TBY talks to Dr. Joseph Torbey, President of the Association of Banks in Lebanon, on the sector’s resilience to crisis, lending strategies, and outlooks for Basel III.
TBY How is Lebanon’s strategy for tackling financial crises different from other countries in the region?
DR. JOSEPH TORBEY Lebanon’s history has been characterized by long periods of political bickering and instabilities to which the Lebanese economy has successfully developed immunity. In fact, sustained remittances from Lebanese expatriates continue to serve as a lifeline to the economy, preventing it from collapsing in the event of unanticipated shocks. Lebanon’s strategy for coping with financial crises revolves around the sustainable role of its central banking arm (the Banque du Liban) in strengthening the banking sector’s resilience through prudent monetary policy and close supervision. Added to this are the conservative credit policies and strong capitalization levels of the banks, which together have so far succeeded in averting the spillover of any major financial crisis on Lebanon. The live-tested resilience of Lebanon during the various phases of political unrest was the driver behind the attraction of remittances from Lebanese expatriates and capital inflows from international investors eyeing Lebanon as a destination for their investments, particularly during periods of turbulent regional markets. This is measured by increasing FDI levels, which have increased by 3.14% y-o-y to $4.96 billion in 2010, up from $4.80 billion in 2009, with capital inflows to Lebanon nearing $21 billion in 2009 and surpassing the $17 billion mark in 2010. Paradoxically, when the international economy was suffering from the repercussions of the global financial crisis, the Lebanese economy recorded unprecedented real growth rates of 9.3% in 2008, 8.5% in 2009, and 7.5% in 2010 according to the latest IMF statistics.
What steps are being taken by the banking sector to jumpstart the economy and increase activity?
The Banque du Liban and the Association of Banks in Lebanon (ABL) have continuously strived to foster the private sector’s involvement in the economy on the back of its vital contribution to spurring economic growth. More particularly, the banking sector has been multiplying efforts to stimulate its activity and exploit the excess liquidity by engineering products and services designated for the various sectors of the economy, namely the agricultural, civic, and social sectors. In addition, the Banque du Liban has been proactive in promulgating laws and circulars aimed at promoting investments within and by the private sector. In this context, and in an attempt to address the high liquidity overhang at Lebanese banks, the central bank lowered the reserve requirements on LBP credit facilities by 60% during the 2009-2011 period, an aspect that helped fuel LBP lending at commercial banks to unprecedented levels.
Is lending more focused on the private sector or the public sector? Which areas are in the most need?
The Lebanese banking sector has undoubtedly played a major role in smoothing government public finances and alleviating external debt. Lebanese banks remain the major subscriber to Lebanese Eurobonds and other governmental instruments denominated in both domestic and foreign currencies. More recently, Lebanese banks shifted their lending strategy more in favor of the private sector, with the share of loans to the private sector reaching around 57% of the total lending portfolio as of the end of May 2011, and claims on the public sector eased to 43%. Central bank incentives for private sector borrowings include a range of subsidies that could attain 700 basis points on loans extended to the tourism, agricultural, industrial, handicrafts, and IT sectors. It is worth noting that subsidized loans reached $774.73 million in 2010, up from $543.68 million in 2009 and $163.52 million in 2003. In addition, we have seen in recent years new directives by the ABL and the Banque du Liban that foster the growth of SMEs in addition to more favorably weighing micro-financing given their important role in accentuating economic growth. This comes in light of the robust demand for private sector lending, the government’s policy to curb the piling of the public debt burden, and international rating agencies’ recommendations for the banking sector to reduce its exposure to the sovereign.
Do you perceive the increase in capital inflows into the country as a sign of increased confidence?
During times of a global recession, waning global investment activity, and squeezed liquidity levels, Lebanon paradoxically succeeded at maintaining unprecedented levels of capital inflows and FDI, which propelled real GDP growth way above regional and international levels. More particularly, capital inflows burgeoned from around $11 billion in 2007, to $16.1 billion in 2008, $20.6 billion in 2009, and $17 billion in 2010. Concurrently, the level of net FDI accelerated from $3.38 billion in 2007 to $4.33 billion in 2008, $4.80 billion in 2009, and $4.96 billion in 2010. Said rosy figures can be mainly attributed to the regained confidence in the economy during the aforementioned period in addition to the less distressed domestic political scene and the uninterrupted flow of remittances from the Lebanese diaspora living in the Gulf. The recent revolutionary changes in political regimes in the Arab region have obviously hampered Lebanon’s prosperous economic realm, to a certain extent, until the recent formation of the new government in June 2011. These factors did not go unnoticed, with capital inflows shedding some $1.65 billion during the first tier of 2011 to $4.15 billion, down from $5.8 billion during the same period last year, and net foreign direct investments dipping by 60% y-o-y to some $1 billion in the first five months of 2011. Nevertheless, remittances from Lebanese expatriates, which constituted a substantial 22% ($8.2 billion) share of Lebanon’s 2010 GDP, are expected to sustain healthy levels in the upcoming period, and thus dilute any unfavorable contraction in capital inflows.
What does it mean for the Lebanese to be ahead of countries in the region for Basel III changes/compliance?
The Lebanese banking sector has always been among the pioneers in implementing international norms, reinforcing as such the sector’s image and credibility on the international scale. As for compliance with Basel III requirements, Lebanon and China were the first two countries in the world to start adopting the different phases of Basel III, which reiterates the Lebanese banking sector’s robust adequacy and capitalization levels. This would unquestionably provide Lebanese banks with a capital buffer to shield them from the repercussions of unexpected shocks or alleged accusations that may put the sector’s reputation at risk. The Lebanese banking sector has at present a minimum tier one ratio of 7% (according to Basel III), with expectations to reach 10% in the few coming years, way ahead of the January 2019 deadline set by the Basel committee.
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