News / Economy

Loyal Banks, Diaspora Help Lebanon Ride Out Region's Turmoil

A money exchange vendor displays Lebanese pound banknotes at his shop in Beirut, Feb. 7, 2012.
A money exchange vendor displays Lebanese pound banknotes at his shop in Beirut, Feb. 7, 2012.
Reuters
Lebanon's politics are descending into sectarian conflict and its economy is starved of investment. But its sovereign bonds are steady, foreign reserves are holding up and there is no sign of serious pressure on its currency.

That striking contrast suggests the country may avoid the economic crisis which has engulfed other nations during the Arab Spring uprisings, even though it is suffering increasing damage from the civil war in neighboring Syria.

An overseas diaspora of around 14 million people, more than three times the size of Lebanon's domestic population of about 4 million, continues to send billions of dollars back to the country each year.

This is swelling bank deposits and allowing banks to keep buying government debt, which means the government can boost spending to try to ease social tensions - and maintain a minimum level of political stability needed to attract more remittances.

It is a three-pronged arrangement based on mutual need that has sustained Lebanon during repeated political crises since the end of its civil war in 1990, and which is so far working well in the current instability, bankers and economists say.

“The situation is not ideal but people aren't panicking,” said Nassib Ghobril, chief economist at the Byblos Bank Group in Beirut. “The country has coped with similar situations before.”

Reduced inflows

By triggering a flare-up of sectarian tensions in Lebanon, the Syrian civil war is taking a heavy toll on the Lebanese economy.

Prime Minister-designate Tammam Salam has been unable to form a Cabinet since March, when his predecessor quit, and  parliamentary elections have been delayed until November 2014. Rival militias and the army have been battling in the coastal cities of Sidon and Tripoli.

This has slashed inflows of portfolio and direct investment; tourism revenues have also tumbled as wealthy Gulf states and other countries have issued travel warnings to their citizens because of poor security.

The result has been a sharp reduction of capital flows into Lebanon. Net private capital inflows shrank to $2.4 billion last year from a peak of $12 billion in 2009, and are expected to drop further to just $1.6 billion in 2013, according to the Institute of International Finance, a global banking body.

For an economy with a gross domestic product of about $45 billion, that is a big blow. From levels around 8 percent in 2007-2010, economic growth slipped to just 1.3 percent last year, and it is expected to be close to that level this year.

But inflows of remittances from Lebanese abroad have been stable. The World Bank estimates they totalled $7.5 billion last year, flat from 2011, and bankers in Beirut say the latest political turmoil has not affected them significantly.

This has allowed deposits at Lebanese commercial banks to continue growing; combined deposits of private sector residents and non-residents at commercial banks climbed to 182.6 trillion Lebanese pounds ($121 billion) in May from 168.3 trillion pounds a year earlier, according to central bank data.

Philippe El Hajj, deputy general manager at Fransabank in Beirut, estimated banking system deposits grew 3 percent in the first half of 2013 and predicted a 5-6 percent increase in 2013.

“This is mainly driven by Lebanese expats and by the accumulated interest on deposits. I don't see why remittances to Lebanon should decrease - those helping their families at home won't stop and will find many ways to continue supporting them.”

Rising deposits have in turn permitted Lebanese banks to continue buying their government's debt, and to buy into any selling by foreign investors, keeping prices of the country's bonds remarkably stable.

Bid at 6.05 percent, the yield on Lebanon's $650 million bond maturing in 2019 is up just 40 basis points since mid-May, outperforming many emerging market bonds, where yields have jumped 100 bps or more because of concern about rising U.S. Treasury yields.

One potential threat to Lebanese remittances is a political backlash against Shi'ism in the Sunni Gulf; Gulf Arab states are punishing Lebanon's Hezbollah for its intervention in Syria by expelling Lebanese expatriates linked to the group, and are keen to block any illicit fund flows to Lebanon.

But it is not clear that the number of people affected will be nearly large enough to cut the global amount of remittances. Meanwhile, other events abroad have helped Lebanon; the debt crisis in Cyprus caused Lebanese to bring back hundreds of millions of dollars from that country this year, bankers said.

Crises

Lebanon's dependence on remittances is not without costs. For example, its banks keep their interest rates about 3 percentage points higher than U.S. rates in order to attract deposits, even though the Lebanese pound is pegged to the U.S. dollar. This slows lending and economic growth.

But as long as the currency peg holds, sustaining the diaspora's confidence that their remittances will not lose value, the system is a robust one.

So far, in contrast to some other crises in the past two decades, the current political instability has not appeared to threaten a run on the pound. The central bank's combined holdings of foreign currencies and gold edged up to $44.4 billion in May from $44.0 billion a year earlier.

Ghobril said the pound came under pressure three times in recent years. The assassination of former prime minister Rafik al-Hariri in 2005 caused an outflow of bank deposits worth 5 percent of GDP over several weeks; Israel's attack on Hezbollah in 2006 prompted a 3 percent outflow; and the 2011 fall of Saad al-Hariri's government led to an outflow of under 1 percent.

Since the peg survived those incidents, a bigger political shock would be needed to even raise the possibility of it being dislodged in future, he said.

Another vulnerability is the risk that state debt, now about 140 percent of GDP, could expand beyond the capacity of the banks to fund it. The current disarray in the government could worsen the problem by blocking efforts to control spending; the International Monetary Fund expects the budget deficit to rise to 9.7 percent of GDP this year from 9.0 percent in 2012.

But with commercial bank deposits at roughly twice the level of government debt, there appears to be little risk of banks losing their capacity to buy bonds for the foreseeable future - as long as deposits do not fall sharply.

“The pound's peg to the dollar survived throughout the past 30 years despite a 15-year civil war, conflicts with Syria and multiple Israeli wars,” said a source close to the central bank, declining to be named because of the sensitivity of the subject.

“Why would that change now? It's quite impossible.”

You May Like

Conflicts Engulf Christians in Mideast

Research finds an increase in faith-based hostilities, and Christians are facing persecution in a growing number of countries in the region More

Chinese Americans: Don’t Call Us 'Model Minority'

Label points to collective achievement, but some say it triggers resentment, unrealistic expectations More

Iran Bolsters Phone, Internet Surveillance

Does increased monitoring suggest the government is nervous? More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
West Africa Ebola Vaccine Trials Possible by Early 2015i
X
Carol Pearson
August 30, 2014 7:14 PM
A U.S. health agency is speeding up clinical trials of a possible vaccine against the deadly Ebola virus that so far has killed more than 1,500 people in West Africa. If successful, the next step would be a larger trial in countries where the outbreak is occurring. VOA's Carol Pearson has more.
Video

Video West Africa Ebola Vaccine Trials Possible by Early 2015

A U.S. health agency is speeding up clinical trials of a possible vaccine against the deadly Ebola virus that so far has killed more than 1,500 people in West Africa. If successful, the next step would be a larger trial in countries where the outbreak is occurring. VOA's Carol Pearson has more.
Video

Video Survivors Commemorate 70th Anniversary of Nazi Liquidation of Polish Ghetto

When the Nazi army moved into the Polish city of Lodz in 1939, it marked the beginning of a long nightmare for the Jewish community that once made up one third of the population. Roughly 200,000 people were forced into the Lodz Ghetto. Less than 7,000 survived. As VOA’s Kane Farabaugh reports, some survivors gathered in Chicago on the 70th anniversary of the liquidation of the Lodz Ghetto to remember those who suffered at the hands of the Nazi regime.
Video

Video Cost to Raise Child in US Continues to Rise

The cost of raising a child in the United States continues to rise. In its latest annual report, the U.S. Department of Agriculture says middle income families with a child born in 2013 can expect to spend more than $240,000 before that child turns 18. And sending that child to college more than doubles that amount. VOA’s Deborah Block visited with a couple with one child in Alexandria, Virginia, to learn if the report reflects their lifestyle.
Video

Video Chaotic Afghan Vote Recount Threatens Nation’s Future

Afghanistan’s troubled presidential election continues to be rocked by turmoil as an audit of the ballots drags on. The U.N. says the recount will not be completed before September 10. Observers say repeated disputes and delays are threatening the orderly transfer of power and could have dangerous consequences. VOA correspondent Meredith Buel reports.
Video

Video Ukraine Battles Pro-Russia Rebel Assault

After NATO concluded an emergency meeting to discuss the crisis in eastern Ukraine, the country is struggling to contain heavy fighting near the strategic port of Mariupol, on the Azov Sea. Separatist rebels are trying to capture the city, allegedly with Russian military help, and Ukraine's defense forces are digging in. VOA's Daniel Schearf spoke with analysts about what lies ahead for Ukraine.
Video

Video Growing Business Offers Paint with a Twist of Wine

Two New Orleans area women started a small business seven years ago with one thing in mind: to help their neighbors relieve the stress of coping with a hurricane's aftermath. Today their business, which pairs painting and a little bit of wine, has become one of the fastest growing franchises across the U.S. VOA’s June Soh met the entrepreneurs at their newest franchise location in the Washington suburbs.
Video

Video Ebola Vaccine Trials To Begin Next Week

The National Institutes of Health says it is launching early stage trials of a vaccine to prevent the Ebola virus, which has infected or killed thousands of people across West Africa. The World Health Organization says Ebola could infect more than 20,000 people across the region by the time the outbreak is over. The epidemic has health experts and governments scrambling to prevent more people from becoming infected. Zlatica Hoke has more.
Video

Video Asian Bacteria Threatens Florida Orange Trees

Florida's citrus fruit industry is facing a serious threat from a bacteria carried by the Asian insect called psyllid. The widespread infestation again highlights the danger of transferring non-native species to American soil. VOA’s George Putic reports.
Video

Video Aging Will Reduce Economic Growth Worldwide in Coming Decades

The world is getting older, fast. And as more people retire each year, fewer working-age people will be there to replace them. Bond rating agency Moody’s says that will lead to a decline in household savings; reducing global investments - which in turn, will lead to slower economic growth around the world. But experts say it’s not too late to mitigate the economic impact of the world’s aging populations. Mil Arcega has more.
Video

Video Is West Doing Enough to Tackle Islamic State?

U.S. President Barack Obama has ruled out sending ground troops to Iraq to fight militants of the so-called Islamic State, or ISIS, despite officials in Washington describing the extremist group as the biggest threat the United States has faced in years. Henry Ridgwell reports from London on the growing uncertainty over whether the West’s response to ISIS will be enough to defeat the terrorist threat.
Video

Video Coalition to Fight Islamic State Could Reward Assad

The United States along with European and Mideast allies are considering a broader assault against Islamic State fighters who have spread from Syria into Iraq and risk further destabilizing an already troubled region. But as VOA State Department Correspondent Scott Stearns reports, confronting those militants could end up helping the embattled Syrian President Bashar al-Assad.
Video

Video Made in America Socks Get Toehold in Online Fashion Market

Three young entrepreneurs are hoping to revolutionize the high-end sock industry by introducing all-American creations of their own. And they’re doing most of it the old-fashioned way. VOA’s Julie Taboh recently caught up with them to learn what goes into making their one-of-a-kind socks.
Video

Video Americans, Ex-Pats Send Relief Supplies to West Africa

Health organizations from around the world are sending supplies and specialists to the West African countries that are dealing with the worst Ebola outbreak in history. On a smaller scale, ordinary Americans and African expatriates living in the United States are doing the same. VOA's Carol Pearson reports.

AppleAndroid

World Currencies

EUR
USD
0.7537
JPY
USD
103.79
GBP
USD
0.6032
CAD
USD
1.0957
INR
USD
60.522

Rates may not be current.