Lebanon Opportunities – August 2019

withdrawal of their deposits. The weighted
average of interest rates on deposits in lira
increased to 8.6 percent last April from 6.64
percent a year earlier. The equivalent rate
on foreign currency deposits rose to 5.68
percent from 4.1 percent. Sfeir said that
local interest rates are still in line with those
offered in the regional market.

ATTRACTING
CAPITAL INFLOWS
The banks recently launched new attempts
to attract dollar deposits by offering interest
rates of 14 percent on large sums that are
locked for three years, according to Reuters.
The dollars are deposited with the Central
Bank (BDL). The banks’ move comes at a time
when the country’s foreign currency reserves
are dropping. “I was told that almost $800
million to $1 billion was injected through
these products. The significance of that
is positive, certainly. It is an additional $1
billion into the reserves, although expensive,
but here they are,” Sfeir said. BDL’s foreign
assets, excluding gold, dropped 19 percent to
$36.6 billion at the end of May, compared with
the previous year. Farouk Soussa, Senior
Middle East and North Africa Economist
with Goldman Sachs, said, according to
Reuters, that Lebanon’s deteriorating
foreign exchange liquidity was “the real
near-term pinch”. “The real challenge is
to stimulate capital inflows, either from
depositors or investors,”
Soussa said. According to
Soussa, support from the Gulf
would strengthen investor
confidence, as it would send
a strong signal that Lebanon
can rely on deep-pocketed
sponsors. Saudi Arabia and
Qatar have shown their
readiness to provide financial
support. Last month, Qatar said that it
had purchased Lebanese bonds as part
of a planned $500 million investment to
support the country.

UPHOLDING THE DOLLAR PEG
Investor confidence depends on levels
of monetary stability and default risks.
According to the Economic Brief written
by the staff of the European Commission’s
Directorate-General for Economic and
Financial Affairs released in June, “the
trust of foreign depositors is inextricably
linked to the expectation that the currency
peg will endure and that the sovereign
will not default, as a sovereign default

would impair two thirds of bank assets.”

The banks could be directly affected by a

default as they hold government bonds, and

indirectly because they have deposits with

BDL, which also holds government bonds.

“Since debt sustainability is problematic

even on the current pegged exchange rate,

devaluation would in all likelihood tip

Lebanon into a sovereign

default. In turn, the stability

of the banking sector would

be acutely threatened,” the

Economic Brief said. The

lira has been pegged to the

US dollar at LL1,507.5 per

one dollar since December

1997. “The peg has acted as
      the main pillar of economic
      stability for Lebanon, and maintaining its
      credibility has been of the highest priority
      for BDL,” according to the brief.

THE CENTRAL

BANK’S RESILIENCE

The IMF has advised BDL to stop lending to

the State at preferential terms. It said: “The

Central Bank should gradually step back

from quasi-fiscal operations and strengthen

its balance sheet. It should step back from

government bond purchases and let the

market determine yields on government

debt.” Earlier this year, the Ministry

of Finance (MoF) said that it plans to

issue nearly $7.3 billion in Treasury bonds

denominated in lira at an interest rate of

one percent. The intention was for BDL to

subscribe to the bond issue, which aims

to reduce 2019’s debt servicing costs by

$663 million. According to the IMF staff,

BDL’s buying of the proposed low-interest

government bonds would worsen its

balance sheet and undermine its credibility.

“There should also not be any pressure on

private banks to purchase the low-interest

debt instead,” the statement said. Riad

Salameh, Governor of the Central Bank,

said that BDL does not intend to subscribe

to the proposed Treasury bill issue at a

one percent interest rate. He said that BDL

would look for other options to help the

MoF cut the deficit. According to Salameh,

the banks cannot be forced to subscribe to

the Treasury bill issue.

Reported by Shikrallah Nakhoul

http://www.opportunities.com.lb

ON OUR WEBSITE

More information is available by typing the numbers

below into the Reference Finder on our home page

L0819-127 Lebanon Country

Report-May 2019-IIF

L0819-128 Economic Brief-June

2019-European Commission

L0819-129 IMF Staff Concluding Statement

of 2019 Article IV Mission

L0819-130 Contact information

BUSINESS AND ECONOMY

COUNTRY REPORT

LEBANON OPPORTUNITIES, AUGUST 2019 19

Cutting the

deficit is a ‘red

line’ that we

cannot cross

The banks woe dollar deposits by offering interest rates of 14 percent on large sums