Lebanon bankers cool in a crisis

BEIRUT — Lebanon, rightly or wrongly, has developed an image in the eyes of the international community as a country in near perma-crisis, lurching from political instability to regional insecurity to civil unrest.

But it seems that things are looking up for Lebanon, economically at least. As the financial crisis batters markets around the world and in the Middle East, economists at Lebanon’s Bank Audi and other big banks say they’re setting records.

"2008 was the best year ever for the Lebanese banking sector, " said Marwan Barakat, head of research at Bank Audi, adding that the growth in deposits in Lebanese banks amounted to $10.5 billion, "a record high for Lebanon."

Banks are also reporting huge profits for 2008, with average increases of 30 percent from the year before, according to the Central Bank. The Bank of Beirut, a commercial lender, says its profits rose by a whopping 51 percent from 2007.

Economists say the record deposits and profits are driven partly by Lebanese abroad who repatriate their money as investing elsewhere becomes riskier.

One incentive for this flight to safety is the growing international reputation of Lebanon’s bankers. The London-based magazine The Banker this month named Central Bank Governor Riad Salameh as the best central bank chief in the Middle East for 2008.  Salameh was also named the world’s best central bank governor by Euromoney magazine in 2007.

The banking sector’s path to relative stability can be traced to 1999, when the Central Bank issued a decree that made it difficult for the country’s commercial banks to invest in risky overseas investments. Nassib Ghobril, head of economic research and analysis at Lebanon’s Byblos Bank, said that at the time the Central Bank wanted to encourage local banks to "channel the excess liquidity of the banking sector into the Lebanese economy."

Then, in 2006, a political impasse caused a crisis that closed Lebanon’s parliament and delayed a presidential election for six months — leaving the country’s highest office unfilled.

As Lebanon teetered on the brink of all out civil war in 2007, Salameh responded to another looming crisis. He forbade Lebanese banks from investing in complicated investment products, like those containing toxic subprime loans.

"I saw the crisis coming and I told the commercial banks in 2007 to get out of all international investments related to the international markets," Salameh told the BBC in December.

Salameh’s order helped to shield Lebanon’s banks from the global financial collapse. In addition, Ghobril says 30 years of instability had created a climate of conservatism in Lebanon’s commercial banks.

"Generally (Lebanese Banks) do not invest in products they don’t understand, that they don’t know, that are not transparent," he said. "This is the problem with the subprime products … even though they were attractive at the time. So between the central bank preventing banks from investing in these products, and the banks already conservative approach, the sector was not exposed to the subprime product."

Banks here also keep large amounts of capital in reserve to guard against political instability. Their investments are largely in low yielding but reliable U.S. Treasury and other government bonds. Bank Audi’s Barakat says banks also keep loans to a minimum.

"They don’t lend much out of their total resources," he said. "The total loan to deposit ratio in Lebanon is 33 or 34 percent, which is very low by international standards. So they don’t take too much credit risk."

If Lebanon’s banking sector were to fail, it would have a "doomsday" affect on Lebanon’s economy, Barakat says. The Central Bank is one of the few institutions, along with the army, that functioned during the last three years of political crisis, and its role is just as important as any security organ.

Lebanon has one of the highest public debt-to-GDP ratios in the world, which at 160 percent, or $47 billion, was originally run up by reconstruction spending after the 15-year civil war, which ended in 1990.

And with deposits in Lebanon’s domestic commercial banks totaling more than three times the country’s GDP, Lebanon’s banking sector owns more than 50 percent of the public debt.

In other words, Lebanese commercial banks are the government’s largest creditor. That role, according to Axel Schimmelpfennig and Edward H. Gardner of the International Monetary Fund in a working paper last month, means Lebanon’s banks are "an important pillar of stability, since their large exposure to the sovereign creates strong incentives to stay the course, even during times of financial pressures."

But financial pressures on Lebanon are not limited to political instability. The federal budget is depleted by inefficiency, corruption and theft.

And at the center of Lebanon’s budget problems is electricity. With no natural fuel resources, Lebanon must subsidize the state-run electricity company and import fuel to run power plants. Yearly, this process costs the government more than a billion dollars — and the sector has contributed to one third of Lebanon’s public debt. The grid is in terrible shape, with daily blackouts of up to 12 hours at a time.

Skyrocketing fuel costs in 2007 and 2008 forced the government to shell out even more, and the budget deficit widened, which in turn increased the public debt. As oil prices rose, money that could have been contributed to servicing the debt had to be dedicated to just keeping the lights on.

But just as the rest of the world’s prospects look bleaker, Lebanon’s have begun to brighten. Lower oil prices have brought down electricity costs and lowered inflation. A stronger U.S. currency has also helped, as Lebanon’s national currency is pegged to the dollar.

But Lebanon may yet be hit by the financial crisis in indirect ways. More than 25 percent of the country’s GDP, or $5 billion, comes from remittances sent home by the millions of Lebanese in the diaspora. That $5 billion figure is expected to drop as the easy money of the last few years dries up and Lebanese lose their jobs, especially as growth and development slows in the Arabian Gulf countries like the United Arab Emirates and Saudi Arabia.

Byblos Bank’s Ghobril said the slowdown in other countries may help Lebanon in the long run. He didn’t expect Lebanese working abroad to return en masse. But he did expect Lebanese university graduates, who would normally go to jobs in the Gulf, to remain in Lebanon. He said brain drain had become a major problem, even for banks.

"It was so competitive that the local companies, local banks were finding difficulty recruiting qualified people," Ghobril said. "Now things have changed. There are jobs in Lebanon for people with experience, for fresh graduates. But they have to have realistic expectations."

There are still plenty of questions about Lebanon’s future. Although a new president was elected in May, 2008, and the internal political turmoil of 2007 has quieted, Lebanon is still in a very unstable neighborhood. Bickering politicians can’t agree on an economic plan, and parliamentary elections are due to be held in June.

Bank Audi’s Barakat expects 2009 to be a "challenging" year for Lebanon’s banks, due to lower returns on investments overseas. But if Lebanon’s past is any indication, the banks will continue to be one of the few Lebanese institutions that act as a touchstone in times of instability.

Other GlobalPost dispatches from Lebanon:

Dreams of return buried in Gaza rubble

Lebanon builds on its ancient past … literally