Bankers and politicians alike delight in calling the banking sector immune — immune to the financial crisis, immune to political rumblings and knee jerks in public opinion. But the health of the banking sector and the health of Lebanon’s economy are incontrovertibly tied.
“The banking sector has a kind of immunity which keeps the industry aside from the political tensions. Nevertheless, any tensions in Lebanon have a direct effect on the economy and accordingly on the banks in general,” said George Abou Jaoude, chairman and general manager of Lebanese Canadian Bank.
It was business as usual for the first half of 2010 with prevailing trends of slowly falling dollarization in both deposits and lending for the first three quarters of the year. But increased political wrangling regarding the United Nations’ Special Tribunal for Lebanon, and inflammatory speeches by prominent leaders in Lebanon since the summer, have led some in the banking sector to predict that upset caused by political unrest will manifest itself in the final quarter of 2010 and the first quarter of 2011.
“I’m seeing it in terms of consumer confidence and I’m seeing people start to question holding their money in [Lebanese lira]… You can’t get away from the fact that domestic and regional politics do play a big part in the economic conditions of the country,” said Pik Yee Foong, chief executive officer of Standard Chartered Lebanon.
Other industry leaders acknowledged the possibility of a spike in deposit dollarization but were not concerned with the formation of a long-term trend.
“It’s not material. When people have more concern they feel more comfortable to keep their savings in [dollars]. The confidence in the local currency has improved so much because of the very important macro achievements of the last few years,” said Freddie Baz, chief financial officer at Bank Audi.
Whether such an occurrence would change the funding dynamics of Lebanese banks is yet to be seen, but if such a shift becomes apparent, it will be a clear statement that some Lebanese depositors are willing to take the weak side of a 292 basis-point interest spread in favor of security. At the end of September the average weighted interest rate on deposits in Lebanese lira was 5.7 percent, while the corresponding dollar rate was 2.78 percent.
Saad Azhari, chairman and general manager of BLOM Bank, predicts that interest rates in the major Western economies will remain stagnant, hovering around zero, because “in all the major economies growth is expected to be lower in 2011 than in 2010.”
He also predicts that, if risk factors including local political dynamics remain at current conditions, Lira interest rates will exhibit similar behavior, still acknowledging the unpredictability of the local market. “I expect, or hope, to see no major escalation in events that could make it increase,” he said.
What comes in must go out
In addition to possible changes on the funding side, the distribution of bank lending is also a hot topic for 2011. For, in the banking sector there is a classic chicken and egg conundrum. Are the banks lending to the so-called “productive” sectors of the economy because they are growing? Or are these sectors growing because they receive financial support from banks?
