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Bank Audi: 2011 outlook depends on key political issues

BEIRUT: Bank Audi said Lebanon’s economic outlook in 2011 hinges on the outcome of key sensitive issues such as the international tribunal, Cabinet formation and policy statement.

These remarks came in the fourth quarter economic report on Lebanon.

“The outlook for the year ahead actually depends on the outcome of forthcoming political milestones [Cabinet formation, policy statement, Special Tribunal for Lebanon indictment and prospects of the domestic political bickering] with what this would entail in terms of spillover effects on private sector confidence at large over the foreseeable future in a country where the private sector remains the main generator of economic value added,” the bank said in the report.

“We cannot but keep our fingers crossed so that the Lebanese would put their country’s national interests at the forefront of regional, sectarian or personal interests, making all necessary mutual compromises that would ensure a minimum deal of domestic political stability supporting the resumption of economic confidence at large,” the bank said.

This reflects the cautious mood of many bankers, investors and companies who are watching the heated debate over the international tribunal into the assassination of former Prime Minister Rafik Hariri with alarm.

“By the time of the finalization of this report, Lebanon had witnessed significant political developments, starting with the resignation of the Lebanese government at the launch of new parliamentary consultations, to the appointment of Prime Minister Mikati at the head of a new government,” the report said.

It added that such political developments caught the Lebanese markets by surprise but all markets were able to contain the recent local political developments without recording noticeable pressures. But the report gave an upbeat picture of the Lebanese economy and financial market which has so far managed to weather the crises.

“The foreign exchange market was able to smoothly absorb the local political stalemate, thanks to the solid confidence in the Central Bank’s strong ability to defend the currency peg given its long track record of successful monetary management and the currently historic high level of reserves,” the report said.

It added that there was a net demand for foreign currencies when the political crisis started, yet in moderate volumes, prompting the Central Bank to intervene as a net seller of the green currency before the market returned to balance by the end of January.

“In view of those relatively moderate net conversions in favor of foreign currencies, the overnight rate remained relatively stable at 2.75 percent-3.00 percent on the money market. Likewise, no considerable interest rate increases were reported on the secondary market for Lebanese pound Treasury bills. More importantly, no considerable capital outflows were reported in the midst of Lebanon’s political stalemate,” the report added.

As to the equity market, the Beirut Stock Exchange price index regained relative stability after some volatility, as the rise in prices in the aftermath of parliamentary consultations compensated for the fall in prices witnessed during the week of strong political bickering. By end-January 2011, the BSE stock market index had regained its level of end-2010.

On the bond market, there were some offers, mainly from foreign institutional investors though coupled with some demand from local investors, expanding slightly bond spreads at times. The five-year CDS spreads widened by 80 basis points to reach 380 basis points by the time of the closing of this report.

“While Lebanon’s financial system has a long track record of successfully coping with the political and security shocks, it is actually important to note that the recent adverse political developments happened in a period when  economic conditions and market buffers were at their best level in Lebanon’s recent contemporary economic history: high growth, reduction of fiscal imbalances, strong foreign asset position, good levels of inflows and healthy deposit growth of banks unscathed by the repercussions of the global final crisis,” the report said.

It reiterated that the most important market buffer is the large foreign assets of the Central Bank that today exceed $30 billion (excluding gold reserves of $13 billion), thus covering 78 percent of the Lebanese Pound Money Supply and representing an important weapon for maintaining currency stability within a tightly managed exchange rate system.

The second significant defense line is the strong primary liquidity of banks which cover around 48 percent of the banks’ deposit base, bearing witness to a strong financial standing of Lebanese banks which puts them in a position to face any new pressures. It is important to keep in mind that Lebanon’s investor and depositor base is largely made up of Lebanese nationals who are familiar with local risk. This rules out quick and massive exits during turmoil.

 

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