Lebanese economic crisis intensifies

DUBAI — As the Israeli-Hezbollah conflict enters the third week, Lebanese economy is getting weighed down under the enormous economic pressure arising from collateral damages to the country's infrastructure and other indirect economic consequences.

By Babu Das Augustine (Assistant Editor)

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Published: Fri 28 Jul 2006, 12:40 PM

Last updated: Sat 4 Apr 2015, 1:10 PM

The government and the central bank has admitted that the war cost in terms of physical damages to the country now exceeds $2 billion. The economic cost of this conflict in terms of loss of businesses, depreciation in values of physical and financial assets and the lost pace of reconstruction of the economy, will add up to several billion dollars.

Economists and international rating agencies believe that prolonged hostilities could have far reaching negative implications for the economy which has been recovering from the crippling 1975-1990 civil war. "The total financial impact of the current crisis on the country and the banking sector is unknown, but the cost will be exacerbated if the crisis continues or worsens," said Emmanuel Volland, an analyst with Standard and Poor's (S&P).

Lebanon's stock market has closed along with much of the rest of the country's economy as Israel's air and sea blockade continues. The conflict has almost wiped out Lebanon's tourism industry. Tourism accounts for about 15 per cent of the Lebanese economy, and had risen 50 per cent in the first half of 2006. The government had hoped the country would draw in 1.6 million visitors this year, bringing in about $2.5 billion in foreign exchange to the economy.

Lebanon's vibrant banking and financial services industry is now facing reputational risk and risk of downgrades by international rating agencies. Rating agencies are cutting their outlook on Lebanon's long-term sovereign rating along with the ratings of its banks and financial institutions.

Amidst the growing worries over the future of Lebanon's economy, more than Dh10 billon worth UAE investments are facing growing uncertainty. Some of the leading UAE based companies such as Emaar, Dubai Islamic Bank, Al Habtoor Group, Damac, Abu Dhabi Investment House and Al Futtaim Group have substantial investments in Beirut's property sector.

With no signs of end to the hostilities, S&P's Ratings Services yesterday announced its CreditWatch placement of three Lebanese Banks. The 'B-' long-term counterparty credit ratings on Blom Bank, Bank Audi-Audi Saradar Group, and Bankmed, remain on CreditWatch with negative implications.

S&P has affirmed the 'C' short-term counterparty credit ratings on Bank Audi-Audi Saradar Group and Bankmed. The long-term ratings on these banks were placed on CreditWatch with negative implications, following the same rating action on the Republic of Lebanon (B-/Watch Neg/C).

"Standard & Poor's considers that the Lebanese banking sector is currently weathering the storm, thanks to their strong liquidity position, long experience of dealing with crises, and good coordination with the Central Bank of Lebanon and the Banking Control Commission," said Volland.

International rating agencies believe that challenges facing the banking sector are likely to be a depressed operating environment with a low level of confidence, triggering pressure on asset quality, and a very high direct exposure to a very indebted sovereign with even less fiscal room to manoeuvre.

Close on the heels of S&P's announcement Capital Intelligence, an international emerging markets rating agency, has announced that it has revised the outlook on Lebanon's "B-" long-term sovereign credit rating to negative from stable. In line with this move, the outlook on the "B-" long-term foreign currency ratings of six Lebanese banks — Bank Audi-Audi Saradar Group, BBAC, BLOM Bank, Byblos Bank, Credit Libanais, and Fransabank — has also been revised to negative.

Large government and external-financing needs and a public debt stock of $40 billion (175 per cent of GDP), of which over 50 per cent is in foreign currency, leaves Lebanon highly vulnerable to political and economic shocks. The government has a limited funding base and depends on the local banking sector for the bulk of its financing needs. In its assessment of the situation, Capital Intelligence said it expects a crisis of limited duration will not significantly affect short-term repayment capacity, though it may have longer-term implications for economic activity and the public finances.

Moody's Investors Service has placed on review for possible downgrade the financial strength ratings (FSRs) of the three rated Lebanese Banks (BLOM Bank, Bank Audi and Byblos Bank).

The three banks carry 'D' FSRs. The banks' deposit and debt ratings together with their respective stable outlooks remain unaffected by this rating action.

“The conflict has delivered a serious blow to trade, tourism, construction and real estate development that have been the main pillars of economic growth in recent times. Moody's believes that the loan quality of the three banks is particularly at risk, exerting significant negative pressure on the FSRs, although we are currently not in a position to accurately assess the extent of possible impairment.”

Moody's points out that that some of the banks continue to be heavily exposed to a low-rated (B3) sovereign through substantial holdings of government securities and CDs issued by the central bank. “Although since the start of the conflict, the volume of deposit conversions from local currency to foreign currency and the deposit transfers outside Lebanon have not been material, they are placing a certain degree of strain on the banks' liquidity position,” said a recent note from Moody's.

Analysts feel that central bank's recent expensive attempts to hold the pound steady will result in steady resource drain that could ultimately have serious consequences for the sovereign credit quality and affect the credit quality of financial institutions.

Fitch, another leading rating agency, has also downgraded Lebanon's outlook from positive to stable. Dubai based bankers and economists said Lebanese economy is inherently strong and downplayded the new outlook announcements from rating agencies. “A large portion of Lebanon's public debt, estimated at $40 billion, are in Lebanese pounds. Hence the risk of international default in the medium term is negligible,” said a Dubai based economist.

According to a CI report prior to the current crisis, official foreign exchange reserves of Lebanon amounted to about $11 billion while the foreign assets of the commercial banking sector which are mostly held with correspondent banks abroad were close to $15 billion.

These foreign assets cover around 52 per cent of estimated foreign-currency debt falling due over the next 12 months, including principal payments on government Eurobonds, which amount to a manageable $440 million.

The international economic aids particularly the $1.5 billion from Saudi adds to the hope. However, the future of Lebanese economy will depend a great deal on the duration of current hostilities.

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