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Rise of financial optimists

Banque du Liban (BDL), Lebanon's central bank
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After a long and depressing dry spell that made local markets yearn for fresh investments, the Lebanese investment climate is looking up, says Jamil Koudim, the head of the asset management team at Beirut-based Banque Libano-Française (BLF). He presides over a family whose offspring has just doubled from a single fund to two. After the BLF Total Return Fund, which saw its inception in September 2012, the team put to effect the BLF Income Fund in November of last year. This new fund is open-ended, denominated in dollars and focused on fixed-income instruments. “We have mainly government bonds, central bank [certificates of deposit], maybe preferred shares of banks [in the portfolio] and any other fixed-income securities by institutions or corporations, and securitized products. Any fixed-income security is our market for this fund,” Koudim explains.

Though Koudim concedes that funds of this type are already offered by several Lebanese banks, the more significant part of the story surrounding the new product is its international attractiveness. He says that this rise in appeal is evidenced in the fact that financial entities outside of Lebanon have shown  interest in this fund, and other local investment products. Koudim goes on by stating that what makes the new Income Fund (I.F.) alluring is the extra earnings potential that is encased in the possibility of Lebanese economic performance improving beyond expectations, which would enable the I.F. to provide returns in excess of its normal target. “If you offer an investment product, you have to be satisfied with the market that you are looking at. This is where the story is. We really think there is upside to [the Lebanese market] following what we have been through. We view last year as worsening of the economy, but the swap transactions [by Banque du Liban] put a floor to that,” Koudim tells Executive.

Attractive stability

He adds that he met with several representatives of international funds during a recent trip to London and that these funds, as well as some banks in the Gulf region looking for country-focused funds to recommend to their clients, are all showing an increased interest in financial investment opportunities in Lebanon. International funds were aware of the 2016 financial engineering measures adopted by Banque du Liban (BDL), Lebanon’s central bank, but their resurging interest was mainly based on political factors. “Their focus was more on the political outlook and political stability, both domestically and regionally. Syria is very important and the war of the past years is [now supplanted by rising stability]. All this is positive,” Koudim says.


No economist in the survey expected growth of less than 1 percent for the Lebanese economy this year


His message of upside potential and optimism correlates with other recent local mood indicators for the economy in both soft and hard data. A January 2017 Economena survey of 17 economists working at Lebanese banks, universities, corporations and institutions found that the median expectation of the surveyed economists is for 2.5 percent growth of GDP in 2017, Economena referred to this as a  “particularly bullish sign,” which was yet above the International Monetary Fund’s (upwards revised) projection of 2 percent growth. No economist in the survey expected growth of less than 1 percent for the Lebanese economy this year. Some even estimated growth to exceed the 3 percent real GDP growth projected by the International Institute of Finance for 2017.

According to the monthly EcoNews publication of bank SGBL, a consumer confidence indicator for Lebanon by regionally active ARA Marketing Research reached 161 points in the fourth quarter of 2016, which represents a 66.5 percent year-on-year increase, signaling the highest confidence level since 2011. EcoNews also pointed to economic upside potentials from oil and gas prospects, tourism, real estate, exports, external political relations and what it called a “rare domestic political breakthrough in late 2016.”

Optimistic views were also reported from a recent roundtable by the Lebanese Institute of Strategic Affairs (directed by economist Sami Nader), which said that the “enterprise landscape in the region is booming” and that Lebanon – albeit slow in embracing entrepreneurship as a drive for economic growth, and thus, not yet having developed to its full potential in this regard – “has gone a long way in developing its environment for entrepreneurs.”

As far as hard indicators from the banking sector, the Lebanon This Week (LTW) publication of Byblos Bank reported from Beirut Stock Exchange filings of six listed banks, that the aggregate net profits of these six banks rose 12 percent year-on-year to $1.36 billion in 2016.

Rich deposits

Alone, the country’s largest bank, Bank Audi, published headline numbers of $44.4 billion in assets, $36 billion in customer deposits, $17.3 billion in loans and $3.8 billion in shareholder equity. Its net profits came in at $470 million, representing a 17 percent year-to-year increase, accounting for about 35 percent of the aggregate profits reported by listed banks, and, nota bene, a new record profit in line with the expectation noted in the year-end issue of Executive.

While assets grew moderately, and net loan portfolio dropped 2.9 percent in year-to-year comparisons, Bank Audi noted that these dents in its figures were connected to currency depreciation in its largest two markets outside of Lebanon, Egypt and Turkey. When calculated on a constant exchange rate, the growth rates of consolidated deposits and loans both would have been 10 percent in 2016, the bank said, marking a difference in spirit to the opening sentence of its statement on its consolidated activity highlights in 2016, which read: “The year 2016 was difficult for the entire Middle East and North Africa region.”

Consolidated figures for the performance of Lebanon’s 14 largest banks were not yet available from specialized consultancy Bankdata at time of this writing, but total assets of banks operating in the country grew 9.9 percent to 204.3 billion at the end of 2016, according to central bank numbers. Based on Bank Audi’s publication in Lebanon Weekly Monitor (LWM), the growth of activity was higher than in 2015, and also higher than in the average of the past five years, by 78 and 61 percent respectively.

Customer deposits accounted for almost 80 percent of sector balance sheets and grew by $10.9 billion in year-to-year terms, or 7.2 percent. Of this total deposits growth, $8.6 billion, or 79 percent was in foreign currency deposits. Deposits in  Lebanese lira (LL) increased by the equivalent of $2.3 billion. Deposit growth more than doubled from $3.1 billion in the first half of 2016 to $7.8 billion in the second half. Growth of resident deposits and non-resident deposits both showed uptrends from one quarter to the next throughout 2016, with the rise of resident deposits being more pronounced between the two.


Not all the signs for the Lebanese economy have switched from red to green, yet the mood indicators are more positive than in recent periods


Whereas Lebanese Lira deposit growth was lower than in 2015, the growth of deposits in foreign currency exceeded that of 2015 by about 153 percent. The composition of deposit growth reflected the influence of BDL’s financial engineering operation in the May to October period and related offers by banks seeking to attract foreign currency deposits in the course of the QE exercise. The dollarization rate of deposits increased by 90 basis points to 65.8 percent.

Lending growth in 2016 was of $3 billion, a drop from the $3.3 billion seen in 2015. Two-thirds of the loan growth in 2016 was a result of an increase in the Lebanese Lira denominated loan portfolio, which was driven up by the central bank’s financial engineering, as intended. Foreign currency denominated loans rose by less than $1 billion. “Lending activity growth yet rose by a healthy 5.4 percent,” the LWM said.

Byblos Bank’s LTW noted that total banking sector assets and deposits at the end of 2016 were equivalent, respectively, to 393 percent and 312.7 percent of GDP and that these rates-to-GDP were higher than in 2015. Loan-to-deposit ratios were 38.8 percent in foreign currency and 28.2 percent in Lebanese liras. According to LTW, gross foreign currency reserves by the end of 2016 stood at $34.03 billion, having dropped by some 0.71 billion since the end of October last year. The year-on-year rate of increase, however, was up to 11.06 percent.

Not all signs for the Lebanese economy have switched from red to green, yet the mood indicators are broadly more positive than in recent periods. But while BLF’s Koudim highlights the good story for Lebanon that is entailed in regional scenarios of more stability, and domestic scenarios of budget and reforms for taking Lebanon in a more bullish direction, he makes a point that the known domestic downside scenarios of high risk and large public debts could be exacerbated “if the political hopes do not materialize.”

He elaborates: “We have seen that international investors, which normally are underweight on Lebanon, are now all interested and want to allocate a certain amount of money to trading Lebanon. What could turn things [back into negative sentiment] would be disappointment in terms of reforms, [and] in terms of political stability.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail