that the US authorities were intensifying their scrutiny of Lebanon’s financial system to see if it was being used to evade US sanctions, particularly against the Assad regime in Syria.

"We have been contacted and asked by different countries like the US and in Europe to make sure our banks are respecting their laws when they are dealing with their banks or their currency," says Salameh.

Salameh says the central bank has issued various circulars regarding the sanctions. For example, he has made clear that whistle-blowing compliance officials at Lebanese commercial banks should go directly to the central bank, without approval from their internal managers.

"The banks are serious about enforcing strict controls," he adds. "All the banks operating in Lebanon are aware of the potential reputation risks and the damage that could be caused in their relationship with their correspondent banks, and how it could hurt their business."

"We can see very serious effort on their behalf to make sure they are complying with the sanctions."