By Babu Das Augustine, Banking Editor

Dubai: The recent political developments in Lebanon such as the election of President Michel Aoun and the designation of Saad Hariri to form the government is expected to boost investor confidence in the country’s financial system. However analysts say in the short to medium term, banks’ foreign asset holdings paint a grim picture.

In mid-October, Banque du Liban (BdL), Lebanon’s central bank, published data showing that Lebanese banks’ foreign assets, mostly in the form of foreign bank placements, had declined by $1.9 billion (Dh6.9 billion) between May 2016 to August 2016, and by $1.1 billion in August alone. As a result, Lebanese banks’ net foreign liabilities increased to $18 billion in August from $15 billion at the beginning of the year.

The repatriated $1.9 billion of foreign assets were invested in long-term Lebanese government Eurobonds and BdL certificates of deposits (CDs) that increased the banks’ overall exposure to the sovereign.

The large reduction in Lebanese banks’ foreign assets is the result of a BdL financial operation that began in May. Although the BdL has not disclosed details of this operation, according to Moody’s estimate, BdL bought $2 billion of Eurobonds from the Lebanese Ministry of Finance in exchange for an equivalent amount of debt denominated in Lebanese pounds.

Additionally, there are reports that BdL bought roughly $6 billion of Lebanese pound denominated Treasury bills over the summer from commercial banks at a premium and sold them the $2 billion in Eurobonds and an additional $4 billion in CDs. Banks were required to keep the profits generated from these transactions as Lebanese pound-denominated reserves ahead of the implementation of International Financial Reporting Standard No 9, which takes effect in 2018.

Lebanese Saints