In the staid world of central bankers, changes are often slow and measured. That is not the case in 2015. In the first four months of the year, the euro slid 10 percent against the dollar. In a single day in January, the euro fell 30 percent against the Swiss franc after Swiss authorities ended their currency’s floor. International bond markets are at or near record lows, with yields on German 2 and 5 year bonds slipping into negative territory. Fears of negative price movements — deflation — are also on the minds of central bankers from Europe to India. Both the Bank of Japan and the European Central Bank are aggressively pushing monetary stimulus, just as the US Federal Reserve threatens to tighten monetary policy.
Considering the high levels of trade with Europe and the Lebanese lira’s dollar peg, such global dynamics will have implications for Lebanon. And in addition to international issues, domestically, the country is finally getting some breathing room with the collapse in fossil fuel prices. Bankers are happy too, with profit growth at the largest banks skyrocketing to more than 9 percent in 2014. Things are so good, the World Bank’s forecasts for Lebanon have finally begun to grow more optimistic, most recently edging up from 2 to 2.5 percent in real GDP growth for 2015.
Executive sat down with Riad Salameh, perennial governor of Banque du Liban (BDL), to get his perspective on both domestic and international developments, and how they bode for Lebanon’s banking sector and economy. This interview has been edited for length and clarity.
Has this year’s substantial growth in banking profits compromised the quality of the banks’ balance sheets?
The balance sheets of the banks are sound. We had asked them to meet, according to the Basel III criteria, a solvency ratio of 12 percent by the end of 2015. Most of the banks are already at least 12 percent. The profit growth was moderate due to the fact that there is a slowdown in the Lebanese economy and there are general provisions they had to take, either for their exposure regionally or because of our circulars that have imposed certain provisioning on consumer loans. The banks are now lending to the private sector more than they are lending to the government. And therefore, it is normal that their profits now, contrary to what is usually thought, come more from their operations in the private sector than their operations with the public sector.
The banks have typically had enough money to lend out to satisfy the lending needs of the public and private sector. With deposit growth slowing in 2015, would a further slowing of the annual growth rate of deposits in any way impact banks’ ability to continue funding public and private sector needs?
As we speak, the banks have excess liquidity, that is free liquidity of around $19 billion, which is sufficient to fund the private and public sector, not only for this year but over a longer period of time. The growth in deposits should not be regarded with a percentage approach because the base on which we are calculating is growing; so we look at the amounts coming into the sector more than the ratio of growth. When you are calculating on a base of $140 billion, when you make a growth of 7 percent, it’s $9 billion. So it is normal that you see these ratios of percentage growth go down as the base of the deposits is growing. So far this year we’re still on a pace in terms of growth in deposits that in terms of amounts would be equivalent to last year. But maybe the ratio would show 6 percent because the base is larger.
So do you see deposit growth stabilizing going forward?
Growth is going to stabilize because the growth in deposits is mainly due to expatriates sending money to Lebanon and, as there is no growth in the Arab countries especially with the decline of the price of oil, we expect steady transfers but we do not see a reason for larger transfers than we saw last year.
One leading bank economist said that Lebanon’s banking sector was not resilient, it was just coping. What is your view on this?
I think the history of the banking sector, given the events that happened in Lebanon at least since I was nominated governor in 1993, is the best answer to this economist because the banking sector — and if you look at the figures, which show growth in terms of equity, in terms of deposits — has grown more than tenfold from what it was in 1993, during which Lebanon witnessed many wars, serious security events and street fights. We coped with the international financial crisis in 2008 and we have also coped with the crisis that happened in Europe around the Mediterranean, and with the Arab unrest. So the answer to that comes from these facts.
BDL recently made banks require a minimum down payment on their loans of 25 percent. Likewise, banks were also recently required to start building collective provisions for their performing loans portfolio. What is the intended effect of these measures and to what degree have they been effective?
We have a prudential approach to the credit markets and we want to prevent bubbles and too much indebtedness for the Lebanese. The ratio of repayment of debts in a Lebanese household represent today 50 percent of the income of that household. It includes the housing loan, of course. We believe this ratio, given the situation in Lebanon, is a ratio that should motivate us to take certain preemptive measures so as not to have a crisis later on in the consumer loan market. We did that. It didn’t have much of an impact on demand, because on the other side we have also put in place incentives for the banks such as incentives for housing loans.
How crucial are the macroprudential measures which go above and beyond the ones suggested by Basel III, given that BDL has already ruled out a lot of risky financial products that the Basel III regulations were essentially created for?
We look at our market and its particularities. And as you know, given the political unrest in Lebanon, the threats due to the security situation, we are dealing with a volatile market. Our aim is to keep confidence in the banking sector and in the currency. And for that, the market should feel that we are taking anticipatory measures that can diffuse any disruption in our market later on. The situation in the exchange market, which is one indicator for us, proves that despite this difficult period in Lebanon the markets kept their confidence in the Lebanese pound, and therefore our policies are welcomed by the markets. This is our main criteria.
Moving very specifically to one set of measures, you’ve stated in the past that BDL has been conducting stress tests for Lebanese banks — what are the results of those tests over the past several years, and have they been published or will they be published?
We conducted stress tests a few years ago, in 2011, and they were positive. But we haven’t recently done that exercise. We always do stress tests on the banks on a regular basis and we have created a Financial Stability Unit at the central bank that is monitoring all the data of the banks and the impact of their capital.
If you go to the Fed’s website, if you go to the European Banking Authority’s website, they have very specific numbers for specific banks’ stress tests. Is there any plan to do that here in Lebanon?
I have to look into it because we have to cope also with the Lebanese legislation — what the central bank can publish or cannot publish. We have no issue with transparency, and as you know we want more transparency, even between the banks and the customers, and for that purpose we have created a Consumer Protection Unit that is going to look into the behavior of the banks: the way they calculate their interest rates, the margins, the quality of service they give and also to make sure that everyone is treated fairly and suitably. This effort [has already begun] — there was a circular issued a few months ago and it’s the banking control commission that is going to handle the follow up on this.
The G20 has decided that globally systemic banks — very large banks — should create ‘resolution plans’ in case of failure. Are there any plans to introduce similar requirements here in Lebanon?
No. Lebanon has a particularity that is that any bank, whatever its size, if it has problems or defaults, will impact negatively [on] the whole market. Therefore we are strict with all the banks. And we believe that there is certainly motivation for the largest bank to increase their capital so they can increase their business and keep growing their earnings. But we have put strict requirements on all banks. Big or small. Our policy will remain not to default banks and to use the merger law for banks to exit, those who cannot continue, because we are a small country and people, and markets are affected by any problem in any bank whatever its size. To give you a practical example, the world has forgotten about Lehman Brothers, who bankrupted the whole world in 2008. In Lebanon, they did not forget the problems of Intra Bank 50 years ago or Al-Madina 10 or 12 years ago.
When you have an expansionary monetary policy with the current stimulus, but then also have these greater macroprudential policies and requirements, that’s a fine line to walk. How do you see that going forward?
The approach is how you manage liquidity. And so far the central bank has been successful in that because there is available liquidity for the markets and interest rates have been declining. But at the same time we didn’t create inflation. There is stability in prices. Our priority remains the stability of the monetary sector. But as long as we have this stability and we have the necessary resources, we will continue taking initiatives that could profit the economic activity in the country.
In the past, you’ve delineated two forms of stability that BDL aims for. One of them is price stability and the other is interest rate stability. With the impending normalization of US monetary policy, perhaps as early as June of this year, what is going to happen if these come into conflict with each other? How will you prioritize one over the other?
Well I think we’ll maintain the same objectives. I don’t believe that interest rates in the United States will go up quickly. I don’t know if they will go up in June — this is a matter that is not really certain, but in case they do go up it’s not going to create a major change in the global interest rates’ structure because they’re talking about an increase that would be between a quarter percent and half percent, which is still far from what is happening in our local markets.
It doesn’t look like oil prices are going to go back up to $100 per barrel anytime soon. You’ve mentioned in the past that this could actually be negative for the Lebanese economy due to a decrease in remittances from the Gulf. However, there’s the other side of the coin, which is that oil and gas are so much cheaper now, which is a major relief to the Ministry of Finance’s accounts. On balance, is this a good thing or a bad thing for the Lebanese economy?
I believe it has increased the purchasing power in the country because consumers have saved on their bills on energy. It will affect the economic activity in the oil producing countries and therefore will have an impact on the remittances coming to Lebanon. But what we are feeling today is that the decline in oil prices so far is more positive for Lebanon than negative.
We’ll see how things will develop because the major source of funds in Lebanon is coming from the Gulf region, and therefore we have to see what will happen there. If they keep their economic growth, then it will not affect us negatively.