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

Beloved Lion Killing Sparks Virtual, Real Life Outrage

Twitter, as usual, was epicenter for anger directed at Palmer, with some questioning his manhood, calling for him to be released into the wild More

Video Booming London Property Market a Haven for Dirty Money

Billions of dollars from proceeds of crime, especially from Russia, being laundered through London property market, according to anti-corruption activists More

Video Scouts' Decision on Gays Meets Acceptance in Founder's Hometown

One former Scout leader thinks organization will move past political, social debate, get back to its primary focus of turning boys into good citizens More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Booming London Property a ‘Haven for Dirty Money’i
X
July 29, 2015 9:34 PM
Billions of dollars of so-called ‘dirty money’ from the proceeds of crime - especially from Russia - are being laundered through the London property market, according to anti-corruption activists. As Henry Ridgwell reports from the British capital, the government has pledged to crack down on the practice.
Video

Video Booming London Property a ‘Haven for Dirty Money’

Billions of dollars of so-called ‘dirty money’ from the proceeds of crime - especially from Russia - are being laundered through the London property market, according to anti-corruption activists. As Henry Ridgwell reports from the British capital, the government has pledged to crack down on the practice.
Video

Video Scouts' Decision on Gays Meets Acceptance in Founder's Hometown

Ottawa, Illinois, is the hometown of W.D. Boyce, who founded the Boy Scouts of America in 1910. In Ottawa, where Scouting remains an important part of the legacy of the community, the end of the organization's ban on openly gay adult leaders was seen as inevitable. VOA's Kane Farabaugh reports.
Video

Video 'Metal Muscles' Flex a New Bionic Hand

Artificial limbs, including the most complex of them – the human hand – are getting more life-like and useful due to constant advances in tiny hydraulic, pneumatic and electric motors called actuators. But now, as VOA’s George Putic reports, scientists in Germany say the future of the prosthetic hand may lie not in motors but in wires that can ‘remember’ their shape.
Video

Video Russia Accused of Abusing Interpol to Pursue Opponents

A British pro-democracy group has accused Russia of abusing the global law enforcement agency Interpol by requesting the arrest and extradition of political opponents. A new report by the group notes such requests can mean the accused are unable to travel and are often unable to open bank accounts. VOA's Henry Ridgwell reports.
Video

Video 'Positive Atmosphere' Points Toward TPP Trade Deal in Hawaii

Talks on a major new trade agreement among 12 Pacific Rim nations are said to be nearing completion in Hawaii. Some trade experts say the "positive atmosphere" at the discussions could mean a deal is within reach, but there is still hard bargaining to be done over many issues and products, including U.S. drugs and Japanese rice. VOA's Jim Randle reports.
Video

Video Genome Initiative Urgently Moves to Freeze DNA Before Species Go Extinct

Earth is in the midst of its sixth mass extinction. The last such event was caused by an asteroid 66 million years ago. It killed off the dinosaurs and practically everything else. So scientists are in a race against time to classify the estimated 11 million species alive today. So far only 2 million are described by science, and researchers are worried many will disappear before they even have a name. VOA’s Rosanne Skirble reports.
Video

Video Scientists: One-Dose Malaria Cure is Possible

Scientists have long been trying to develop an effective protection and cure for malaria - one of the deadliest diseases that affects people in tropical areas, especially children. As the World Health Organization announces plans to begin clinical trials of a promising new vaccine, scientists in South Africa report that they too are at an important threshold. George Putic reports, they are testing a compound that could be a single-dose cure for malaria.
Video

Video 'New York' Magazine Features 35 Cosby Accusers

The latest issue of 'New York' magazine features 35 women who say they were drugged and raped by film and television celebrity Bill Cosby. The women are aged from 44 to 80 and come from different walks of life and races. The magazine interviewed each of them separately, but Zlatica Hoke reports their stories are similar.
Video

Video US Calls Fight Against Human Trafficking a Must Win

The United States is promising not to give up its fight against what Secretary of State John Kerry calls the “scourge” of modern slavery. Officials released the country’s annual human trafficking report Monday – a report that’s being met with some criticism. VOA’s National Security correspondent Jeff Seldin has more from the State Department.
Video

Video Washington DC Underground Streetcar Station to Become Arts Venue

Abandoned more than 50 years ago, the underground streetcar station in Washington D.C.’s historic DuPont Circle district is about to be reborn. The plan calls for turning the spacious underground platforms - once meant to be a transportation hub, - into a unique space for art exhibitions, presentations, concerts and even a film set. Roman Mamonov has more from beneath the streets of the U.S. capital. Joy Wagner narrates his report.
Video

Video Europe’s Twin Crises Collide in Greece as Migrant Numbers Soar

Greece has replaced Italy as the main gateway for migrants into Europe, with more than 100,000 arrivals in the first six months of 2015. Many want to move further into Europe and escape Greece’s economic crisis, but they face widespread dangers on the journey overland through the Balkans. VOA's Henry Ridgwell reports.
Video

Video Stink Intensifies as Lebanon’s Trash Crisis Continues

After the closure of a major rubbish dump a week ago, the streets of Beirut are filling up with trash. Having failed to draw up a plan B, politicians are struggling to deal with the problem. John Owens has more for VOA from Beirut.
Video

Video Paris Rolls Out Blueprint to Fight Climate Change

A U.N. climate conference in December aims to produce an ambitious agreement to fight heat-trapping greenhouse gases. But many local governments are not waiting, and have drafted their own climate action plans. That’s the case with Paris — which is getting special attention, since it’s hosting the climate summit. Lisa Bryant takes a look for VOA at the transformation of the French capital into an eco-city.
Video

Video Racially Diverse Spider-Man Takes Center Stage

Whether it’s in a comic book or on the big screen, fans have always known the man behind the Spider-Man mask as Peter Parker. But that is changing, at least in the comic book world. Marvel Comics announced that a character called Miles Morales will replace Peter Parker as Spider-Man in a new comic book series. He is half Latino, half African American, and he is quite popular among comic book fans. Correspondent Elizabeth Lee reports from Los Angeles.
Video

Video Historic Symbol Is Theme of Vibrant New Show

A new exhibit in Washington is paying tribute to the American flag with a wide and eclectic selection of artwork that uses the historic symbol as its central theme. VOA’s Julie Taboh was at the DC Chamber of Commerce for the show’s opening.

VOA Blogs

World Currencies

EUR
USD
0.9043
JPY
USD
123.19
GBP
USD
0.6445
CAD
USD
1.3030
INR
USD
64.170

Rates may not be current.