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

Turkish Public Fears Jihadists More Than Kurds

Turkey facing twin threats of terrorism by Islamic State and PKK Kurdish separatists, says President Erdogan’s ruling AK Party More

Video One Year After Massacre, Iraq’s Yazidis a Broken People

Minority community still recovering from devastating assault by IS militants which spurred massive outrage More

‘Malvertisements’ Undermine Internet Trust

Hackers increasingly prey on users' trust of major websites to delivery malicious software More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Iraqi Yazidis Fear Death of Their Communityi
X
Sharon Behn
August 03, 2015 2:23 PM
A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Iraqi Yazidis Fear Death of Their Community

A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Bangkok Warned It Soon Could Be Submerged

Italy's Venice and America's New Orleans are not the only cities gradually submerging. The nearly ten million residents of the Bangkok urban area now must confront warnings the city could become uninhabitable in a few decades. VOA Correspondent Steve Herman reports from the Thai capital.
Video

Video Inclusive Gym Gets People With Disabilities in Fitness Spirit

Individuals with special needs are 58 percent more likely to be obese than the general population. According to the U.S. Centers for Disease Control, they also have an increased likelihood of anxiety, depression and social isolation. But a sports club outside Washington wants to make a difference in these people's lives. With Carol Pearson narrating, VOA's June Soh reports.
Video

Video Astronauts Train Underwater for Deep Space Missions

Manned deep space missions are still a long way off, but space agencies are already testing procedures, equipment and human stamina for operations in extreme environment conditions. Small groups of astronauts take turns in spending days in an underwater lab, off Florida’s southern coast, simulating future missions to some remote world. VOA’s George Putic reports.
Video

Video Special Olympics Show Competitors' Skill, Determination

Special Olympics competitions will wrap up Saturday in Los Angeles, and the closing ceremony for athletes with intellectual disabilities will be held Sunday night. In a week of competition, athletes have shown what they can do through skill and determination. VOA's Mike O'Sullivan reports.
Video

Video Civil Rights Leaders Struggled to Achieve Voting Rights Act

Fifty years ago, lawmakers approved, and U.S. President Lyndon Johnson signed, the Voting Rights Act of 1965. The measure outlawed racial discrimination in voting, giving millions of blacks in many parts of the southern United States federal enforcement of the right to vote. Correspondent Chris Simkins introduces us to some civil rights leaders who were on the front lines in the struggle for voting rights.
Video

Video Shooter’s Grill: Serving Food with a Touch of the Second Amendment

Shooter's Grill, a restaurant in Rifle, Colorado, attracts visitors from all over the world as well as local patrons. The reason? Waitresses openly carry loaded firearms as they serve food, and customers are welcome to carry them, too. VOA's Enming Liu and Lin Yang paid a visit to Shooter's Grill, and heard different opinions about this unique establishment.
Video

Video Despite Controversy, Business Owner Continues Sale of Confederate Flags

At Cooter’s, a store in rural Sperryville, Virginia, about 120 kilometers west of Washington, D.C., Confederate flags are flying off the shelves. The red, white and blue battle flag, with 13 white stars representing the Confederate states, was carried by southern forces during the U.S. Civil War in the 1860s. The South had seceded from the Union over several key issues of disagreement, including slavery. VOA’s Deborah Block has the story.
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 Hometown of Boy Scouts of America Founder Reacts to Gay Leader Decision

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.

VOA Blogs

World Currencies

EUR
USD
0.9118
JPY
USD
124.31
GBP
USD
0.6420
CAD
USD
1.3048
INR
USD
64.136

Rates may not be current.