The Central Bank of Lebanon – Riad Salameh (Q&A)

The governor at the center of the banking sector

Reading Time: 8 minutes

As governor of Lebanon’s central bank for the past 16 years, Riad Salameh has seen political and financial instability wrack his country, and he has been lauded by domestic and foreign observers for his steady hand during those times of crisis. Executive Magazine recently sat down with the governor to discuss deposit tax, remittances and strategy.

E At present, how is the Lebanese banking sector performing? When will it feel the impacts of the global financial crisis?
Lebanon will not feel the effects of the financial crisis, because we took the necessary measures preemptively. This crisis has turned out to be a confidence crisis. Confidence in the banking sector in Lebanon and in the monetary in general, is very high, as witnessed by the large conversions from dollars to the Lebanese pound. In 2008, de-dollarization was important and the central bank bought more than $8 billion from the markets. Dollarization rates in deposits in the banking sector dropped from 77 percent to around 69 percent during 2008. The measures that we took preemptively were essentially based on preventing the banking sector from leveraging its balance sheets and on the other side, regulating the structured products and forbidding the acquisition of toxic assets — like the sub-prime — by banks. So the banking sector in 2008 recorded profits that were over $1 billion, which was the best year for them. The liquidity that we do have in our system will prevent any crisis in 2009. As you know our GDP is driven, essentially, by consumption and we do not have a real estate bubble in the country, therefore we are still predicting a real rate of growth of four percent. The only risk for Lebanon is political or security, because the consumption sector is sensitive to events that are linked to these two elements.

E With the regional financial situation at hand, what is expected in terms of foreign remittances to Lebanon this year?
We have run a scenario here at the central bank that we call the ‘worst-case scenario,’ whereby the remittances would drop from $6 billion — which was the level of 2008, according to the World Bank — to $4 billion, which is almost a 30 percent drop. On the other side, we have also computed the import bill of the country, given the new prices of oil — which is a big import for Lebanon — and raw material in general, especially building material and foodstuffs. It turned out that in the worst-case scenario this is going to affect the balance of payment by around 10 to 15 percent. In 2008, our balance of payment closed with a surplus of $3.4 billion. Therefore, an effect of 10 or 15 percent on this balance of payment will not really be affecting the credit possibilities of our system, whether to the public or to the private sector. Now if some Lebanese would return to Lebanon, I personally view it as an opportunity to improve the productivity in our economic sector, because these people have talent, that’s why they were hired outside. Now they have experience and connections. The central bank, in agreement with the government, is going to take initiatives to facilitate credit for new businesses created in 2009.

E With the ongoing political situation in Lebanon — and the upcoming parliamentary elections in June – what are the implications for the Lebanese banking sector?
The elections should happen in a better situation now that we have the reconciliation that took place in Kuwait between Saudi Arabia and Syria. As you know, Lebanon is affected by regional tensions and it is positively perceived here when you have Arab reconciliations. So, the markets are telling us today that we don’t have a real problem in 2009 and we have seen through all the month of January, more conversions from dollar to Lebanese pound. I don’t foresee any negative implications on the banking sector.

E What strategies and regulations will the central bank be implementing this year that are different than the past?
The central bank will make sure that the credit market is working normally and that there are packages that could help to decrease the cost of borrowing, especially on newly created businesses. We do not anticipate any major or fundamental change in the model that we have built through the years. There is no need — given the stability we are seeing and the progress in the banking sector — for any new administrative decision. This year what we are looking at is… implementing Basel II, so we are looking to work more in the elaboration of circulars pertaining to the application of Basel II. We are going to improve on the payment system. We are working today with the Banking Association to introduce the iBank, which is a banking identity for each customer. This will improve the transparency and also the speed of payment. There is also going to be the introduction of what we have called the ‘city project’, which links online and real time the banks with the Central bank so they can have direct access to the information they need. Of course it’s secure access. So we are looking at some improvement, but no administrative measures.

E At a recent conference in Beirut, you announced your support for a single Gulf currency. What are the pros and cons of creating a Gulf Central bank? How will it affect Lebanon?
The Gulf countries have been working for many years to create this currency that we think is an important step forward that can be an advantage for all the Arab countries. The idea to create an Arab currency is based on creating an instrument that would help the Arab countries in the future to face any major crisis that could happen internationally. As you have seen today what saved the US and Europe was the fact that they had an instrument, a currency that was accepted worldwide. So they could create more of this currency and inject it into their economy and keep this economy afloat. You need a currency as an instrument for stability and development… This is a serious project, but also we all know that it will take many years if we start today in order to implement it. In Europe, it took them 50 years. I think it’s important to start laying the ground for that. The Gulf currency can be the first pillar for that project.

E The recently drafted five percent non-deductible tax on interest deposits — which is reportedly going to go up to seven percent – has left many bankers feeling uneasy. Some of them say it is unjustified and its benefits are outweighed by the negative impact it has on the banking sector and depositors. What is the reasoning behind this tax?
The government is seeking to create revenues, because one of the major vulnerabilities of our system is the deficit. The yearly deficit that is increasing and adding to the stock of debt — Lebanon can handle its stock of debt, but the markets need to see less deficit. Of course there are revenue measures, but there is also on the other side, an obligation to the government to rationalize its expenditures. I think that the banking sector that has lent consistently to the government is frustrated by the fact that they are not seeing reforms being implemented. This tax is part of the Paris III program, which was approved by the government, by the parliament and even approved by the banking sector at that time. Including this in the budget does not mean it’s going to be applied immediately because it is stated that it will be left to the Ministry of Finance to determine the proper timing. Certainly today everybody agrees that it is not the time to put more taxes on deposits and therefore on the liquidity of the country. Based on that, I believe this measure — and according to what I understand from the Minister of Finance and the government — will be enacted in the budget, but will not be applied as long as we have this worldwide environment of a crisis in the banking sector.

E With the low interest rate on the US dollar, dollarization of the Lebanese economy is decreasing and people are saving in Lebanese pounds to receive higher interest rates. How safe is the Lebanese pound?
The Lebanese pound is sound, safe and has weathered major crises in the past. The market is confident about the strength of the Lebanese pound. It’s not only an issue of interest rate spread, because you had in the region many currencies — or in emerging markets — that are paying now more interest than the Lebanese pound and yet they have not attracted conversions toward them. On the contrary, we see that their value is decreasing. You can site any emerging country in the past six months — we have seen their currency drop in a substantial way. So there is confidence from the market that the currency is sound and we are determined to keep the Lebanese pound stable and now we have more means to do that. As you know the balance sheet of the central bank is at an historical high. Our liquidity in foreign currency is approaching $20 billion, our gold stock is evaluated at more than $8 billion and we do have other assets that can add up to around $2 billion. So we have a balance sheet that is equal to the GDP of the country and that is a very rare situation in the world.

E The central bank has a lot of obligations in 2009. How are you looking to finance these payments? What should be done for Lebanon to start paying back its national debt?
In 2009, you have the foreign currency denominated debt and you have the Lebanese pound debt. On the foreign currency, the decision was taken to exchange all the bonds that are due in 2009 into maturities that are to be in five to 10 years. The exchange is presently taking place — the Ministry of Finance is preparing for that and we know from the banks that it’s going to be successful. On the Lebanese pound side, there is a heavy demand on treasury bills. I don’t think that the central bank will have to intervene to finance the government this year because of that demand and because the government is running a large surplus in its accounts in Lebanese pounds at the central bank. Our contribution would come in case the government does need foreign currency to pay the interest in foreign currency on the total debt for this year and to meet their demand to buy dollars from us for the import of fuel… As long as political and security situations are good, we view [2009] as a stable year.

E Will bank profits for this year be the same as last or will they slowdown?
I think the stress in 2009 — and I’ve spoken to the bankers about this — is not to fight to improve their profitability, because it is already in good shape, but more to have their attention on keeping good liquidity and not taking undue risks. Lebanon today is one of the rare countries that has excess liquidity, especially in the area. I know that they will be approached for financing in the region, so they have to be careful about their decisions. De-dollarization — and we encourage that — is helping us to decrease the risks, because once the savings are in Lebanese pounds, the usage of this currency is purely local and cannot be used regionally or internationally. So we want to be conservative in 2009.

E In all your years spent as governor of the central bank, what has been your biggest challenge to date?
I am maybe one of these governors who had a big challenge every year. If you want to go back the last 15 years, I have seen Israel invade Lebanon three times. I have seen crisis in the emerging markets — first in Asian markets, then in Eastern European markets, then in Latin American markets. We have lived through very hard political times — the country was always split in two. We have seen the assassination of Prime Minister Hariri and the assassination of many other prominent personalities. Blockades on Lebanon and the war in 2006. International crisis in 2008. A local political crisis with no institution functioning in 2007… I leave it to you to decide which one was the most difficult.