The political convulsions of 2011 across the Arab world have transformed the nature of economies, spawned capital flight and threatened the stability of entire banking systems. Lebanon is a dramatic example of a small, open economy without oil reserves dependent on tourism and foreign trade, vulnerable to multiple political shocks to its banking system.
The assassination of Prime Minister Rafic Hariri in 2005, the Cedar Revolution and the recall of Syrian troops from Lebanon, the 2006 Israeli assault on Hezbollah, the sectarian clashes between Hezbollah and the Druze/Sunni militias, the death of prominent anti-Syrian Maronite politicians and journalists, an Islamist revolt in a Palestinian refugee camp in Tripoli and bitter political fissures in the Cabinet are only a few of the political pathologies of post civil war Lebanon. The current bloodletting in Syria has ominous implications for Lebanon.
The Lebanese economy’s growth rate plummeted in 2011 as exports to the Arab world have plunged after the uprisings began in Tunisia, Egypt, Yemen, Syria and Libya. Beirut can no longer benefit from flight capital inflows from the wider Arab world, apart from Syria’s ruling elite now under US, EU and Arab league sanctions.
Moody’s has placed four Lebanese banks on credit watch for a negative downgrade since it estimates that the Arab spring will hit their business models, as the four leading banks hedged their volatile home country politics by diversifying into a wider regional footprint.
Lebanese lenders even acquired banks or opened branches in Egypt, Sudan, Tunisia, Iraq and Syria – all Arab countries whose economies are devastated by political convulsions. It is no coincidence that all Lebanese banks have increased their provisions, as nonperforming loans surge. Corporate loan books are Tunisia.
The popular revolt in Syria against the regime of President Bashar al-Assad is a strategic disaster for Lebanese banks as the seven major Beirut money centre banks own subsidiaries, affiliates and joint venture banks in Syria.
The endgame for Syria is unknown but the Baathist regime in Damascus has killed an estimated 5,000 protestors in its bid to retain the absolute power it won when Hafez al-Assad seized it in a coup d’etat in 1970. Lebanese banks are vulnerable because they own more than half of all private bank branches in Syria and the economic shock will badly hit their retail/corporate loan books.
The political uncertainties in Lebanon and the wider Arab world will take their toll on GDP growth rates, bank loan growth, real estate prices, capital inflows, tourist arrivals, capital expenditure, exports, FDI and the Beirut stock market. An infallible indicator of Lebanese financial risk is the rise in the proportion of dollar deposits in the local banking system, as well as the rise in Lebanon’s sovereign credit default swaps and sovereign dollar
Lebanon’s foreign debt/GDP ratio is dangerously high at 140 per cent, while the telecom/electricity reforms and privatisation programmes promised in the Paris II Accords have not come to pass. The Lebanese banking system is hugely exposed to sovereign risk since it owns almost three quarters of all outstanding government debt. Lebanon’s banks are exceptionally liquid, thanks to hot money inflows and deposits from the Lebanese diaspora in the Gulf and Africa.
Yet the nature of sovereign risk in Lebanon has never been more fluid with Hezbollah, designated a “terrorist” organisation by the US, the political kingmaker in the Cabinet. The Lebanese Canadian bank recently failed after it was accused of money laundering and terrorist financing by the US Treasury. The escalation in US-Iran and Saudi-Iran tensions has ominous potential for Lebanese banking’s Syria risk and local government debt exposure. The storm clouds are darkening in Lebanese finance.