DUBAI: Lebanon’s politics are descending into sectarian conflict and its economy is starved of investment. But its sovereign bonds are steady, foreign reserves are holding up and there is no sign of serious pressure on its currency.
An overseas diaspora of around 14 million people, more than three times the size of Lebanon’s domestic population of about 4 million, continues to send billions of dollars back to the country each year.
This is swelling bank deposits and allowing banks to keep buying government debt, which means the government can boost spending to try to ease social tensions — and maintain a minimum level of political stability needed to attract more remittances.
It is a three-pronged arrangement based on mutual need that has sustained Lebanon during repeated political crises since the end of its civil war in 1990, and which is so far working well in the current instability, bankers and economists say.
“The situation is not ideal but people aren’t panicking,” said Nassib Ghobril, chief economist at the Byblos Bank Group in Beirut. “The country has coped with similar situations before.”
By triggering a flare-up of sectarian tensions in Lebanon, the Syrian civil war is taking a heavy toll on the Lebanese economy.
Prime Minister-designate Tammam Salam has been unable to form a cabinet since March, when his predecessor quit, and parliamentary elections have been delayed until November 2014.
This has slashed inflows of portfolio and direct investment; tourism revenues have also tumbled as wealthy Gulf states and other countries have issued travel warnings to their citizens because of poor security.
The result has been a sharp reduction of capital flows into Lebanon. Net private capital inflows shrank to $2.4bn last year from a peak of $12bn in 2009, and are expected to drop further to just $1.6bn in 2013, according to the Institute of International Finance, a global banking body.
For an economy with a gross domestic product of about $45bn, that is a big blow. From levels around 8 percent in 2007-2010, economic growth slipped to just 1.3 percent last year, and it is expected to be close to that level this year.
But inflows of remittances from Lebanese abroad have been stable. The World Bank estimates they totalled $7.5bn last year, flat from 2011, and bankers in Beirut say the latest political turmoil has not affected them significantly.
This has allowed deposits at Lebanese commercial banks to continue growing; combined deposits of private sector residents and non-residents at commercial banks climbed to 182.6 trillion Lebanese pounds ($121bn) in May from 168.3 trillion pounds a year earlier, according to central bank data.
Philippe El Hajj, deputy general manager at Fransabank in Beirut, estimated banking system deposits grew 3 percent in the first half of 2013 and predicted a 5-6 percent increase in 2013.
Rising deposits have in turn permitted Lebanese banks to continue buying their government’s debt, and to buy into any selling by foreign investors, keeping prices of the country’s bonds remarkably stable. Bid at 6.05 percent, the yield on Lebanon’s $650m bond maturing in 2019 is up just 40 basis points since mid-May.
Lebanon’s dependence on remittances is not without costs. For example, its banks keep their interest rates about 3 percentage points higher than US rates in order to attract deposits, even though the Lebanese pound is pegged to the US dollar. This slows lending and economic growth.
Reuters
