The Lebanese economic climate is tougher than usual, but adversity in one area is breeding innovation in another, writes Sarah Rundell.


Lebanon’s small and open economy, heavily reliant on imports, is used to being buffeted by instability. It’s given the country a reputation for a gutsy, business-as-usual ethos, irrespective of what is happening in the region. But Lebanon’s ability to cope with instability is being tested by the ongoing civil war in neighbouring Syria and continued fallout from the Arab spring affecting trading partners like Egypt. Sanctions have stopped most banks financing Lebanese trade with Syria, and flows that used to pass overland through Syria, now have to travel by sea or airfreight, hiking costs. Banks which expanded into Syria over the last decade as that economy opened up have also seen the profitability of their subsidiaries tumble. It is a challenging time for Lebanon’s banks.

Turmoil in Syria has hit the affiliates of the county’s seven biggest banks which all reported losses from their Syrian operations last year and have been forced to cut their exposure to the country. The war in Syria has also dented Lebanon’s own economic fortunes hitting trade flows and tourism, triggering a domestic slowdown.

Rating agency Moody’s cut growth to 2.5% for 2013 in contrast to an average annual growth rate of 8.1% between 2007 and 2010. Yet Lebanon’s risk-averse banks sit on high exposures to liquid and safe government debt and the number of banks in the sector ensures ongoing healthy competition to finance trade, a core business. The banking sector, which benefits from steady remittances from Lebanese in the diaspora and central bank support, including a recent injection of US$1.4bn, still has ample dollar liquidity.

Within Lebanon, demand for trade finance and banks’ appetite to lend for everyday imports including energy, food stuffs, electrical goods, machinery parts and cars remains steady and unaffected. Although high-end value goods have been hit, import flows of fuel, grain and building materials from markets in the UAE and Europe are still robust despite conflict in Syria. Overland trade flows through Syria have fallen off but since more of Lebanon’s trade flows via sea and air routes anyway, bankers say the impact of this has been modest.

Lebanese banks have, however, been affected by the drop in demand for trade finance from Syria. The Syrian market is off limits since US sanctions were imposed to put pressure on the Syrian government, forcing most to withdraw from the market. “We’re not supporting the flow of goods into Syria,” says a Beirut-based trade finance expert at one of Lebanon’s biggest banks. “It’s too difficult to tell what is under sanction and what isn’t and we want to avoid the complication altogether.”

That said, anecdotal evidence suggests some banks are still prepared to offer finance to Syria. One local expert observes that banks financing exports to Syria “are prepared to stretch tenors to allow for problems at the border”. Fuel trucks heading to Syria have been held up at the border by protestors because they are destined for the military. Syria is a large producer of oil but has limited refining capacity. It is dependent on imports and private companies in Lebanon to help supply the regime with fuel sourced from European countries, he says.


New prospects

In another trend, Lebanese banks are also providing trade finance to the many Syrian companies which have sprung up outside Syria since the war. These Syrian importers, now based either in Lebanon or the wider Gulf region, are choosing to source trade finance from Lebanese banks which they had relationships with back in Syria, says Jacques Saboungi at BLOM Bank. “Syrian traders and manufacturers outside Syria have recourse to trade finance mainly through Lebanese banks – they understand Syrian transactions better than others.” But banks’ enthusiasm to lend here is similarly tempered by significant international scrutiny. They are under pressure not to do business with Syrian clients subject to sanctions and Lebanese banks won’t want to invite reputational risk.

As a consequence, Lebanese banks are seeking opportunities further afield; financing trade for Lebanese businesses in other parts of the region such as the Middle East and Africa, which provide a growing client base. “The affects of upheaval on our borders has been compensated by business generated by Lebanese in the diaspora – it isn’t as gloomy a picture as it might have been,” says the Beirut-based trade finance expert.

The growth in Lebanese banks financing regional trade flows is also flagged up by the sharp spike in demand for guarantees from the International Finance Corporation (IFC) through its Global Trade Finance Programme (GTFP). “The growth in GTFP guarantees to Lebanese banks in the last two years has been partly down to increased demand in Lebanon, but also banks’ search for business volumes in the wider region,” explains Shehzad Sharjeel, who leads the IFC’s GTFP in the Middle East and North Africa region from his base in Istanbul. “Trade finance is a core expertise for these banks and they have sought to tap into regional flows,” he says, adding that Lebanese banks using GTPF guarantees have supported shipments of goods and services in more than 20 countries outside Lebanon.

Shipment of goods to a new power plant in Iraq is a recent case in point. “Only a few international banks are willing to take this kind of payment risk in Iraq because of the large amounts involved and the long tenors. We’ve observed Lebanese banks facilitating the shipments of goods while we provide the guarantees against their payment obligations.” The IFC now partners with six local Lebanese banks offering AAA guarantees on letters of credit (LCs) issued by these local lenders, enabling international banks to take incremental exposure. It’s helping Lebanese exporters forge new relationships with correspondent banks in new jurisdictions. “In some transactions, just being under the umbrella of the programme has been enough reassurance for correspondent banks,” says one local banker.

However the climate of instability has reinforced Lebanese banks’ risk-averse nature. It means it is difficult for some businesses to access trade finance.

“Unfortunately Lebanese banks do favour relationships so they will always lend to long-term clients with deep pockets over a new client, whatever the merits of the business plan,” says Elias Chedid, managing partner at Chedid Law Offices in Beirut. LCs require at least a 15% cash guarantee but banks now often “ask for more” and credit insurance, covering the risk of non-payment, doesn’t always acquiesce to their demand for security either. Riskier borrowers will need real guarantees like property as security, although banks will extend letters of credit to new clients if they are confirmed by “foreign, creditworthy banks”, he says.


Risk reduction

The tougher climate has spiked demand for credit insurance amongst Lebanese SMEs as a strategy to both facilitate access to bank trade finance or insure their own risk. “Most SME directors are ready to pay premiums of up to 2% if it helps access to bank loans,” says BLOM Bank’s Saboungi. But insurance doesn’t buy access to any market. Lebanon’s credit insurer, the LCI, won’t cover Syria, which used to account for 10% of its portfolio and Egypt is also off-cover. 

The challenge with the Egyptian market, explains Karim Nasrallah, managing director of the LCI, lies with the scarcity of foreign exchange. “Lebanese exporters into Egypt face payment default because of the lack of dollars so we’ve reduced our exposure there,” he says. In March, Egypt’s central bank’s foreign currency reserves tumbled to US$13.5bn, accounting for just two months’ imports. It’s led to a rationing of dollar supplies, making it harder for firms to access dollars through the banking system.

Cyprus, where the eurozone bailout has been conditional on a massive restructuring of the banking system, has also joined the ranks of the LCI’s off-cover list, now too risky for the insurer to venture. “We’ve dramatically reduced our exposure to Lebanese exporters selling to retail businesses in Cyprus,” says Nasrallah. However the LCI still provides cover to Lebanese exporters selling to Cypriot companies that then re-export the goods out of Cyprus. “If the end market isn’t Cyprus we’ll still provide cover.”

Along with insurance, other sources of help are also available. The GTFP’s commitment to Lebanon has steadily grown and in a reflection of the tougher climate, the facility looks more in demand this year than last. From July 2012 to March 2013, the programme provided guarantees of US$330mn, just short of the value of guarantees issued last fiscal year. “It looks likely that we will exceed the volume of guarantees this year. We’ve supplied US$1.2bn of guarantees to Lebanese banks over the last six years but over half of that has been since the conflict in Syria,” says Sharjeel. He puts the growth in calls on GTFP guarantees down to deleveraging by some European banks and higher commodity prices causing the need for support for oil flows into the country. French banks BNP Paribas and Crédit Agricole are a case in point. They have pared down their presence in recent years as country risk weighed on their portfolios.

The IFC is also rolling out new products to help trade flows. In some cases its guarantees can stretch for up to three years so support infrastructure projects via the issuance of bid and performance bonds. In another product offering, it plans to engage with partner banks supporting local Lebanese corporates though its Critical Commodities Finance Programme and Global Warehouse Finance Programme under which it takes direct corporate exposure.

Trade flows between Lebanon and Syria are grinding to a halt because of the ongoing civil war. The war has also hit Lebanon’s economic growth and banks that expanded into Syria have taken a battering. Yet Lebanon’s demand for everyday imports is as strong as ever and banks have reacted to the loss of one market by seeking to build their revenue bases in others. “It is tough right now but the average banker will actually say it’s not too bad,” says the Beirut-based expert.