The politics of Lebanon have never been simple, but since the start of the Syrian conflict, the country has faced ever-increasing insecurity. Sofia Lotto Persio reports on the banking sector, the only pillar holding up the country.


Very little has changed in Lebanon in the two years since GTR’s last country report, in 2014. And what has changed, has become worse. A 2015 World Bank report measuring the impact of the Syrian conflict on the country estimates a fall of 2.9% of real GDP each year from 2012 to 2014, leading to a cumulative loss in wages, profits, taxes, private consumption and investment of up to US$7.5bn.

The conflict has shut down the only land border Lebanon used for exports. Land crossings, which used to facilitate a quarter of the country’s exports, are now close to nil because of the insecurity of shipping routes through Syria. In fact, between 2010 and 2015, Lebanese exports fell overall by 31%, moving from US$4.2bn to US$2.9bn.

The fall in oil prices should have brought benefits to Lebanon as an importer, but the positive impact has been offset by increased expenditure (of over US$1.1bn), due to the surge in demand for public services brought about by the refugee influx from Syria. The United Nations estimates that more than 1 million people have fled to Lebanon and, according to the World Bank, this influx contributed to raising the unemployment rate to above 20% and decreasing government revenue collection by US$1.5bn.

The banking sector in Lebanon has a crucial role to play in determining the country’s resilience to these challenges. “The pillar holding up the Lebanese state, weak as it is and poor in its performance as it is, remains the banking sector,” says Firas Abi Ali, IHS senior principal analyst, Mena country risk. Banks fund most of the Lebanese state debt, and as such they are deeply intertwined with the functioning of the state. “One cannot survive without the other and both have an interest in the other’s wellbeing,” he adds.


A weak state

The country has been without a president for the past 21 months, a role which, according to the Lebanese 1943 National Pact, has to be filled by a Maronite Christian. While the president’s function is mostly representative, the prolonged delay in finding a suitable candidate is symbolic of the fragility of the political situation in a country with a history of sectarian violence.

Political differences have delayed other decisions, too. The various political parties only recently agreed on an emergency plan to handle a garbage crisis that has been ongoing since July, when the Naameh landfill (which itself had been set up in the 1990s as a temporary measure), south of Beirut, was closed down without alternative landfills available. In February, the government agreed to allocate US$50mn for the export of the garbage to Russia, but that plan had to be abandoned when the British firm awarded the contract failed to meet the deadline to provide documentation proving Russia had agreed to the accept the waste. At least, according to what the Lebanon Council for Reconstruction and Development (CDR) told Reuters, the country could now claim a US$2.5mn guarantee from the British firm.

Recently-discovered oil and gas reserves represent a potential opportunity for investment in Lebanon, but developments are moving slowly on that front, too. “The plans to extract oil and gas have not been affected by the decreasing prices since the country is still in the exploration phase,” explains Ziad Ghosn, head of financial institutions and trade finance at BankMed. “The effective extraction will take some time to kick-start. In this respect, the Lebanese government is expected to issue two decrees to allow the launching of a new licensing round and to begin the exploration of offshore fields,” he adds.

However, the first bidding round for offshore oil and gas exploration has been delayed due to political differences and a new date has yet to be set. “The political environment in Lebanon makes it very hard to see how this would take off. You would need to see some sort of fundamental change in government before that sector is tapped and I don’t think we are close to that yet, I would expect many more delays in that sector,” says Abi Ali.


The Saudi menace

As if these problems weren’t enough, Lebanon is now facing increasing external pressures. As progress on the Syrian front stalls, the big regional powers are dragging their fight for influence over to new battlegrounds. Lebanon’s precarious political situation makes it a fertile ground for the Sunni/Shia tensions plaguing the region

In February, Saudi Arabia decided to suspend its US$4bn of funding to the Lebanese army and security forces. It also issued a travel ban on the country, closed the two Beirut branches of its National Commercial Bank (“due to their low financial returns”, according to an official statement) and listed Lebanon’s most powerful political, social and armed group, Hezbollah, as a terrorist organisation, sanctioning four companies and three individuals for having ties with the group.

This escalation has a lot more to do with Iran than with Lebanon itself. The Saudis are frustrated by Iran’s support for Assad in Syria and for the Houthi rebels in Yemen. Iran’s close ties with Hezbollah make the Shia party an ideal target for the Saudi proxy war. “As the Saudi and Turkish agenda fails to achieve its objectives in Syria, they will probably be looking for other arenas where they can pressure the Iranians and the Russians, in the hope of bringing about a settlement that is slightly more in their favour, and Lebanon is a key candidate for that,” Abi Ali tells GTR.

According to him, the Saudis are not going to abandon their interests in Lebanon wholesale, but they will be looking to support players that can better represent them.

Despite this show of political arm-wrestling, the repercussions for the banking sector will be limited. According to a note by Capital Economics Middle East economist Jason Tuvey, these measures will have a larger impact politically than economically. Abdul-Salam E Chebaro, head of group trade finance at Banque Audi, agrees with this analysis. “The adverse developments of the past couple of weeks will undeniably have adverse spill-over effects on the Lebanese economy, with further weaknesses in the real sector economy, yet with no tangible impact on the resilience of the monetary and the banking sector,” he says.

Chebaro explains further: “The financial sector, in its double components of monetary sector and banking sector, is not under pressure. Fundamental buffers persist and are related to the strong reserve adequacy, the high remittances, the sustained deposit growth, the adequate bank liquidity, the financial soundness of Lebanese banks and potential exits for fiscal conditions.”

Under the present circumstances, the banking sector can endure the pressure. “You are not going to see a collapse of the banking sector in the coming year,” says Abi Ali. Saudi Arabia and the other Gulf Co-operation Council (GCC) members, particularly the UAE, Lebanon’s second export destination, would have to impose much harsher conditions before the Lebanese economy would seriously be impacted.


Keep your friends close and your enemies closer

GCC countries have a number of aces up their sleeves if they wanted to tighten the grip on Lebanon. For instance, they could close their borders to Lebanese goods (more than 25% of exports are destined for the GCC, equal to 1.5% of GDP) or deport Lebanese nationals working in the Gulf – about 500,000 people, of which 300,000 are in Saudi Arabia.

“The remittances that come out from the Gulf to Lebanon are worth around 15% of Lebanon’s GDP, so a serious attempt to cut these remittances and reduce their volume would have a significant impact on the Lebanese economy,” says Abi Ali. However, despite the political spat with the Saudi, it is unlikely tensions would escalate to such point. “The Gulf States retain the capabilities to do more damage to the sector but they have refrained from doing so, so far,” he adds.

The historical ties between the GCC and Lebanon seem to act as a deterrent to an escalation of the political tension to the point where it could have a bigger economic impact. Ghosn underlines the strength of the ties between the UAE and Lebanon. “The UAE became an important financial partner to Lebanon based on the deep-rooted history of relationships between the Lebanese banks and their counterparts in the UAE, as well as with the global banks present in the Emirates,” he says, expressing confidence that “the current situation will not escalate further and that a proper resolution will be done by the higher authorities of Lebanon and the GCC”.

“[Trade between GCC countries and Lebanon] is based on long-term relationships between Lebanese businessmen that are close to GCC countries, and most of them are politically affiliated to GCC countries, so the current political conflict is not likely to reflect on those exports,” adds Chebaro.

According to him, the good relations between Lebanese banks and their GCC customers also make it unlikely that GCC nationals would withdraw their deposits from the Lebanese banking system, as some analysts fear. “There are incentives for those to hold accounts in Lebanon, such as the strictly regulated environment, the conservative practices of Lebanese banks, the banking secrecy and the higher interest rates,” he explains.


Two perspectives on Iran

Besides influencing the political situation, Iran has the potential to have a great impact on Lebanon’s economy, too. According to Abdul-Salam E Chebaro, head of group trade finance at Banque Audi, the gradual lifting of sanctions on Iran is likely to benefit the country tremendously, as well as the region in general, on several fronts, namely banking, investment and trade.

He sees Iran as an attractive destination for Lebanese banks, with the consequent facilitation of trade financing activity between the two countries, as import/export ties are likely to strengthen and warrant higher trade volumes. “Lebanon could benefit from oil imports at a relatively lower cost, can invest in productive Iranian sectors and offer its know-how, especially in the services sector,” he says. “Lebanon is looking forward to taking advantage of special privileges in duty-free zones in Iran, and increasing agriculture exports. As such, economic co-operation between the two countries is likely to expand, lead to mutual economic benefits and create job opportunities for future generations.”

BankMed’s head of financial institutions and trade finance Ziad Ghosn takes a more sceptical attitude towards the short-term impact of the sanctions: “Given the overall hesitation from the international correspondents in general, and as long as the US correspondents are not and cannot introduce any change to their policy towards Iran, the lifting of sanctions will not have an impact on the Lebanese banking sector in the foreseeable future.”