Elected as banker of the year by EUROMONEY magazine, Riad Salame, govenor of the central bank, has been a guarantor for the authenticity of Lebanon’s monetary policy of safeguarding currency stability and relying on market forces. EXECUTIVE asked Mr. Salame about the state of the banking and financial sectors at the end of the year, the impact of the Al Madina scandal, and his outlook for 2004.
E: How do you evaluate the period in terms of fulfilling the commitment and promises of Paris II, one year post the event?
RS: Paris II recreated confidence in the financial markets. Interest rates saw an important decline. In 2003, interest rates are 50% to 60 % lower than in the previous year. The confidence and positive dynamic allowed Lebanon to issue debt instruments in the local currency with three-year duration. That was the first time it was possible to do this and this was done through the CDs [Certificates of Deposit]. The other achievements in the financial sector were the different initiatives taken by the central bank to reorganize its portfolio. These various initiatives allowed savings in 2003 of more than $800 million and will create more than $1.2 billion [of savings] in the year 2004. Despite the fact that the debt has increased in 2003 to reach around $33 billion by yearend, the servicing of the debt for 2004 is going to be less by around 20% compared to what was achieved in 2003, and less than it was estimated to be before the success of Paris II, by almost 40%. On the government side, more work has to be done. The budget in 2003, according to the ministry of finance, has a deficit equal to 37% of the total budget, while predictions were for around 30%. The 2004 budget is showing a deficit of around 30%, which is good compared to what was achieved in 2003, but not in line with the decline of the deficit that was promised to bring down the dynamic of the debt. On the other side, promises of privatization and securitization were not realized this year.
E: Is the delay in privatization by at least another couple of months a threat to Paris II and what has been achieved so far?
RS: The funds that were released were not conditional. Therefore, the results of Paris II have already been finalized. The importance of reforms comes from the fact that we have to keep this confidence in our markets so that the interest rates could go lower for the economy.
E: In view of some analysts, the central bank has been focusing on monetary stability, while fiscal authorities had priorities on lower interest rates that were of a different emphasis. Do you see a divergence between the two?
RS: Monetary stability is also the objective of the government and has been the objective of all governments since independence. The divergence comes from the views on which policies would result in stability. The central bank relies essentially on market sentiment in order to determine the rates of interest in the country. There are some views that you could administer interest rates and keep monetary stability. This is not our view. Therefore, and as the priority is still for monetary stability, the central bank remains with the same policies.
E: The desire to drive interest rates further down to ease further borrowing is not what you would unconditionally agree to?
RS: We look at the interest rates to be stable. We intervene in case there are upside pressures, because we do have the means to do it through all the funds we raised through the CDs. We think that the next move would be to have lower rates but this has to be market driven, so that the confidence remains in the financial sector. And for that, we need good news from reforms initiated by the government.
E: If we turn now to the banking sector: was 2003 a good year in Lebanese banking?
RS: Lebanese banks in 2003 have realized returns that are equal to 2002 despite their contribution to lend the government at zero percent, and despite the fact that interest rates have declined on the lending side, especially for borrowers with a good rating. The balance sheets of banks have increased this year, especially on the deposit side, with growth of over 13%. There was a good progression for non-resident deposits and fiduciary deposits, which means that the banking sector in Lebanon is conveying more confidence for the region and non-Lebanese. The capitalization of the banks is now over $3 billion, capital adequacy is over the required 12%, and the situation in the sector, in terms of improving management and technology, is also good. So I think that the banking sector in Lebanon is sound and is progressing in a healthy manner.
E: What would you tell someone who claims that banks are making too many profits?
RS: The return on assets, as mentioned by the IMF, is on average 1% internationally. The return on assets in Lebanon during the past two or three years was below this 1%. Therefore, the banks’ return on assets should improve. The reason why you have big nominal profit figures comes from the quick expansion in their balance sheets. When the total balance sheet of Lebanese banks was $10 billion, their profits were $100 million. Today, as balance sheets total $50 billion, their returns theoretically should be $500 million. But in fact, due to provisioning and less income from the government, their returns are less than that. The higher profit figures for the banking sector are derived from the expansion of their balance sheets and not by increases in the spreads they are charging in the cost of money.
E: Are you satisfied with the interest rate environment as it stands today?
RS: We would like to see the debit accounts – excluding consumer loans – with a ceiling of 10%. We are working for that with the banks in Lebanon and the Association of Banks in Lebanon [ABL]. A commission is to be formed in the coming two weeks to study professionally how to get this achieved across all accounts, whatever their size.
Interest rates on deposits are not a concern to the central bank. We think that the banks know how to manage their treasury and if they do sacrifice on their profits to pay their clients more or gain new market shares, the central bank doesn’t see this as harming the economic growth. Our focus is on debit interest.
E: If we look forward into 2004, what will banks have to achieve next year in regard to getting ready for Basle II requirements and working for the needs of the national economy?
RS: The central bank has issued a circular with the purpose of cleaning the balance sheets of the banks from redundant debts and provisions that were constituted for these debts. This includes all accounts up to June 30, 2003. Our priority to prepare the sector to be in a very good situation for Basle II – that we expect for around 2008 – is the success of this operation because the settlement of these loans will help the banks take them out of their provisions. On the part that is not settled, banks will have to reconstitute liquidity during five years, as to equal the amounts that there were no settlements on. This will give the economy a boost because many players will come back and will be able to refinance from banks as they have settled their loans and at the same time will clarify the banks’ balance sheets and will defuse the high percentage of provisions compared to the loan portfolio, which is effectively cosmetic because it is mainly constituted by reserved interest rates. This is the priority for the year 2004 and I think all banks are aware of the importance of this reorganization.
E: Is the Al Madina case closed from the perspective of the central bank?
RS: For us, the matter is closed, banking wise, because we have secured enough funds to pay the true depositors, including interest rates. We have changed the management of the bank, we have nominated a manager by the high banking commission and, therefore, ousted the previous management that brought the bank into the situation. On the legal side, all the necessary has been done. Whatever happens between the players and their disputes is not the concern of the central bank.
E: From your perspective, has the whole Al Madina affair been resolved without damage to the image of Lebanon or its banking sector?
RS: The banking sector did not suffer, on the contrary. This year we have increases in deposits by 15% and a record positive balance of payments – around $3.4 billion until the end of October. The banking system is safe. No other bank was linked to this bank and there is no echo on other banks. We do think that the way the situation was handled was quick and the results were good. Nobody lost money, neither the government nor the central bank nor the depositors.
E: Lebanon’s financial sector has been lagging behind the banking sector in the attention it has been getting. Are there any realistic prospects for establishing an oversight institution of the type of a Securities and Exchange Commission, or legislation that would enable the sector to be stronger next year?
RS: It is necessary to have such an organization. There are projected laws that were presented by the central bank to the government. We don’t know of any immediate follow-up but this is an important initiative that will help raise more equity for the private sector and increase their performance.
E: Next year is an election year in Lebanon, per chance in parallel to the US. In that country, an election year usually means a 1% better than economic growth. Would you foresee anything similar for Lebanon?
RS: Our estimates for next year are still in line with what was achieved in the economy for 2003, with some improvement. Due to the seasonality and volatility of the economy, the central bank has been reserved on putting out estimates. After the first quarter of 2004, we will follow with a better estimate.
E: Would the run up to the election here impact the economy, either positively or negatively?
RS: We hope that the debates will be in line with the interest of the country and its economy. And anyway, if things get harder, we have taken all the necessary measures so that they do not affect the stability of the economy or the financial sector. Already, the results have shown that despite the political internal tensions of the last two or three months, these were not felt by the financial markets. And this is a big improvement in the financial history of the country, where these financial markets were very sensitive to political developments.
E: Is being central bank governor a good preparation for being president of Lebanon?
RS: The time for our interview is up.