Executive Magazine spoke with Dr. François S. Bassil, general manager at Byblos Bank and president of the Association of Banks in Lebanon, for his views on the Lebanese banking sector in the current global financial conditions.
E How do you see the current and future economic situation of Lebanon in view of domestic and global developments?
The Lebanese economy has demonstrated its resilience in the face of a series of political shocks since 2005, but it also missed many opportunities and could not take full advantage of the economic boom in the states of the Gulf Cooperation Council and the unprecedented level of liquidity in the region during that period. The Lebanese economy grew by 7.4% in 2004, its highest growth level in the previous 10 years, so the system demonstrated that it has competitive advantages and that the economy can attract capital, tourists, foreign companies and talent. But due to deteriorating security and political uncertainties in the country, the economy could not fulfill its potential and grew by only 1% in 2005, and it did not post any growth in 2006 because of the July War and expanded by just 4% in 2007. But all indicators point to unmistakable signs of improvement in economic activity in Lebanon since the Doha Accord this May that saw the end of the downtown sit-in, the reopening of parliament, the election of a new Lebanese president, the formation of a national unity cabinet and the overall reactivation of public institutions after a long period of paralysis.
These developments helped improve the country’s economic outlook, which increased investor sentiment and improved consumer confidence. In turn, this has revived economic activity as best illustrated by a very successful tourism season that saw the number of incoming tourists to Lebanon rise by 29% and the number of passengers at Hariri International Airport jump by 17.5% in the first eight months of the year, while occupancy rates at Beirut hotels reached 91% in August. Further, the coincident indicator, an index of economic activity in Lebanon, rose by 12% year-on-year in August, reflecting the revival of economic activity. Also, the balance of payments posted a surplus of $2.2 billion in the first nine months of the year compared to a surplus of $580 million in the same period last year, reflecting an increase in capital inflows. Further, the central bank’s assets in foreign currency increased by $4.2 billion, or 29%, in the five months since the Doha Accord to reach a record high $18.4 billion on October 15, 2008.
The improvement of these and other indicators illustrate the positive impact of the political developments on the economy. As such, several organizations changed their growth forecasts for the country. For example, the International Monetary Fund projects real GDP growth at 6% in 2008, up from 3% last April, and forecasts a 5% growth in 2009. Similarly, the Economist Intelligence Unit revised upwards its economic growth forecast since the Doha Accord to 4.2% in 2008 and 3.1% in 2009 from -0.7% for 2008 and 0.5% in 2009 previously. In parallel, rating agency Standard & Poor’s upgraded its long-term sovereign credit ratings for Lebanon to ‘B-’ from ‘CCC+’ and maintained the outlook at ‘stable’ due to the easing of political tensions and the reduction in the government’s near-term financing risks. Capital Intelligence revised its outlook on Lebanon’s ratings to ‘stable’ from ‘negative’, while Fitch Ratings and Moody’s Investors Service affirmed the country’s sovereign ratings.
During this entire period of political instability and uncertainty, Lebanon’s financial authorities managed to contain the fiscal deficit and the growth of the public debt, as the fiscal deficit declined from 11.5% of GDP in 2006 to 10.3% in 2007. Similarly, the public debt regressed from 178% of GDP at end-2005 to 177% of GDP at end-2006 and 171% of GDP at the end of 2007. Also, the national currency remained stable throughout the past three years, while monetary authorities demonstrated their ability to defend the currency and maintain the stability of the Lebanese pound. But at the same time, we have missed several opportunities to improve the investment climate and the business environment in the country. For example, most of the structural reforms necessary to reduce the public debt have yet to be implemented, such as the privatization of the mobile licenses and the crucial reform of the electricity sector. Also, the prevailing political conditions did not allow the country to benefit from the high level of liquidity in the region to increase foreign direct investment. So authorities should make financial and economic issues their priority and let political decisions serve these priorities, rather than the other way around. We need to help ourselves in order for others, including our friends in the region and around the world, to help us.
E Byblos Bank issued $200 million in preferred shares in 2008. How will the proceeds be used? Are the political and security conditions in the country favorable for such issuance?
The share offering constituted the largest issuance of preferred shares by a Lebanese bank so far in 2008, and reflected the confidence of investors in the Lebanese banking sector in general and in the vision and strategy of the Byblos Bank Group in particular. Proceeds will be used for general funding purposes, including strengthening the bank’s capital structure, external growth and development of investment banking activities, among others. The preferred shares are non-cumulative, redeemable and subject to a call option by the bank starting in 2013 and for each subsequent year. Holders of the Series 2008 Preferred Shares will receive $8 annually per share in dividends.
In November 2007, the bank raised $200 million from the issuance of a convertible bond. The issuance took place amid challenging political circumstances and a difficult period in the country’s history, while the issuance of the preferred shares took place shortly after the normalization of the political situation. In both cases, Byblos Bank demonstrated that it is possible to attract funds to a transparent, well-managed institution that has a clear vision and strategy backed by an executable expansion plan. Still, the ability of Lebanese banks and companies in general to attract funds would improve significantly with an improved macroeconomic environment, sustainable GDP growth, declining public finance ratios, increased stability, implementation of structural reforms [etc.].
E How would you evaluate the global fiancial crisis? What effect will it have on the Arab world, and Lebanon in particular?
The world is facing a financial crisis of unprecedented proportions. What started as defaults on mortgages in the United States evolved into a liquidity crisis, then a solvency crisis and spread to the rest of the world to become a global confidence crisis, while it looks like it is gradually also becoming an economic crisis. Authorities in advanced economies have committed a total of $2 trillion to support their banking and financial sectors, while the International Monetary Fund is stepping up its efforts to help emerging market economies that are facing difficulties. The crisis affected stock markets as well, with estimated losses of about $30 trillion in market capitalization around the world so far. Further, it looks like major advanced economies will enter into a period of economic slowdown. So one key factor is to restore confidence in the global financial system, as the longer the volatility and uncertainty in global markets, the longer it will take to restore confidence in the credit and equity markets and the longer it will take to restore a high level of global economic growth.
The Arab economies, especially the economies of the GCC, are not isolated from the rest of the world. So the crisis has been felt regionally, reflected in part by a significant drop in Arab stock markets. But monetary and financial authorities in key Gulf economies have taken preventive measures to ensure liquidity in the system. Also, the GCC has wisely used its oil revenues and continues to post fiscal and current account surpluses. In addition, the region has very large foreign reserves and its foreign assets are estimated at about $2 trillion. So the region is capable of weathering the crisis, but there is no doubt that Arab financial markets are feeling its impact. However, the GCC is one of the most important economic blocs, not only in emerging markets but across the world. So the expected stability of this economic bloc will be a key to restore global confidence and stability.