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FOREIGN DIRECT INVESTMENT IN LEBANON REPRESENTS 6.7% OF GDP

Lebanon 2017 | FINANCE | VIP INTERVIEW

TBY talks to Dr. Riad T. Salameh, Governor of Banque du Liban, on the so-called “swap operation," the current account deficit, and the knowledge economy.

The Lebanese economy despite being known for its resilience in the face of ongoing regional conflicts suffered a USD3-billion balance of payments deficit and a 3% decline in customer deposit growth in 2016. Besides those, what have been the main factors that prompted the Central Bank to launch the financial engineering (swap operation)?

The past few years have strained the Lebanese economy with political tensions, security challenges, and regional unrest, caused particularly by the spillover risks from the Syrian crisis. To date, Lebanon is hosting over 1.5 million Syrian refugees with a cost estimated at 5% of GDP. The Syrian refugee crisis has had negative impact on the Lebanese economy. The unexpected flow of refugees has strained already unstable public finances, service delivery mechanisms, infrastructure, and the environment. According to the ILO, an estimated 170,000 Lebanese have fallen into poverty, and the unemployment rate has doubled to around 20%. Overall real economic losses of around USD13 billion have been incurred thus far. The situation was also exacerbated by the political paralysis, which kept the country without a president for more than two years. In effect, the main economic indicators, namely foreign trade, tourism, investment, and consumption, have been steadily decreasing since 2011. As a consequence, the debt-to-GDP ratio has risen to around 144%; fiscal deficit has reached 8% of GDP, aggravated by the absence of a public budget for a decade now; GDP growth has decreased from 8% in 2010 to around 2% currently; the deficit in the balance of payments has reached USD3.3 billion in the year 2015, mounting to USD9 billion during the last four years; the country rating and outlook by relevant international agencies have been relatively unfavorable; the growth in bank deposits has been declining. Yet despite these challenges, the year 2016 ended with a surplus in the balance of payments of USD1.3 billion and a growth in deposits of 8% due to the success of the financial engineering of BDL. The Lebanese economy has remained resilient, with a real GDP growth of around 2% and inflation close to 0% in 2016. The achievements on the monetary front, particularly the stimulus packages that have greatly contributed to GDP and the financial engineering scheme, ensured that confidence in the Lebanese economy and the Lebanese pound remained strong. The policies undertaken by the BDL, to safeguard monetary and economic stability in addition to increasing the Lebanese national wealth; have proven to be major drivers of the Lebanese economy.

Moody's admitted that the swap operation enabled BDL to boost its foreign currency reserves, increasing them to more than USD41 billion. What does this mean for the Central Bank and the economy in general?

One of the chief objectives of the financial engineering that the BDL undertook was to strengthen the Central Bank's foreign currency assets. A strong balance sheet is essential to maintain exchange rate and interest rate stability, which is in turn necessary to achieve sustainable economic development. After the swap operation, BDL's foreign currency assets reached a historical record level, which confers stability to the Lebanese Pound and to interest rates. Other objectives that this scheme targeted include beefing up the capital base of banks, increasing the liquidity in local currency, improving the government debt profile by reducing the cost of borrowing, improving the balance of payments status through setting the means for increasing internal demand and productivity, targeting positive inflation rate below 4%, and finally improving the country's rating and outlook.

Lebanon's economic growth is projected to more than double to 2.5% in 2017, according to an analysis made by Economena Analytics and 17 economists from different sectors. How does the BDL analyze these prospects?

The BDL's outlook for the current year is a positive one. We expect economic growth to pick up even further, with estimated growth rates of more than 2% and inflation contained below our 4% target. Moreover, the recent financial engineering scheme has had a positive impact on both the monetary and banking fronts. As previously stated and in addition to the record level reached in BDL's foreign assets, the balance of payments has recorded a surplus of USD1.3 billion in 2016. The banking sector remains strong despite the pressing challenges that took some toll on its advancement. However, its performance remains healthy and enduring: total banking activity grew by more than 9% with total assets of banks exceeding USD205 billion in March 2017. Customer deposits have increased by around 8% to reach a new high of USD174 billion, with additional funds of around USD10 billion entering the banking sector. Lending activity recorded a 5.4% growth during 2016, with total credit to the private sector exceeding USD58 billion in March 2017. The deposit dollarization ratio registered a slight increase, reaching 66%, while the loan dollarization ratio continued its downward trend to reach 71% in March 2017, its lowest recorded so far. The Lebanese banking sector's high levels of liquidity enable commercial banks to finance the government and private sector needs while maintaining a stable interest rate structure. In terms of capitalization, banks' capital base has exceeded USD18 billion in March 2016, with an annual growth rate of 8%, which enables banks to comply with the new international capital, risk, and IFRS requirements. Our stimulus packages that have been renewed for the fourth consecutive year with an average of USD1 billion per year, have proven their worth, boosting the various sectors they target, contributing sizably to GDP and promoting job creation.

Currently, foreign direct investment (FDI) in Lebanon represents 6.7% of national GDP. In which sectors do you see the most potential?

The Lebanese knowledge economy has been a new and important driver of Lebanese economic growth. The BDL has placed more focus on further developing this sector. It has increased the margin of funds that banks could dedicate to the financing of this sector, by authorizing them to invest, with BDL's guarantee, up to 4% of their own funds, compared to 3% previously. To date, and after only three years of implementation, the Lebanese knowledge economy has attracted 800 startups, created 6,000 jobs, and increased national wealth by around USD1 billion. We expect this sector to grow by around 7-9% per year in the coming three years. We believe that this new growth model has the potential to attract investments to Lebanon, and mainly from Lebanese expatriates in the form of FDIs. With the former in mind, we are designing an Electronic Trading Platform that will provide the necessary equity and liquidity for SMEs and will boost investment in the Lebanese knowledge economy, since it will facilitate the access of people from around the world to the Lebanese markets. We hope that the SME stock market will be launched in parallel with the privatization of the Beirut Stock Exchange.

In general what advantages and benefits offers Lebanon for investment and how is BDL working into attract those flows?

BDL's efforts have been channeled in the past 20 years to build a prudent financial model, which has inspired confidence in the system. Over the past two decades, the BDL has been dedicated to strengthen monetary policy, push modernization forward, strive to achieve sustainable economic growth and financial sector stability, foster transparency and integrity through establishing best in class financial sector supervision and anti-money laundering capabilities and strengthen internal systems and processes. We believe that our banking model itself is the main attraction for investment, with proven resilience and competitiveness over time. Growing confidence in the system has continuously strengthened the Lebanese pound and the position of our banking sector both regionally and internationally. And as previously stated, we believe that the Lebanese “knowledge economy," that is rapidly growing, will be key to attracting investment flows, especially now that the ambition and innovative spirit of the Lebanese human capital has made the latter renowned across the world. The Electronic Trading Platform will surely be the tool that will attract those investments and help our capital markets grow and become regionally competitive.


 

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