Lebanon financial markets profile 2008-09

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1. Lebanon's golden results overshadow doubts on debt, remittances[edit]


For lovers of contrarian economic thinking, no country is a hotter financial topic right now than Lebanon.

As the world continues to recover from the global financial crisis and its devastating effect on the global banking sector, Lebanon's overall economy continued posting its usual solid results in 2008. And earlier this month the Lebanese economy got another boost when the incumbent pro-western coalition government that has overseen recent growth and stability was returned in national elections. Conservative monetary policy by the central bank over recent years has kept the currency, the Lebanese pound, stable via a peg to the U.S. dollar and prevented banks from investing in exotic OTC derivatives. Such policies "have shielded the country from the worst of the economic downturn", wrote analyst Hussein F. Zeaiter in Beirut's English-language Daily Star last month.[1]


Global finance appears to agree. The International Monetary Fund wrote in an April 2009 report on Lebanon's recent economic progress that the country "has so far weathered the global financial crisis and succeeded in maintaining financial stability, raising international reserves, and reducing public debt in 2008."[2] The report also noted that the spreads on Lebanon's Eurobonds had fallen below the average for emerging markets.

In recording a remarkable 8% annual growth rate in 2008, Lebanon's economy benefited from more than just monetary caution. Lebanese economists told the Daily Star in October 2008 that 2008's fall in the prices of commodities like crude oil and the depreciation of trading partners' currencies, especially the euro, gave the economy a much-needed boost.[3]

Unlike their western counterparts, Lebanon's banks were barely singed by the financial firestorm that laid low high-flying international names like America's Merrill Lynch, Britain's Northern Rock and Iceland's Glitnir. In recent reports praising Lebanon's remarkable resilience the financial shocks, western financial media usually highlights a ruling by the Bank of Lebanon (BofL) in 2005 to ban the purchase of mortgage-backed securities by local banks. BofL governor Riad Salamé, has been hailed a financial dragon-slayer for his strong backing of the ban.[4]


In fact, some of Lebanon's larger financial institutions like Bank of Beirut, a top-five Lebanese bank, posted stellar financial results backed by increased lending in the period just before and after the financial crisis began.[5] Market leader Bank Audi also had a solid 2008, with total assets rising from 30.76 trillion Lebanese pounds in March 2008 to 31.21 trillion a year later.[6] And the nation's central bank, the Bank of Lebanon, in May adjusted its economic growth forecast for 2009 upwards from 4% to 6%.[7]

But not everyone is so upbeat on the future of the Lebanese economy. Bank Audi, the largest bank in Lebanon by assets, in May expressed fears of a reduction in foreign remittances from expatriate Lebanese as well as a decline in Lebanese exports to trading partners still suffering fall-out from last year's financial crisis.[8] Bank Audi's report also mentioned the need for investment and banking reforms in areas like taxation, trade barriers and financing in the local currency.

And the IMF's report a month earlier, although generally congratulatory, adds some cautions. The report offered a lower 2009 economic growth estimate of 3% compared to the BofL's revised 6% forecast, citing the negative affect on Lebanon of lower global liquidity resulting from 2008's financial crisis. The IMF also expects bank deposit growth to fall to 10% in 2009 compared to the 15% increase in 2008, although the BofL predicts a 12% rise this year.

But the IMF report also pointed out some significant concerns that could hit Lebanon's economy over the next few years, chief among them the country's potentially crippling burden of public debt (see story below). At 162% of GDP, Lebanon's public debt ratio is one of the highest in the world and measured $47.21 billion in February 2009, 44% in forex, although the public debt to GDP ratio is down from the 180% recorded in 2006.[9]


The Economist magazine recently described Lebanon's national debt as "colossal", noting that 162% was triple the world average and required political as well economic leadership to reduce.[10]

Several analysts have also noted the local economy's dependence on remittances as a potential future source of uncertainty, particularly from an estimated 200,000-400,000 Lebanese workers in the Gulf region cited by Zeaiter in the Daily Star.


And Lebanon's investors may have already turned contrarian themselves. A recent report on the appreciation of gold posted on investment website Seeking Alpha by the head of Passport Capital noted that Lebanon has the highest ratio of gold ownership to GDP at 28.8% compared to ratios of 1.7% in the U.S. and 0.8% in China.[11] With gold having appreciated more than 13% over the past decade, Lebanon's economy can only have benefited.

2. Lebanon's capital markets top world marks as '09 growth picks sag[edit]

The Lebanese banking sector and its currency the Lebanese pound were among the world's most contrary performers during the 2008 global financial crisis. And despite plenty of outside skepticism that Lebanon's remarkable growth numbers in 2008 can continue, Lebanon's capital markets seem to be reading from the same script so far in 2009. And the June 7 election results, which re-elected a western friendly, pro-market government, haven't harmed either.


Although frontier market Lebanon was one of the financial stars of 2008 (see above entry), global financial agencies have turned pessimistic on 2009. Most recently, in late June, the World Bank lowered its annual growth forecast for Lebanon to 2.5% from the 4% it set six month earlier,[12] more than three months after the International Monetary Fund lowered its 2009 growth target for Lebanon to 3-4%.[13] In between, however, Bank of Lebanon governor Riad Salamé forecast 6% growth for Lebanon this year. Amid the gloom, Lebanon's stock and bond markets continue to improve. That's welcome news at the Beirut Stock Exchange, which took a hammering in the year to May 2009. The exchange lost almost one-third of its value from May 2008 to may 2009, dropping 30% or $3.7 billion


in market capitalization according to a Byblos Bank report cited by the Daily Star.[14] Economist Marwan Iskander told a Beirut economic forum also in May that the Beirut Stock Exchange had lost $5 billion since mid-2008. The bond market has also suffered from excessive public borrowing over many years, resulting in levels of public debt close to 200% of GDP, amongst the highest in the world. Some 27% of Lebanese bank assets are held as Treasury bonds, representing almost two-thirds of all


credit owned by Lebanon's banks, reports the Brookings Institution[15]. Lebanese banks still hold most of Lebanon's treasuries and Eurobonds, the Daily Star reported in May.[16]

But both look to be bouncing back. The Beirut Stock Exchange has been one of the top global equities market performer so far in 2009 with its market benchmark, the Blom Stock Index,[17] rising almost 18% in the year to June 28, 2009 and a remarkable 16.23% since the global market peak of June 2, according to research by British firm The Market Oracle.[18] Only Mauritius, Sri Lanka and Kenya have posted double-digit gains since June 2, when the Bloomberg World Index rally peaked, The Market Oracle noted.

That growth period corresponds with the electoral honeymoon the markets received from investors following Lebanon's June 7 election, however, and is unlikely to be sustained at that pace.

And Lebanon's bond and forex markets also got a boost recently when international credit rating agency Capital International in early July raised Lebanon's sovereign rating a notch from B- to B,[19] just over two months after


fellow ratings agency Moody's Investors Services raised its rating from B3 to B2.[20] And in August 2008 credit rater Standard & Poor's also raised its Lebanon rating a notch from CCC+ to B-.

The central bank is also looking to reduce its foreign debt by offering better yields on longer-dated, dollar-denominated government bonds in exchange for dollar and euro bonds maturing this year.[21] Lebanon is currently offering guaranteed minimum yields of 7.5% and 9% on bonds maturing in March 2012 amd March 2017 in exchange for bonds maturing between August and December this year. The aim is to reduce some coupon payments on the existing Lebanese foreign debt totalling around $12 billion.

Nonetheless, Lebanon faces pressure from Gulf-area economies that contribute significant amounts to the Lebanese economy via remittances and foreign direct investment (FDI) from the area's thousands of expatriate and ethnic Lebanese businesses, the World Bank report recently cautioned. On the other hand, lower crude oil prices and fewer imports could reduce Lebanon's current account deficit from 14.7% of GDP in 2008 to 6.1% in 2009.

Frontier markets like Lebanon are still alive and kicking back, it seems.