Reflecting the position of banking in the economy, the Association of Banks in Lebanon (ABL) is the country’s most potent group in representing private sector economic interests and influencing future direction. ABL president, Dr. Joseph Torbey, sat with Executive to discuss the current state of the nation’s economic affairs and its prospects.
How do you assess the situation in the first quarter of 2005 from the viewpoint of the Association of Banks in Lebanon?
Lebanon faced a very dramatic turmoil during the first quarter of this year. This political destabilization had some impact on the banking situation, the economic situation, and also the spirit. The country without [assassinated former Prime Minister Rafik] Hariri is different to the country with Hariri. But in my opinion, the country really recovered. This is also expressed by the behavior of the banking sector and the confidence of depositors. It is important to know that the banking sector is not only a domestic one; it is now a regional one with also international ramifications. Thus the assassination of Mr. Hariri was really a big event and caused two problems.
What problems were these?
The first was the threat to see a flight of deposits from the country. The second threat was lack of confidence in the Lebanese Pound due to the macroeconomic situation, especially the public debt and budget deficit.
The flight of deposits from the banking sector was a threat but it really didn’t happen at all. The second threat of massive conversion of deposits in Lebanese pound into deposits in foreign currency was a real threat and the central bank, in cooperation with the banking sector, acted in a very creative way to face this challenge. Together we were able to convert 10 percent of the deposit base in three weeks from Lebanese pound to foreign currency. This represented roughly $6 billion and was really a big challenge.
So it was an exceptional achievement?
It was really an achievement and after this success, we really were surprised to see a reversal in the whole conversion campaign by customers shifting again from dollar to Lebanese pound. In terms of figures, the total drop in the deposit base was around one billion 500 million dollar, which is nothing compared to the total assets of the banks which today stand at around $67 billion. We can recover that in two or three months.
In this context, what are your expectations on banking sector performance for the whole of 2005 in comparison to last year?
We don’t expect the same growth in the deposit base as in 2004. But the banking system is super-liquid, resources of banks are really larger than the need of the country and that is one reason why the banks are expatriating their activity outside Lebanon. So for banks there is no problem of financing the Lebanese economy. But as we are comparing year on year, we will see a slight difference due to the major event of this year. We will see recovery and expect also growth by yearend 2005. In my opinion, we will see between seven and nine percent growth of the deposit base, whereas in 2004 we had about 12 percent.
Then you would share the view that the current period is indeed hopeful?
Some perceived it also as the end of the tunnel with the withdrawal of the Syrian army and the regaining of the self-confidence of the Lebanese, especially under consideration of the new political process which is now being conducted under the auspices of the United Nations and international controllers coming to control the political elections and the political process. What was done showed a mark of confidence not only in the banking sector but also the political system and the future of Lebanon.
In this light, would you say that Lebanon’s sovereign rating should increase in the near term?
It is early to expect such but we are sure that it will happen, because with the new parliament and new government we expect a new policy and program. Starting from now the international community, World Bank, IMF, and the Association of Banks in Lebanon are all really busy to draft plans for the new era.
These plans will include two factors. The first will entail to make a major fiscal adjustment by re-analyzing the development spending and also undertaking a review of the operating cost of the public administration and some public utilities. With the liberation of Lebanon, the corruption process will slow or stop by itself and also by government policy, which must now really move to fight corruption and reform the administration.
What is the second factor?
The second factor is to plan or prepare for economic development. If we don’t have economic growth, we will face problems. The base of any economic government policy in the next era will be how to promote growth again for the economy. We had 5 percent growth in the economy last year. This year we will face a drop, which I expect to be a slighter drop if we can overcome the election problem before the summer season. We are expecting a good summer season. The fourth quarter of the year will be the quarter of the recovery and we will see in my opinion a different Lebanon after the political process will be terminated.
Will the ABL present its own proposal for economic growth to the government?
No, this is a government duty. We are participating with the government of Prime Minister [Najib] Mikati in a joint team. This team is discussing all schemes on how to emerge from the situation and draft priorities.
What would be the key wishes of the ABL towards the government in the new Lebanon?
The first wish is to promote private sector competitiveness and enhance private investment through removing the hurdles faced by the private sector and reducing the cost of business. This means streamlining the administrative procedure, reducing red tape, modernizing the legal framework and government private sector activities, as well as providing incentives to private investments. We must have a new spirit in welcoming and assisting investors.
The second point is implementing the fiscal adjustment as soon as possible. This is really a major issue and in my opinion we need also some efforts from the international community because the problem of the public debt is becoming more and more difficult for the country to overcome only by techniques or mechanisms. We need some restructuring of this debt. I am here evoking the Paris II conference. We need a new conference, which will be backed by real positive government attitude.
So you would be in favor of what by want of a better term is being called Paris III?
Yes. The Middle East is facing big challenges. These challenges are not only political ones. A major challenge is poverty and economic destabilization. I think stability of Lebanon is important for the stability of the region. Here we must expect from the international community a comprehensive program, which like Paris II will not be based on donations but on lending and restructuring the debt, helping Lebanon to upgrade its rating by having a better restructured debt with better maturity and easier debt service.
Following Paris II the banking sector was relied upon quite substantially by the Lebanese state for supplying a financial contribution by way of subscribing to zero-interest T-bills. Would you see it possible that the banking sector would be called upon again in a similar matter after a new debt restructuring conference?
In the Paris II conference, the banking sector was a major player. We provided about $ 4 billion as loan to the government with zero percent interest rate for two years. The reason of this participation was based not in any pressure from the government. It was a voluntary participation based also on the banks’ own interests. It helped to upgrade the rating of the country. The reward for the banking sector was very important because our T-bill portfolio, despite being devaluated, was appreciated. We were buying stability and better ranking and at the end, we also gained as we could lower interest rates on our deposit base, and we shared those benefits with the state. This was the explanation of the process. The situation today is completely different.
In what way?
Today we are overpaying our depositors to keep the deposits in the country. Thus we are helping in the restructuring process of the economy by fighting to keep our resources in the country. This is really an important contribution which is for us more costly than the first participation, due to a slowing economy. After the assassination of Mr. Hariri, we had now about three months of vacancy in the economy. We are covering this and we are restructuring our debt portfolio with our customers as our customers are also facing problems. We are not able to increase our interest rate on the loan side and we are increasing our interest rate on the deposit side. So we are overpaying to keep the resources and we are acting softly with our loan customers to help them to recover and reemerge again as profitable customers.
Isn’t this very costly to the banks?
There is a real dilemma here and we are very conscious of this. We are at the forefront and the strategic reserve of this country and helping to finance the government at a stage where it is difficult to raise any capital on the international markets. At the same time, we are still also financing our customers to keep going. So we are playing a very important role in this economy. This is our economy and our market and it is in our interest to keep it safe. But it will have an important cost to us.
You told us what the ABL recommends for improving things on national economic scale. Would you have special requests to the new government on behalf of the financial services industry?
We are very satisfied with the financial environment. Sure, we need to develop it and especially develop the capital markets; this is an important issue. But our claim is not on the activity of the banking sector. We need to reform the investment climate and ease the government requirements on any investment activity. The best solution here would be to navigate towards e-government as the best way to deal with the administration and have a standard approach, which is now missing.
Do you have specific suggestion for legislation on capital markets?
We really need legislation to create a real capital market. We have a capital market but this is not an active capital market. So we really need new legislation here.
But you would not ask for special incentives to the banking industry such as supporting mergers or expansion?
We have the appropriate laws. If we will participate in a wider approach to the economy, it would be by asking the government to have a special scheme to develop small and medium size enterprises and to give subsidies to some new activities, which must be developed. All our suggestions will be related to development and economic growth and also to fighting poverty because the big threat to the banks, to the political system, and to the economic system in the country is poverty in some areas and regions. Poverty is not only an economic threat. It is also a political threat and there is contamination.
With a new government, financing needs for public sector projects might arise, such as socioeconomic projects or developing rural areas. How would you foresee the banking sector to respond to more public sector demand in project finance?
We are for private sector intervention. We don’t see the government or the public sector capable of managing rural development projects. This is a country of private initiative and I see any assistance coming to Lebanon as coming to the private sector. The banking sector will help and cooperate in any project and it will also initiate some projects, as we are now very active in microfinance and financing of small enterprises.
Do you expect major changes in the portfolio composition of Lebanese banks to the end that T-bills and sovereign debt would soon play a lesser role?
I expect permanent demand from the government. Because the need is still there and the deficit is still there and the banking sector is able to satisfy this demand, especially since we now have large experience in international markets and are directing some of these funds outside. There is still demand and confidence on the Lebanese paper.
Some stakeholders in the economy recently emphasized that they see politics and business in Lebanon as being inextricably intertwined. Is it impossible to separate politics and economy in Lebanon?
For the banking activities, I can assure that there is no important interference of politics. It is a major strength of the Lebanese banking sector that there is no real political intervention on banking decisions. Perhaps there is some intervention in some investments which are related to public activities but the banking sector is really very well defended by its decision makers. We are complaining from some bureaucratic difficulties but the climate is acceptable. This is a country of private initiative. You have here a big fragmentation of society and a very important diversity. Nobody can enforce control and in my opinion, having such diversity is a really favorable climate for democracy.
