Two months after a blundering collage of new budgetary revenue measures drove people into a unified and spontaneous civil uprising, the state of Lebanon remains an unresolved mess. Six weeks of attempts by the political regime to uphold and reorganize what the people perceived as a corrupt system only made the country’s social and economic predicaments more intractable. Failures of the process to determine a cabinet in the first week of December then further exacerbated questions if the stakeholders in the old regime have understood the popular will and demand for a new independence of Lebanon from its soiled political past and the seriousness of the country’s economic disaster and looming financial implosion.
From a banking and finance perspective, the dire monetary state of Lebanon in the final weeks of 2019 is neither the fruit of the populace’s political struggle for a redesign of the country’s electoral and representative paradigms nor the root cause of this struggle for a new system on the threshold of the symbol-heavy year 2020. Nor is the current monetary and economic mess the direct result of just another period during which the implementation of government has been stalled by a—as socially entrenched as societally lethal—mix of political selfishness, communal inertia, and national disunity.
What was triggered by another government attempt to tap into the people’s pockets—and specifically the sensitive communication expenditure pocket—was the eruption of society telling the state “enough” with a voice that could be neither overlooked nor silenced: the unified voice of the street. This voice coincided with a crisis of confidence—according to some views long overdue and to others premature—in the sole functioning pillar of economic strength, Lebanon’s monetary stability and banking resilience.
Total information loss
What could not be expected from this voice of civil thawra (revolution) in this highly combustible constellation of vanishing confidence and financial instability, however, and what did not come to bear, were concise answers on the concrete need to maintain economic life support for the large private and public consumption needs, equally gigantic dependence on financial inflows, and the comparatively small productive capacity existing in the national economy.
The offspring of this unintended union of civil revolution in politics and draining of liquidity and confidence in the economy appeared firstly as a total loss of actionable information in the financial system. From an observer’s perspective, this collective lack of transparency and early warning signals might have been attributable in part also to the behavior of stakeholders in the Lebanese financial system, who did not make determined efforts to regain the trust of private account holders on corporate, small-to-medium business, and household levels, as would have been wise, and instead acted behind smoke screens when seeking to rein in financial transactions.
One side-effect of the worrying monetary movements that set in during the year—which in hindsight appear to have become visible to system insiders from mid-2019 but remained largely camouflaged in communications between the banking sector and the public—is that it is impossible to draw any conclusions on the health of the banking sector’s performance in the second half of 2019 on the basis of the performance up to the middle of the year.
Neither a 1.3 percent contraction in domestic customer deposits in the first half of the year, nor the slowing asset growth trajectory of alpha banks (with deposits exceeding $2 billion each) to $263.6 billion by end-June 2019 provided data that at first glance would have supported immediate alarm in response to six-month results. Alpha bank assets were recorded as a 1.6 percent growth in consolidated assets (a 2.2 percent growth in domestic assets versus an exchange value deprecation-induced contraction of assets at overseas operations). A stagnation of domestic branch network developments and a headcount decrease of some 300 banking employees in Lebanon also provided no cause for crying out. The sharpest deterioration in bank activities, a 7.5 percent drop in domestic loans, could be taken as reason for another exasperated sigh over the state of the Lebanese economy rather than as a sign of new weakness in the banking sector.
Primary liquidity ratios of banks even increased significantly on paper, to almost 60 percent (an increase by 8.7 percentage points from a year ago) and the downturn of bank profits—an 8.1 percent contraction of domestic net profits in the first six months—should, if anything, have been comforting to critics alleging disproportionate banking sector profitability. In the sum of the data, while the sector numbers gave no reason for euphoria, there appeared to be no huge noticeable alarm signals, sharp digressions from historic banking performances in multi-year time series, nor data points of any predictive crash dimension for the first half of 2019.
Arguably, this first-half performance only made it more difficult for many business and household clients of banks to prepare adequate and rational behavior in response to the altered behaviors by banks that came as a full surprise near the end of Q3 of 2019.
Left in the dark
Moreover, when the first wave of protests was triggered in mid-October and quickly escalated into the civil thawra that resulted in the government’s demise by the end of the month, there was little else than fear, instinctive self-interest, and very short action horizons for the bulk of banking customers to go by. Central Bank Governor Riad Salameh addressed the country on November 11 with assurances that there was no intention whatsoever of embarking on a capital control, haircut, or devaluation policy, saying as reported by the National News Agency that the protection of deposits and depositors is “a basic and final matter, and we have taken the necessary procedures so that there will be no losses borne by depositors.”
Meanwhile, banks took what they considered as decisions in their best interest, dispatching updates on withdrawal and transaction barriers via messages to their customers individually and often on ultra-short notice. But in any larger sense, thawra was a non-event as far as communication by the systemically most important pillar of the private sector. Even in the beginning of December, the home pages of alpha banks contained next to no comments on the national societal situation or, as far as the deteriorating economy, either systemic financial assessments or personal advice on how to behave rationally as a customer in times of national economic crisis.
This left the field wide open to all the legitimate concerns voiced by economic experts (but also some almost pejoratively imprecise or premature labeling of the role of banking and finance in the crisis with negative to criminal connotations), erratic exchange rate signals from the private currency market, viral anti-banking rumors and accusations as part of the thawra expressions of systemic disapproval with the ruling status quo and the exploitative cliques of corruption, and even what looked to some like orchestrated attempts to further destabilize the country through attacks against the central bank and banking sector at large.
In published economic evaluations and discussions—such as the Executive Roundtable series that took place November 18 – 21—credible views on the scope of liquidity problems, on the extreme danger to the banking system, or even a practical “bankruptcy” on central bank level were debated. Scenarios of recovery and rescue were juxtaposed with scenarios of extended bleakness for the banking system and the economy at large.
Opaque or invisible
Some impacts on the financial fabric of the worrying liquidity and currency situation were visible by the example of the insurance market in Lebanon. A few weeks into the economic and currency dilemma, international insurance ratings agency AM Best published a snapshot report on the situation of Lebanese insurers in November 2019, in which the agency noted that amidst an accelerating decline in investor confidence and US dollar cash-flow constraints, Lebanese insurers with dollar-based fixed costs face new challenges and have been seeking to maximize their dollar inflows and minimize outflows.
“AM Best notes as an example that companies have been paying obligations such as staff costs in the local currency where possible, limiting the risk for short-term operational problems,” the report says, adding that ability of premiums collection in insurance companies has suffered. “Insurers with weak asset and liability management frameworks that have not matched their US dollar-denominated liabilities with US dollar-denominated assets may find themselves exposed to the risk of a Lebanese pound devaluation,” According to AM Best, Lebanese insurance providers have resorted to measures such as leveling a surcharge oriented on the exchange rate in the parallel market on policyholders settling premium obligations in lira, or refusing to pay claims in dollars if a policy holder paid all or part of the premium in lira.
“Over the longer term, should BDL find itself in a position in which it is not able to refinance its US dollar debt issuances, pressure to devalue the Lebanese pound could increase, leading to a significant erosion of shareholders’ equity for companies with poor asset-liability management. A devaluation could also result in significant inflationary pressure,” the agency warned.
In an interview with Executive in the first part of November, Farid Chedid, chairman and CEO of Chedid Capital Holding, explained that the bigger worry for the Lebanese insurance sector since the eruption of protests resided in investment concerns, not underwriting issues. Attributing this to the uncertainty on the fate of investment portfolios held in the local financial system under regulatory mandates, he pointed to work interruptions, difficulties in premiums collection and achievement of renewals, and new business as additional burdens of local insurers.
He conceded that local insurers face further challenges for their reinsurance dealings where a very large currency mismatch is being created between lira and dollar at the level of insurance companies that have all their reinsurance contracts with international providers in dollars. “But having said that, insurance companies are well protected because reinsurance contracts are all in dollars. Assets of clients of insurers are well protected because contracts are in US dollars,” he noted.
Insurance stakeholders participating in the Executive roundtables further emphasized that settlements of reinsurance obligations at the end of 2019 or any point of contractual payment obligation in 2020 could unleash crises on coverages under the important insurance verticals from medical and motor to property and life business lines.
When compared with the opaque outlook for the insurance sector, the ability to predict banking sector health developments in the new year and even before the arrival of 2020 is even more limited. At this point, consensus in discussions of economists and informed stakeholders appears to be that central bank directives for the bolstering of bank capitalization and the initially temporary realignment of interest rates away from the excessive levels seen earlier in 2019 and before are steps in the right direction but may not suffice, depending on the development related to the formation of a real government and support from the international level.
Requiem for a global failure pattern
Lebanon’s financial and economic outlook for 2020 is interdependent with geopolitical factors and prone to be influenced by the wider international economic outlooks. This, however, is no comfort. The global debt problem is being increasingly thrust into the spotlight. Quoting the total combined public and private debt at world level as never-before seen 230 percent of global GDP at time of her speech in early November (something like $188 trillion dollars, up from $184 trillion mentioned in a January 2019 document), Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said that private and public debt were responsible for the high total in a ratio of about two to one. While noting that some countries with rooms in their budgets should consider borrowing to finance “productive public investments” she also highlighted the “darker side of debt” and the “devastating effects of unsustainable credit booms.” The borrowing of developing nations has to become more sustainable, transparent, and organized in collaborative ways with creditor options, she said.
The uncertain and dichotomous global financial realities picture comes, moreover, in a frame of sharp contrasts of almost scarily complacent market perceptions in developed markets with recent boosts of vibrant consumer spending and increasing numbers of developing countries in desperate struggles against state failures, corruption, inflation, rising impoverishment, and outright hunger. In this context of a world that has over the course of the last 40 years incurred massive liabilities on the dual fronts of debt and climate under irresponsible economic behaviors of overwhelming proportions, the descent of Lebanon into a vicious cycle of national spending beyond national means no longer looks like a purely local madness.
Too important to fail
For the time being, one retrospective argument that seems in order relates to the fact that measures of quantitative easing, unconventional methods, and financial engineering have not only been the practice of the Lebanese central bank. The challenges of financialization and redefinition of fundamental monetary paradigms are universal and not a problem suited for exclusionary views on Lebanon’s monetary authority or allegations of local thievery. Other than that, it seems that in the concluding weeks of 2019, all perspectives on the local banking sector entail too many variables and unknown elements to dare predictions or rational expectations.
In conjunction with the civil uprising’s attempts to generate, in the medium or even shorter term, a new systemic political reality, the banking system can only benefit from pursuing a path of constructive adaptation instead of passive rejection of slowly impending change. In the immediate term, the implications of the currently witnessed turning points on systemic and banking realities converge at the threshold of 2020 in the sense that any progress will have to rely on international interventions.
Sadly, it seems against the backdrop of the uprising experiences of the last quarter in 2019 up to the middle of December that the representatives of the existing communities and structures cannot be entrusted neither on the individual, nor the organizational level to be effective agents of meaningful innovation. The consequence of this for the financial and economic rescue of Lebanon is that an IMF-type program with foreign supervision is the best option for moving forward. The Lebanese banking sector, even if considered as a single bank for the purpose of discussion, in this regard does not have the advantage of being “too big to fail” in global perceptions. The best hope might be that the Lebanese polity as factor of relative stability and peace on the edge of a most volatile geopolitical crisis zone, is too important to fail.