BEIRUT: Lebanon's Central Bank will maintain stable interest rates through its intervention in the bond market, Governor Riad Salameh said Thursday, a week after Standard & Poor’s downgraded three leading Lebanese banks.
“The Central Bank will work on several fronts to overcome this period while maintaining stability in interest rates through continued intervention in bond markets,” Salameh said.
Salameh said the Central Bank had sold in September and October 2013 the equivalent of $2.8 billion from its own portfolio of eurobonds issued by the Lebanese government.
Last week , S&P lowered to ‘B-’ from ‘B’ its long-term counterparty credit ratings on three Lebanese banks – Bank Audi SAL-Audi Saradar Group, BankMed SAL and Blom Bank SAL – following a similar rating action on Lebanon.
Salameh said the decision to downgrade the credit rating of some banks was due to the outlook on sovereign risk.
“The market is well aware of this and that is why the downgrade didn’t have negative repercussions on the financial markets,” Salameh said in reference to the stability in the price of sovereign bonds or interest rates.
Lebanese commercial banks are often keen buyers of Lebanese government debt, which increased from 135 percent to 140 percent of GDP, according to Salameh.
“The sovereign downgrade reflects our assessment that Lebanon’s macroeconomic fundamentals have slowly but steadily declined since the Syrian crisis began in early 2011. After nearly three years of weak growth ... public finances have deteriorated and the debt-to-GDP ratio is again trending upward,” S&P said.
Despite the economic slowdown due to the spillover from the Syrian crisis on the state’s finances, Salameh said bank deposits were expected to grow by 7 percent in 2013 while non-resident deposits may reach $8 billion or 20 percent of GDP, according to World Bank figures.
The governor also said the Central Bank would extend $800 million in loans to commercial banks at a 1 percent interest rate to stimulate the economy and revitalize the real estate and productive sectors.
After nearly 8 percent growth between 2007 and 2010, Lebanon’s GDP growth has decreased since the start of the Syrian uprising in 2011 from 3 percent to 1.7 percent in 2012.
The real estate and the tourism sectors have both suffered the most as a result of political and security instability which have scared off wealthy Gulf investors and Arab tourists who have long accounted for nearly 70 percent of tourism spending.
On top of the steep decline in tourism revenues, Lebanon hosts some an estimated 1.3 million refugees from Syria putting a huge additional burden on its health, education and power budgets.
A World Bank study last month put that extra cost at nearly $900 million a year between 2012 and 2014, and estimated that the Syrian crisis was cutting 2.85 percent a year off Lebanon’s economic growth.
The report estimated that the cost of the health, education and social safety net was between $308 million to $340 million while $1.4 billion to $1.6 billion would be needed for stabilization.