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Remittances and a Strong Banking System Keep Lebanon Afloat, Even in Tough Times

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By all accounts, the challenges facing Lebanon this year are daunting. The country remains without a head of state for the second year in a row, refugees numbering roughly 30 percent of its population have come over the border from war-torn Syria and the normal drivers of growth such as real estate, construction and tourism are all in a state of suspended animation.

And yet despite all this, the Lebanese banking system, relying on strong of inflows of remittances and a strategy of regional expansion, continues its valiant effort to remain viable with good liquidity and sufficient capital cushions.
 
Just as impressively, the country is investing in the development of its knowledge economy in a program that is already starting to see signs of success.The overall economy is expected to grow this year at a modest 2.5 percent, a far cry from the 9 percent average recorded between 2007 and 2010.

Remittances
The number of Lebanese living outside the country has been estimated at anywhere from 8 million to 12 million people, or two to three times the in-country population. They benefit Lebanon in two ways. First, they have created a powerful commercial network around the world--a network that provides career opportunities for native Lebanese seeking opportunities outside the country. And they channel a huge inflow of hard currency back to Lebanon through remittances. Lebanon ranks first in the Middle East for remittances as a percentage of GDP. Last year, nearly $9 billion--or 18 percent--of the country’s economy found its way back home through remittances.

The positive impact of the remittances can be felt in a variety of ways. For starters, they often take the form of household assistance, which has a direct effect on bolstering the consumption rates within the country.

They also provide a source of hard currency, a necessary component in maintaining stability in Lebanon’s current account balance.

And given the current conditions under which the economy is performing, they play a huge role in supporting the solvency of the country’s banking system, enabling the banks to finance the economy, particularly by financing government-issued debt.

Freddie Baz, Group CFO and Strategy Director of Bank Audi, notes that the volume of the remittance flows makes Lebanon unique among other Middle East nations. “Lebanon only accounts for about 1.5 percent of the region’s GDP, yet our remittances account for about 20 percent of such flows from throughout the region.”

Interestingly enough, the remittances also form a very dependable cash stream for the country, regardless of what strife is going on internally or externally. “Remittances are not a recent development for us. From as far back as the 1950s and throughout the Civil War, they have accounted for a significant and predictable source of funding,” says Baz.

Makram Sader, secretary-general of the Association of Banks in Lebanon, says that remittances to Lebanon primarily depend on an estimated 500,000 Lebanese nationals who have immigrated since 2006.

“The striking point is the remittances-to-GDP ratio [16 percent of the GDP for 2014], which is a very high ratio even when compared to countries such as Mexico [1.9 percent of the GDP] and the Philippines [9.8 percent of the GDP]. Both those countries are known for exporting workforce and for the size of their expatriates’ remittance inflows,” he says.

Sader adds, “This indicates an increase of the Lebanese emigrant workforce compared to the Lebanese resident workforce. There are approximately 400,000 Lebanese workers in the Gulf region, which is a high number, compared to the overall workforce in Lebanon of around 1.5 million workers. In other words, a large proportion of productive Lebanese nationals have migrated in the last decade.”

Bank Regionalization
For the last ten years, Lebanese banks have been successfully expanding outside of their home market as a way to grow their asset base both by serving the overseas Lebanese community as well as providing financial products to local customers within the various markets.

Of all the Lebanese banks, Blom Bank has been the most active in expanding outside of its home market with operations in 13 countries throughout the Middle East and Europe. It has been particularly active in Egypt, Jordan and the rest of the Gulf. The bank estimates the pickup in regional diversification will allow it to grow this year somewhere between 4 and 6 percent, while maintaining liquidity at 66 percent and a loan loss provision of 120 percent.

It’s not surprising that Egypt is one of the favorite destinations for the Lebanese banks. Despite the political volatility, the economic outlook for the country is cautiously optimistic, with the GDP growth rate projected at 3.8 percent this year in the wake of important ongoing reforms and anticipation of parliamentary elections. Adding to Egypt’s appeal is the recent expansion of the Suez Canal, which the country is hoping will account for an additional $8 billion in toll revenues annually.

Therefore, BDL is closely monitoring the performance of banks in countries that are witnessing turmoil and we have asked them to take the necessary measures, capital and provisions wise. We have a complete view of the risks and we can assess which of these can become a systemic risk.

Turkey also is an attractive market. There, Bank Audi has been able to grow its asset base from startup to $10 billion in the past three years.

The Lebanese banks have a built-in advantage in their regionalization efforts. With so much of the Lebanese migrants spread throughout the Middle East and the rest of the world, the banks have a natural clientele from which to build their operations. But importantly, they have not contented themselves with simply serving the expat community. “Our goal is to become a truly regional player, taking advantage of the £70 billion in inter-Arab trade, writing letters of credit and providing financing where it’s appropriate,” says Baz.

Is the Central Bank concerned there might be a diminishment in credit quality given the regional expansion?

Banque du Liban Governor Riad Salameh thinks not. “We are closely monitoring the performance of banks in countries that are witnessing turmoil and we have asked them to take the necessary measures, capital and provisions wise. We have a complete view of the risks and we can assess which of these can become a systemic risk.”

The Knowledge Sector
The Lebanese have long been considered to be among the most entrepreneurial people in the Middle East. It should therefore come as no surprise that despite all the challenges the country is facing, 
it is moving forward boldly in developing its high-tech sector.
Industry estimates suggest Beirut’s tech sector has grown by an average annual rate of 7.9 percent in recent years to reach a market size of $381 million last year.

One key element in the build-up has been the decision by the Central Bank, through Circular 331, to provide cheap funds and partial loan guarantees to banks in order for them to finance tech start-ups.

Nadim Zaazaa, director of the UK Lebanon Tech Hub, believes as much as $500 million in financing has been directed to the sector through Circular 331. “It has created a lot of momentum for us,” he says.

Along with the financing, there is also an effort underway to address the tech infrastructure in the country. Lebanon has notoriously slow internet connections, but the Telecommunications Minister Boutros Harb has unveiled a five-year national telecommunications strategy to provide Lebanon with a fiber optic network and 4G services across the country.

Additionally, the UK-Lebanon Tech Hub — a joint initiative between the UK government and the Lebanese Central Bank — recently identified 45 small and medium Lebanese to undertake a 4-month training program as a way to bring the entrepreneurs up to speed on managing their businesses.

The Future
While Lebanon anxiously awaits the end of the Syrian Civil War, there are other question marks hanging over the country’s future.

It is estimated that Lebanon has claims to perhaps more than 30 trillion cubic feet of natural gas and 660 million barrels of oil in offshore fields. The political inertia within the country along with a territorial dispute with Israel has precluded any meaningful efforts to extract those resources and has been a source of great frustration for the major energy companies who would like to take part in the exploring those fields.
 
At the same time, there is a debate going on within the country over the impact of lifting the sanctions against Iran. On one hand there are those who argue that without sanctions Lebanon would be able to expand its trade and investment opportunities into a new market. It would also allow Iran to use its expertise in the oil and gas sector to help Lebanon take advantage of its own resources.

Those arguments are countered by those who contend that allowing Iran to increase its support of Hezbollah would only serve to divide the country further.

However those debates are settled, the recent and not so recent history of Lebanon suggests the country will remain moving forward despite all its challenges.
By John M. Anderson

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