As 2014 was winding its way from present to past, the Lebanese market’s top banking buzzword was resilience. In interviews throughout the year as well as in year end conversations with Executive, bankers emphasized the resilience of the sector’s financial results in the face of a challenging environment.
The numbers for 2014, as far as they were available for this issue of Facts and Forecasts, have corroborated the sector’s ability to adapt to stress and adversity. But on operational levels, the year for the Lebanese banking industry could also be characterized by another R word: restrictions.
From new compliance issues and reporting requirements under the American tax-cheat-catch invention, FATCA, to various foreign threats of new political hunts after Lebanese financial institutions, the year forced local banks to deal with further restraints and risks that had nothing to do with their business skills and everything to do with behavioral supervision. As a visiting banker said in September, “In general, nowadays it is much less fun to be a banker than it used to be.”
Arab banks, including Lebanese, face other political and reputational risks that have recently all too often morphed into special interest-driven restraints, whether by punitive targeting of Lebanese banks under American political agendas or litigious US activism against Arab banks through civil suits motivated by resentment and greed.
Amid the webs of restraints that Lebanese banks have to deal with, some strands exist which are totally domestic and these are not the least problematic strings. First, there is the easily discernible rope of dependency on the political regime. This is perfectly normal for banking in a state context anywhere, except that under the creeping self incapacitation of the Lebanese political system, 2014 has become a year in which the banking sector’s exposure to dysfunctional political governance no longer looks like just an inconvenience that one can sit out.
The impediments caused by fiscal imbalances and growth in public debt were on the lips of every banker and bank-employed economist who Executive interviewed in 2014, whether for our annual banking report or the year end review. All these concerns tied in, as Byblos Bank chairman Dr. François Bassil put it, “with macroeconomic policies, or the lack thereof.”
The new tax strings that were proposed in spring 2014 in the context of the salary scale debate were perceived in banking circles as totally detrimental ideas. Imposing taxes such as a non deductible 7 percent levy on banks’ interest rate income from treasury bills and certificates of deposit would lead to higher interest rates for loans, Banque Libano-Française chairman Walid Raphael pointed out. This would have “an immediate impact on bank borrowers, whose monthly payments will increase as interest rates go up,” he told Executive, adding that more than 100,000 home loan clients and over 270,000 other small borrowers would be hurt.
Blom Bank chairman Saad Azhari named the fiscal deficit as an outstanding concern as increasing primary surpluses of 2007–2011 fell back into deficits in 2012 and 2013. He emphasized the “need for a fiscal policy that will increase revenues and compress expenditures in order to produce a higher primary surplus and put back the debt to GDP ratio on a sustainable track.”
Finally, in the view of a number of economists there is a macroeconomic ball and chain weighing on the Lebanese economy in the form of the dollar peg. It is a whole set of restraints when it comes to setting monetary policy. But things are not black and white here. A turn away from the peg is conceptually a no brainer, because such measures are meant to be short term, said Bank Audi Group chief financial officer Freddie Baz. “The peg policy has not been really harmful but conceptually it of course should be a transition policy of 18 to 24 months, not something that lasts 16 years,” he conceded. However, Baz argued further that historically deep seated confidence deficiencies in the Lebanese population vis à vis monetary liberalization, as well as current problems, are standing against a rash move away from the peg, especially since associated factors of fixity such as the crowding out effect have been kept under full control.
For Baz, the main frustration is the low capacity utilization rate at financial institutions and in the whole economy. Citing the rate at an estimated 72 percent, meaning full capacity utilization would translate into a GDP of $62–$64 billion instead of the $47 billion expected for 2014, he said, “We are not using our full potential and this applies to the overall economy.”
Unfortunately, the discussion on how to fundamentally improve both Lebanon’s political and economic governance through a more complete democracy, and shift growth drivers from domestic demand to foreign demand, has not happened in 2014, and from the collective sense of the banking sector, the one word answer to whether an effective discussion could be expected for 2015 was ‘no’.