An ode to strength

The banks versus Lebanon’s instability

Banque du Liban (BDL), Lebanon's central bank

Last month Lebanon celebrated, on May 25, our liberation and resistance national holiday for the 16th time. The region also marks 100 years of the Sykes-Picot Agreement’s adoption on May 16, which was signed in secret by colonial powers to delineate areas of power in the Near East. We commemorate too that 10 years ago this summer, some Israeli hardheads said they would bomb Lebanon “back into the stone age”. And last but surely not least to note is that May 25 is the day on which the country suffered the completion of two years without a president.

It goes without saying that the country needs a president and that history, however loaded with mistakes, is a river whose tide we cannot turn back. But in noting the painful past and its many sins of omission, something also deserves to be said about the current time, namely that Lebanon now, more than ever, is advised to think with full appreciation of its banks and its central bank.

Even if the banks’ results in 2015 and the first quarter of 2016 demonstrate lower or absent growth except for profits (see analysis) and even if the central bank governor is so pressed for time that his statements sound like similar to previous ones (see Q&A), the story is simple: we need both factors of confidence, the banks’ prowess and the central bank’s integrity, more than ever.   

This is not because the central bank has a monopoly on printing and controlling our money and because the commercial banks are financing both our private and public deficits. They have been doing both for ages.

There are at least three reasons why we should think about banks and the financial economy at this point. One is external. The global economy is calm now – but the question begs if this is the proverbial calm before the next storm. Experts warn that the developed and large emerging markets are passing through perilous moments of uncertainty and risk (see overview), and we will be under their influence.

Growth in the wrong places

The second reason is that the Lebanese economy is faced with low growth in 2016, for yet another year. As conventional wisdom goes, there is not much – not any – progress in the development of the oil & gas sector; not much growth in our traditional power house sectors like hospitality and real estate; not much transparency in most sectors of our economy; and a depressed mood to the point that the only things perceived as rising are corruption and inequality.

The global economy is calm now – but the question begs if this is the proverbial calm before the next storm

All this is reflected or even demonstrated in the data – as weak as some of the data are – such as the relentless increase in the gross public debt to over $71 billion in March 2016 according to numbers cited by the Association of Banks in Lebanon; the increasing share in recent years of gross public debt as percentage of gross domestic product (GDP); the weak consumer confidence index levels that are in a trough for multiple quarters and 66 percent below peak levels that were reached in the fourth quarter of 2008; and the declining perception of Lebanese competitiveness, as shown in the World Economic Forum’s Global Competitiveness Index where Lebanon slid down from 89th place in 2011 to 101st place in 2015, including the world’s second lowest (139) ranking in the “macroeconomic environment” pillar.

Inversely, it feels as if – whether based on facts or not – banks and the central bank are ever more important. The stimulus packages that keep our housing market afloat (as illiquid as real estate is in itself) come from the central bank. The investments that drive our slow migration into the entrepreneurial knowledge economy come from the central bank (see update on the latest funds). When people organize large social events, such as the Beirut Marathon, a cultural festival, a design week or a startup competition, they go to banks, and the banks, as Byblos Bank’s chief economist Nassib Ghobril put it, “respond”. That is why we sought out examples of how important a role banks play in our society, not only in their core business activity but also in areas like sponsorship of movies (see story) and cultural events (see Executive Life).

What is not a reason for any worry about the banking sector’s viability, by the way, is compliance. Lebanon’s commercial banks are prepared for whatever compliance mandates are thrown at them and the latest updates on the compliance front only confirm this (see story and Q&A).

The third reason why there is still room for serious, fundamental concerns is related to the difference between sustainable staying power and exhaustion by being in power too long and too lonely. The inherent instability of capitalism – which is not to be confused with the discredited idea of capitalism as being doomed – is captured in well-known concepts like Austrian economist Joseph Schumpeter’s ‘creative destruction’ and American economist Hyman Minsky’s financial instability hypothesis according to which “the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system”, or in short ‘stability leads to instability’. The history of finance does not support the argument that something will work in future just because evidence shows that it has worked in the past.

Within the reality of us not ever being able to predict the future with certainty (but enjoying the illusion that we can), trust in our banking system is key for having confidence in our own future. That is perhaps the reason why banks are vulnerable to sudden changes in the narrative that determines investor behavior, as seen in the financial crisis. It is when the narrative and behavior of our economic actors change that the future is in jeopardy.

What lies beneath

But also, we dare surmise, because even the strong get vulnerable when they are on their own in stemming the tide. The home-made problem is the weakness of our implementation of democracy. This problem means that in our experience of the past two years in absence of the Baabda manor’s mistress or master, inefficiency, inequality, irresponsibility and corruption cannot be curbed.

The home-made problem is the weakness of our implementation of democracy

These monsters are building their strength for the third year now – and all the while too many banks seem overly and increasingly concerned with controlling their messages than with open and honest debates that come, for example, from answering the questions of journalists (and not from trying to turn all that is asked into controlled PR). If the banks are the last line of defense against economic decay and if the central bank is the last force standing against the invading monsters of inequality and greed, even the most ethical bankers or central bankers need support. They are tasking themselves with doing what they are not trained for – things like issuing fiscal incentives on top of guarding monetary stability.

Although writing about a different set of circumstances from the Lebanese scenario, American finance guru Mohamed el-Erian lately sounded like he was talking about Lebanon’s central bank, when he said “We all owe a big debt of gratitude to central banks. Acting boldly and innovatively in the midst of a massive financial crisis, they helped the world avert a multi-year depression that would have wreaked havoc on our generation and that of our children.” But he also observed the danger of them being so central to the whole economy, saying “the longer central banks remain ‘the only game in town’, dedicated to repressing market volatility and artificially boosting asset prices, the greater the subsequent risk to their effectiveness and operational autonomy.”

The problem is that the monster, of whatever nature, is growing and gnawing beneath the ground that our economy is based on: it is gnawing at our roots of trust because we give it too many opportunities to do so by not empowering a groundskeeper. It may be speaking to the wind, but Executive calls one more time for the election of a president, and for more standing together: that means standing shoulder to shoulder in openness to an unconventional and inclusive search for solutions to coming challenges, in our banking sector and the entire economy.

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