Lebanon Opportunities – August 2019

T

hose who think that monetary stability might

be shaken in the foreseeable future (in the

next few years) are mistaken. Our outlook

is based on statistics and facts. Foreign currency

reserves at the Central Bank (BDL) and at banks

represent more than 33 percent of the deposits

in these currencies. This is without counting the

gold reserves, which are worth $12 billion. The

level of foreign currency liquidity relative to the

size of deposits is considered

a good ratio by international

standards despite the bleeding

of foreign payments that Lebanon

witnessed during the first five months

of 2019 and which showed a deficit of

$5.19 billion. Evidently, a substantial

part of this large deficit came from

financing Lebanon’s imports of goods and services.

The other part resulted from the decline in remittances

and foreign direct investment (FDI). Just to refresh the

readers’ memory, $1.1 billion of Lebanon’s foreign debt

became due and was repaid, which means that a limited

exit of capital and deposits took place.

ATTRACTING DEPOSITS

The country witnessed uproar over the rise in interest

rates on financial products marketed by some banks

to unprecedentedly high levels. These operations are

categorized as private banking activities more than

regular bank deposits. This means that they are the

exception, not the rule. Interest offered at the rates of 11,

12 or 13 per cent, or more, are paid on fixed-term deposits

of over $5 million. These deposits come from external

sources and have maturities of around, or exceeding,

three years.

LIMITED SCALE

I have three remarks on these products: the first

is that they represent less than one percent of the

overall deposits with commercial banks, which have

reached more than $170 billion, according to the latest

published data. Around 70 percent of these deposits are

denominated in foreign currencies and the remaining 30

percent are in the Lebanese lira. In other words these

operations are limited, and are of marginal size.

WIDENING SPREADS

The second remark is that, despite the recent uproar,

interest rates in the banking sector as at the end of May

were still less than 6.5 percent on savings deposits and

term deposits in US dollars and less than nine percent

on those denominated in liras. Of course, there was an

upward trend that became evident in June and July, when

market forces agreed on ceilings higher than the rates

prevailing in late May. The cost of lending to customers

reached 9.5 percent in the dollar market and 10.75 percent

in the lira market, that is, credit interest spreads (deposits)

and debit interest spreads stabilized at 375 basis points

(bps) for the dollar market and at 205 bps for the lira, or

an overall average of 324 bps. These spreads were in line

with those prevalent in many advanced and emerging

countries in 2018 such as the East Asia and Pacific region’s

500 bps, Latin America and the Caribbean region’s 708

bps, and the middle-income group of countries, which

includes Lebanon, at 528 bps. The global average of

interest and debit interest spreads is around 543 bps.

The other interest benchmark that can be used is to

compare the dollar interest margins in Lebanon with the

LIBOR rates. In May 2018, the interest

rate on savings and term deposits in

the Beirut market was 4.67 percent,

compared with a three-month LIBOR

rate of 2.34 percent with a spread of

233 bps. This spread reached 384 bps

in May 2019 with the rates in Beirut

rising to 6.37 percent and the three-

month LIBOR rising to 2.53 percent. The new spread (384

bps) is considered high compared to historical levels in

Lebanon, which have ranged between 250 and 300 bps. It

reflects the rise in sovereign risk due to the deterioration

in public finance conditions and deepening disagreements

regarding the political management of the country.

PROFIT IS NOT THE AIM

My third remark on the financial products that emerged

on the market recently is that the return these products

generate for the banks that promoted them does not

exceed one percent after calculating the anticipated tax

on interest income (ten percent). The main aim of these

products is not to generate profits for the banks, but

to bolster BDL’s foreign exchange reserves in order to

maintain monetary stability. Monetary stability is not a

banking decision, but an open policy of the State at all its

hierarchical levels.

DOLLAR PEG TO REMAIN

If the State decides not to peg the lira to the dollar

and thus to liberalize its exchange rate, then there

will be no need for financial engineering operations or

extraordinary financial products. The exchange value of

the lira will then be driven by changes in the country’s

balance of payments, price differentials between

domestic and global markets, and by speculative

operations. It does not appear that exchange rate

liberalization is currently an option for the concerned

authorities. On the contrary, all constituents of the

State support the perpetuation of the monetary stability

policy, because it serves the interests of the country and

the people. Maintaining monetary stability requires

however, many prerequisites, which are detailed below.

Makram Sader
Secretary-General
of the Association of
Banks in Lebanon

FINANCE

IN MY OPINION

Preconditions for

monetary stability

24 LEBANON OPPORTUNITIES, AUGUST 2019

Smuggling under

the government’s

nose must stop