Gareth Smyth – Lebanon’s resilience is famous. Since the civil war ended in 1990, Lebanon has survived Israeli onslaughts in 1996 and 2006, as well as the 2005 assassination of former Prime Minister Rafik Hariri. Since 2011, Lebanon’s population has absorbed more than 1 million Syrian refugees. Some attribute such resilience to a political system based on compromises between sects, even when politicians are allied to rival regional powers. Others say Lebanon has survived due to its banking system. In a country with intermittent electricity and rampant nepotism, Lebanon’s banking sector excels. The regulatory framework imposed by the Central Bank, led since 1993 by Riad Salameh, showed its resilience in 2009. The world financial crisis barely rattled Lebanon’s banks. At the end of 2017, the banks’ assets in the domestic market were $220 billion. The six banks listed on the Beirut Stock Exchange have assets, including foreign operations, of $125 billion. The banks’ overall assets represent approximately four times Lebanon’s gross domestic product.
The banks’ importance is twofold. First, their earnings and receipt of remittances from Lebanese abroad mitigate a balance-of-trade deficit of $20.3 billion in 2017. Along with tourism receipts and foreign direct investment (FDI), this has resulted in a balance of payments deficit of just $156 million. This represents a deterioration on 2016’s $1.2 billion surplus but it is better news than it might have been. Second, the banks have financed government borrowing that took public debt to $78.15 billion in September 2017, up 4.6% year-on-year and 149% of GDP. Borrowing has financed a bloated public sector: From 2000-16, the International Monetary Fund said, 34.7% of public spending went to salaries. In the past three years, the government has appointed 26,000 extra staff. Bankers want reform. Some detect positive signs. A recent government circular called for a 20% reduction in non-salary spending. Ahead of April’s elections, there is newfound government efficiency in planning cabinet ratification of the 2018 budget. “Lebanon needs drastic structural adjustment, such as fighting fiscal evasion, which is $4.2 billion a year in a country with a $5 billion deficit,” said Marwan Barakat, chief economist at Banque Audi. “The deficit has to be reduced to ensure a soft landing.” The politicians assume the banks will forever rescue them, bankers say, thereby threatening not just the country’s banks but its entire economy. “The banking sector faces challenges,” said Nassib Ghobril, chief economist at Byblos Bank. “The first is the decline in lending opportunities in the private sector, due to the expanding public sector. Second, there are the continuing borrowing needs of the government. While the banking system — the Central Bank and the commercial banks — finances the deficit, we see no political will to reduce the fiscal deficit and implement reforms.”
Lebanon and political risk are long-term partners but regional tensions are growing and there is speculation of new Israeli attacks targeting not just Hezbollah’s missile capacity but Lebanon’s infrastructure. After playing a supportive role since the 1990s, Saudi Arabia’s new assertive foreign policies mean Riyadh’s support is not automatic. Riyadh is alarmed by Hezbollah, the Shia group closely allied to Iran and active in Syria. Along with other Gulf Cooperation Council (GCC) countries, the Saudis have discouraged their nationals from visiting Lebanon, affecting not just tourism but real estate. “In 2008-10, Gulf visitors were the biggest spenders and the largest share of Arab tourists in the country but the numbers have declined since 2011. Investments have also fallen,” said Ghobril. “They have been selling personal real estate holdings, land, apartments, villas.” Riyadh’s worry over Hezbollah is not entirely new. “In 2013, Saudi Arabia promised the Lebanese Army and security $4 billion in assistance, only to suspend payment in 2016 because of Hezbollah’s influence,” said Michael Young, a Lebanese author and analyst. Young said cutting military aid — also being discussed in Washington — is self-defeating. “The Saudi reversal may have disturbed the army but it did absolutely nothing to Hezbollah,” he said. “A cut in US military assistance would do much the same — harm the army and leave Hezbollah intact.”
Barakat said the importance of Saudi support for Lebanon should not be exaggerated. “In 2006 [the Israel-Hezbollah war], they transferred $1 billion to the Lebanese Central Bank [to maintain confidence] but over the past decade this has been repaid in full. Today there are zero Saudi deposits at the Central Bank.” Private deposits are relatively low, said Barakat: “GCC deposits in banks are $4 billion-$5 billion; $1.5 billion are Saudi, out of a deposit base of $170 billion. FDI from the Gulf is almost negligible.” In a crisis, Lebanon’s greater vulnerability would be its remittances, with 20% ($1.5 billion a year) coming from Saudi Arabia, said Barakat. He said he did not believe in “a doomsday scenario, where the Saudis lay off the 300,000 Lebanese workers there. Perhaps they would send a political message laying off, in the worse case, hundreds.”
