Lebanon 2013 | ECONOMY | INTERVIEW

TBY talks to Riad Toufic Salamé, Governor of the Banque du Liban, on the role of the central bank in the midst of political uncertainty in the region, the importance of remittances, and Lebanon as a finance hub.

Riad Toufic Salamé
Born in 1950, Riad Toufic Salamé graduated with a degree in Economics from the American University of Beirut. He has been the Governor of Banque du Liban (BDL) since 1993, having been reappointed for three consecutive terms in 1999, 2005, and 2011. In his capacity, he chairs the BDL Central Council, the Higher Banking Commission, the AML/CFT Special Investigation Commission, and the Capital Markets Authority. Additionally, he is member of the Board of Governors at the IMF and the Arab Monetary Fund (AMF). In 2012, he chaired the IMF and World Bank Boards of Governors held in Tokyo. In his earlier career, he acquired experience at Merrill Lynch in Beirut and Paris between 1973 and 1985, and from 1985 to 1993 was Vice-President and Financial Advisor.

How have the banks managed to contain the negative impact of the political situation in the region?

The regional situation is not encouraging for investment or consumption. Lebanon is in the midst of the Middle East, and whatever is happening around us has an influence on the behavior of people in our country. The major challenge that we had to encounter, and we succeeded in doing so, was to maintain confidence in our banking sector, and our currency. That confidence has helped the country to once again preserve stability. We were negatively impacted in terms of the rate of growth, which is now running at around 2.5% per year, having fallen from 8%. Nevertheless, compared to other countries in the region, we are still doing well. Lebanon has undergone many difficulties in the past, but stability was preserved, and, therefore, we have developed more resilience. Of course there are risks, but the rewards in Lebanon are there to compensate for that risk. By letting the market forces determine the prices of assets in the country as well as interest rates, we have created a risk-reward profile that has prevailed, helping the country to proceed.

Which segments of the economy benefit most from the Banque du Liban's stimulus package?

Our main objective is to stimulate internal demand. Because of the prevailing situation in the Middle East, external demand has decreased. The central bank has a strong balance sheet, and it is, therefore, capable of implementing incentive programs to help the local economy develop. The stimulus package aimed at increasing growth by 2%, and was dedicated to housing, new projects, especially in SMEs, R&D for energy substitution projects, the environment, and university studies. We will continue to monitor our markets, and whenever needed will come up with new financial stimulus packages. We are presently working on a stimulus project for startups, especially in the knowledge industry.

How can the Banque du Liban further stimulate the economy and control inflation?

Through the management of liquidity we can control inflation. Our economic models determine the optimal liquidity needed to maintain a healthy economic growth. The excess liquidity is taken out of the market by the central bank to target an inflation rate below 4%.

How would you evaluate the performance of the banking sector in the first half of 2013, and what do you expect for the next six months?

The banking sector in Lebanon is healthy. We were able to go through major crises in places where our banks were operating, such as Syria, Egypt, and Cyprus. The growth of deposits in 2013 is more than 7%, and we believe that they will yield profits that are equal to, or better than, 2012. We are not expecting any negative news in the market, as we have already instituted the necessary provisions for the exposure of our banks regionally. Our banks are well capitalized, and the central bank stipulated a solvency ratio of 10% at the end of 2012, based on the Basel III resolution. This was achieved, and we have asked for a 12% solvency ratio by 2015, also based on Basel III. That will put our sector, in terms of capitalization, at a higher ratio than required by Basel III.

What does it mean for the Lebanese to be ahead of the curve on implementing Basel III?

It means more confidence for the banking sector, and therefore more capital inflows. Lebanon is financed through its local markets, because our rating is low. Lebanon has a B rating due to its political and security risks. Therefore, the more funds that you can draw into the country, the more funds you have available to fuel the economy, and the more you can preserve acceptable levels of interest rates. Although Lebanon is rated B, it has interest rates that are equivalent to countries that are rated BBB.

What steps are being taken to reduce the budget and trade deficits?

The trade deficit is a historical fact with Lebanon. We cover that by remittances. The Lebanese work more beyond Lebanon than within it. They transfer assets to the country, and this has been Lebanon's history since its independence in 1945. The country does not really have sectors that can export and, even though we have discovered gas, we currently lack commodities to export. The Lebanese economy is relying on the human factor. The Lebanese who travel all over the world still have an attachment to their homeland, and they send their money here. This helps the country to find the necessary funding for its imports. This structure will be maintained, and we have to sustain confidence in the banks, because if that is lacking, people will not transfer money into the country.

How would you assess the country's financial confidentiality?

Lebanon has bank secrecy laws, but, as the world is changing, we also have other laws to ensure transparency and good governance in our sector. The bank secrecy law is maintained, but does not prevail in the case of money laundering. Currently, Parliament is discussing a law that would suspend bank secrecy in cases of tax evasion.

What measures have been taken to tighten bank supervision following the Lebanese-Canadian Bank issue?

What happened with the Lebanese-Canadian Bank has happened with banks outside Lebanon, too. It is essentially linked to the fact that the US considers that when you are using their currency, you also have to abide by their laws. This bank was accused by the US of the infringement of US laws, and there was a settlement of the case lately with the US government, whereby the bank paid a fine of $102 million, and the case was closed. Nevertheless, the Banque du Liban has taken measures to make sure that we have the proper legal structure to not experience such incidences again. The banking sector is very important for the Lebanese economy, and a problem at any bank in Lebanon could create economic or social crisis. The most important circular we issued is that the banks here have to respect the laws and sanctions of other countries when using the currency of these countries, or when dealing with the banks of these countries. The banks here are abiding by that. On the other side, the Special Investigation Commission (SIC), which is the body that fights money laundering, is doing the utmost to make sure that business is being done properly.

What is the central bank doing to make sure Lebanon regains its status as the financial hub for the region?

Today, Lebanon has developed its banking sector, not only in terms of size, but also in terms of sophistication. We have requested the banks to have new discipline in their work, and have encouraged them to improve their systems. You could say that Lebanon has a banking sector that is on an international level, and regionally attractive for business in the Arab world. We are currently working to develop our capital markets, and are heading toward a situation where the Beirut Stock Exchange (BSE) will become a private company. The regulators will be ensuring that there is good governance, no manipulation, and no insider trading. And, we want to go further still by creating a financial center that would be off-system, where it is easy to open a business, and that would also be coupled with incubators that would allow Beirut to become an address for those keen on startups. This all takes time, but we are working hard. I am also the head of the Capital Markets Authority, the central bank, and SIC, the anti-money laundering body.

What is your economic outlook for Lebanon in 2013 and in the medium term?

Lebanon is difficult to predict because of the political- and security-related volatility. Nevertheless, the track record of the country has shown that, despite these obstacles that have sometimes been tragic, resulting in war and assassinations, we have seen improvements in our GDP, and in the figures of the financial sector. Also, we have seen improvements in tourism and construction. I have confidence in the potential of the Lebanese, and the way they approach their business has taken into consideration the volatility and insecurity that we could potentially see. I believe that Lebanon will see continued growth that could either be moderate, as today, or much higher, given a better economic climate. Of course, we need to have a government that would invest greater effort into developing the nation's infrastructure.