BEIRUT: Bank Audi said over the weekend that it was cautiously optimistic about the prospects of modest economic growth in Lebanon, despite the difficult political and security environment and the spillover of the Syrian crisis.
In its second quarterly report about the Lebanese economy, Bank Audi said that past experiences have demonstrated that Lebanon is always able to weather political, security and economic challenges, and even achieve modest growth.
But the report warned that blind optimism or enduring pessimism are unfounded in an economic environment of recurring cyclicality.
“While Lebanon has undergone several episodes of domestic and external shocks, it has always succeeded to rise from its setbacks in the longer run. The long-term track record of the Lebanese economy and the markets reinforce the belief that the economy is governed by cyclicality, with no grounds to lose faith when the environment goes through an adverse trend and no reason to become euphoric when environment forces get relatively better,” it said.
Bank Audi believes that there were elements of strengths that Lebanon should capitalize on.
“At the level of strengths, we mention the elevated per capita income, the highest in the neighboring region, the strong support to the home economy from the Lebanese diaspora, the sustained inflows of capital from a large pool of offshore savings, the robust, strictly regulated banking sector, the long track record of monetary stability, the record high foreign assets of the Central Bank in both absolute and relative terms, the sustained level of price stability with a low one digit inflation rate and the history of debt settlement despite severe economic and political turmoil,” the report said.
Bank Audi did not conceal its alarm over the impact of the political crisis on the country in general.
“At the level of weaknesses, we mention the domestic political uncertainties with a continuously high level of domestic political bickering, the widespread public debt and the large fiscal deficit relative to the size of the domestic economy, the high trade deficit generating sustained deficits in the current account balance, the contracting investment aggregate amid a wait-and-see attitude on behalf of domestic and regional investors postponing major investment decisions and the slow economic growth for the fourth consecutive year,” it added.
Bank Audi argued that Lebanon can still capitalize on certain factors to boost growth and lure back foreign investments to the country.
“At the level of opportunities, we mention the potential pent-up aggregate demand growth within the context of a large cyclical output gap between actual output and potential output, the strong and diversified services sector with significant potential for a regional role, the postwar reconstruction of Syria with significant potential opportunities for Lebanese enterprises in general, and the large oil and gas reserves able to provide a way out for the fiscal conundrum in the long term,” it said.
The bank said there was a slight economic improvement in the first half of the year.
“The Lebanese economy gained relatively some momentum in the first six months of 2014, as witnessed by most real sector indicators, though growth remains well below its potential amid lingering regional uncertainties and their spillover effects on the domestic environment. The IMF [International Monetary Fund] revised slightly upward its real GDP [gross domestic product] growth forecast for 2014 from 1 percent in its World Economic Outlook to 2 percent in its recent Article IV Consultation mission report,” it added.
Bank Audi said that the average Central Bank coincident indicator reached 278.8 over the first five months of 2014, growing by 3.0 percent year-on-year. In parallel, inflation remains on a downward trend, reporting an annual average of 1.2 percent in June 2014, its lowest in more than two decades in Lebanon.
It added that the foreign assets of the Central Bank reached a record high in the first six months of 2014.
“Monetary conditions in Lebanon were marked during the first half of 2014 by a healthy rise in ... [Central Bank] foreign assets within the context of some foreign currency to Lebanese lira conversions and repos on foreign currency CDs [certificate deposits], in addition to a higher yearly growth in ... [Lebanese lira] money supply, and a higher banking appetite for ... [Lebanese lira] Treasury bills as evidenced by lower intervention from the Central Bank of Lebanon on the primary market, notwithstanding an interest rate cut on longer-term categories,” it said.
It noted that the Central Bank’s foreign assets rose by $1.8 billion during the first half of 2014 to reach $37.1 billion by June 2014, covering 21.6 months of imports and 79.0 percent of Lebanese lira money supply, showing the Central Bank’s ability to defend the currency peg and meet market needs for foreign currencies.
Bank Audi also highlighted the modest growth in bank deposits in the first six months of this year.
“The banking sector recorded a modest activity growth over the first half of this year. Measured by total domestic assets of banks operating in the country, sector activity grew by 3.4 percent in the first half of 2014 to reach $170.5 billion at the end of June. Deposits increased by $4.1 billion between December 2013 and June 2014, but the growth fell short of that recorded in the first half of last year [$6.3 billion] and of the average growth over the previous five years’ first half period [$5.4 billion],” Bank Audi explained.