Institutions react to unrest
With the political situation in flux recently, international institutions and organizations have been putting in their two cents as to what they regard as the possible impacts on the Lebanese banking sector:
- The International Monetary Fund (IMF) congratulated the Lebanese banking sector for its resiliency in past crises and said that it sees no concerns in the near future due to the large reserves at both Banque du Liban (BDL), Lebanon’s Central Bank, and local banks. For this reason, the IMF said that depositors should have no concerns about the security of their banks or the strength of the Lebanese lira.
- Merrill Lynch said that holding Lebanese assets is no longer worth the risk, though it does not see a forthcoming decrease in the interest rate spread between the Lebanese lira and Western currencies, suggesting that deposits should stay stable.
- HSBC said that though investor sentiment may suffer, Lebanese banks are not in immediate danger as they are well capitalized.
- Credit Suisse said that the situation is likely to spook some investors. They also said that with Lebanese banks dependent on short-term depositors from outside of the country, unhedged lending with an increase in the rate of dollarization might be an issue.
- Barclays Capital expressed confidence in BDL’s ability to keep the Lebanese lira stable but said that continued political stagnation and uncertainty may cause a reversal of any progress the government has made in paying down the public debt.
- Citibank noted that domestic deposits have historically continued through tense times, including after the Hariri assassination and the 2006 war with Israel.
- JP Morgan suggested buying Lebanese credit default swap protection.
- Standard Chartered highlighted the potential negative impact that current conditions may have on the real estate and tourism sectors in the long-term.
All parties acknowledged the concern that a macroeconomic slowdown would be detrimental to the banking sector. The central bank put out a statement on January 19 in which Governor Riad Salameh stated that “the current conditions will not stand in the way of the Central Bank’s commitment to stability of the exchange rate and interest rates.” Joesph Torbey, chairman of the Association of Banks in Lebanon, echoed that sentiment saying in a statement that the “banking sector is capable of containing… and overcoming the situation. [We wish] that the crisis is not prolonged as it would have a negative impact on the economy.”
BDL balance sheet dips
Banque du Liban (BDL), Lebanon’s central bank, held $31.03 billion in foreign assets as of mid-January. This new total represents an appreciation of 1.39 percent, or $425.49 million, in the first two weeks of January. Since mid-January 2010, BDL’s foreign assets have grown 8.8 percent from $28.68 billion. The central bank’s overall balance sheet saw a 3.01 percent ($391.67 million) depreciation, however. Gold reserves at the BDL showed annualized growth of $2.15 billion, or 20.5 percent, increasing from $10.47 billion on January 15, 2010 to $12.62 billion on January 15, 2011.
Clearing up… checks, that is
Cleared checks were up 20 percent in 2010, showing a healthy rise in consumer spending for the year. However, the indicator did see a 3 percent decrease in December 2010 as compared to December 2009. December was the only month demonstrating negative growth, but the slowdown in spending began in August, as overall clearing growth for the first half of the year was at 35.5 percent. The fourth quarter solidified the trend as growing rumblings of political tensions brought the average growth down to 3.1 percent. Cleared checks are an indicator of general patterns of spending within an economy and therefore demonstrate the potential effect that continuing political uncertainty could have on domestic economic trends.
Five MENA companies to watch
Three UAE companies, one Saudi corporation and one Egyptian company were included in Boston Consulting Group’s (BCG) “New Global Challengers” list for 2011. DP World, Emirates Airline, Etisalat and Saudi Arabia’s Saudi Basic Industries Corporation, as well as Egypt’s El Sewedy Electric, all made BCG’s lineup. The list was compiled following a BCG search for small companies in rapidly developing economies that have posted impressive levels of growth. DP World replaced Dubai World on this year’s list. The report noted that DP World is posting 50 percent more growth than the industry average and is aggressively expanding into emerging markets such as Brazil, Egypt, India, Pakistan and Turkey. Chemical, plastic and fertilizer producer Saudi Basic Industries (Sabic) is the Middle East’s most profitable non-oil company and now operates in 40 countries. In 2009, Sabic posted revenues of $27.5 billion. Egypt’s El Sewedy Electric is a manufacturer of cables and power transformers, distributing in Africa and the Middle East. The company posted an average of 35 percent annual revenues growth from 2004 to 2009 and reached $1.7 billion in 2009. El Sewedy is the only company of its kind distributing through many parts of Africa.
The Islamic road to standardization
The main challenge on Islamic finance’s path to equal consideration with conventional banking is standardization, according to David Vicary, global Islamic finance leader for Deloitte. Still in relative infancy, Islamic finance requires an agreed-upon set of short-term liquidity instruments and an index where these instruments can be traded, said Vicary at a January 14 press event in Beirut. Vicary suggested that a global sharia body would be necessary in order to standardize Islamic finance and make it globally relevant, though he noted that such a body is unlikely to come about due to the varying opinions of sharia scholars. Furthermore, Islamic finance needs a cross-border liquidity structure and transparency. Some sharia scholars sit on the boards of over 130 different Islamic financial institutions, a threat to transparency and honest competition. Despite its challenges, Vicary said that Islamic finance is poised for growth as 25 percent of the world population is Muslim and only 1 percent of the assets are Islamic. Though religion, he reminds us, cannot be the only driver of growth. “The crisis has drawn attention to a different economic model which is not based on derivatives,” he said. Regarding Lebanon’s Islamic financial industry, Vicary said that the local market is less important than the opportunities for regional expansion that greater Islamic fluency would bring. “There is an opportunity for Lebanese banks to use Islamic finance to drive their regional aspirations,” he said.
Iraqi central bank tiff
Iraq’s central bank is dissatisfied with a recent court ruling which places it in the hands of the country’s cabinet and not the parliament. The bank says that giving the cabinet supervisory authority opens its international assets up to seizure attempts by the country’s creditors. “[The bank’s] independence, as stated in the law, was and still is the only guarantee that the Central Bank of Iraq’s financial resources outside Iraq are not subject to measures of confiscation and seizure by international creditors,” said the central bank’s statement. The bank holds $50 billion in reserves. The ruling came down in mid-January just before Prime Minister Nouri al-Maliki’s reappointment and also put the electoral commission and the country’s anti-corruption watchdog in the hands of the cabinet. The independence of Iraq’s central bank was implemented by a 2004 law written by United States administrators and the central bank’s statement suggests that this move by the country’s executive runs counter to that sentiment. “Safeguarding the central bank from executive authority is as necessary now and in the future as it was immediately after the fall of the previous regime,” said the same statement.
