The Daily Star.
A leading bank called Thursday on Lebanese politicians to make concessions and focus on crucial economic and financial matters for the welfare of the country.
“It is urgent for Lebanese politicians to make necessary concessions and minimize their differences and optimize their common grounds in order to foster the country’s economic, financial and monetary resilience looking ahead,” Bank Audi said in its third quarter Lebanon Economic Report.
Audi noticed that over the past months the regional political-security turmoil accentuated further with adverse spillover effects on the Lebanese economy, especially because political bickering in Lebanon intensified even further amid a quasi-paralysis of the different constitutional bodies of the state.
“Recent demonstrations have exacerbated further the prevailing gloominess, adding complexity to the Lebanese political conundrum,” the report said.
It warned that such a situation adversely impacted Lebanon’s real economy, with most real sector indicators on the decline in the first nine months of 2015, suggesting the economy is not growing or is barely growing this year.
Audi reminded that the IMF revised real GDP growth downward to 2 percent for 2015 while Lebanon’s Central Bank estimates growth would approximate 0 percent this year, the lowest in almost a decade in the country.
“This forecast comes on the back of a very low rise in the coincident indicator of 0.7 percent over the first 8 months of 2015. Most sectors of the economy are suffering, widening Lebanon’s gap between its actual output growth and its potential output growth,” Audi said.
Total demand for goods and services is weakening, as witnessed by a stagnant spending widening the underutilization of resources in the domestic economy.
“The slowdown in the real economy this year is mirrored by a declining growth in bank lending to the private sector as a result of weak lending opportunities in a low growth economy,” the bank said.
It added that bank loans to the private sector grew by 33 percent over the first nine months of 2015 less than they grew over the similar period of 2014.
“The correlation between GDP and bank lending to the private sector over the past 40 years in Lebanon actually shows a strong coefficient of determination of 51 percent, suggesting the extent to which the pace of economic activity and bank lending are actually correlated.”
Audi said the questions that increasingly arise within the prevailing political-economic conundrum are related to whether economic risks are likely to be translated into monetary and financial drifts. “Here, it is important to highlight that under the prevailing difficult circumstances, the financial sector buffers are still today providing important defense lines, the first against conversions from Lebanese pounds to foreign currencies and the second against outflows of capital from Lebanon,” the report said.
Audi stressed that no pressure on the foreign exchange market was recently reported despite the deterioration of the overall environment, with the Lebanese pound exchange rate trading within the Central Bank intervention bracket, while bank deposits did not witness contractions in the past months but continue to grow at a satisfactory pace.
“Regarding financial buffers, the foreign assets of the Central Bank are today at a record high of $38.3 billion ($50 billion when including gold), covering 75 percent of the Lebanese pound money supply and almost all consisting of short-term deposits in OECD banks which optimizes the quality of reserves at hand against risks of conversion from local currency to foreign currency.”
It added that Lebanese banks have foreign currency liquidity representing today 43 percent of foreign currency deposits (the equivalent of $42 billion), one of the highest ratios in peer markets, against a regional average of 22 percent and an emerging markets average of 21.9 percent.
Audi said it is important to bear in mind that bank deposits have a steady nature, with an insignificant decline in deposits realized in previous crisis episodes, while crisis years ended with a positive deposit growth, as deposits started to build up again after the crisis settlement and the market reversal.
“At the public finance level, though fiscal imbalances remain worrisome, the situation today is somehow better than what it was a decade ago. Deficit to GDP was as high as 15 percent in 2006 while it is 6.8 percent today.”
At the indebtedness level, Lebanon has seen its debt ratio decline from 185 percent in 2006 to 134 percent in 2011, which has almost stabilized since then, displaying 129 percent today.
The debt profile of Lebanon has also improved in terms of currency structure, with what this entails in terms of redemption capacity on behalf of the Lebanese government that has full control over its local currency.
The share of foreign currency debt to total debt, which exceeded 50 percent in 2006, reached 38.1 percent in September 2015.
“This is not to lessen the challenges to Lebanon’s outlook at a foreseeable horizon. Policy inertia is undoubtedly taking a growing toll on the economy, exacerbating macro vulnerabilities at large, as political paralysis is shaking the social and physical landscape of Lebanon. Unfortunately, the weakness of the political institutions in Lebanon stems from the country’s difficult geostrategic environment,” Audi said.
The report added that economic activity remains weak, reflecting policy inaction amid a protracted political crisis and rising regional insecurity.