Lebanon's economy rated as "high risk"
Standard & Poor’s Ratings Services ranked Lebanon in the high-risk group eight in its latest Banking Industry Country Risk Assessment.
In a report published Thursday that maintained Lebanon’s banking sector rating as BB negative, the agency said Lebanon scored respectively 9 – extremely high risk – and 6 – high risk – on the two main BICRA components, economic and industry risk.
The economic risk component addresses economic resilience, imbalances and credit risk while the industry risk component looks at the institutional framework, competitive dynamics and system-wide funding.
Among the reasons behind the high-risk profile ranking, S&P cited slowing economic growth, which will continue to hinge on the regional situation.
“The civil war in Syria is weighing negatively on investments and the main confidence-sensitive business sectors, such as tourism and financial services,” the report said.
Real GDP growth was projected by the agency to remain low at 1.5-2 percent in 2012 and 2013 with potential imbalances from Lebanon’s fast-paced loan growth.
In addition to the recent upsurge in lending to the cyclical construction and mortgage segments, the agency said it views “negatively Lebanese banks’ high foreign currency lending (73.2 percent of total lending on Oct. 31, 2012).”
However, S&P added that banks are positively settling problem loans.
While it expects further deterioration in loan quality in the coming quarters, the report added that banks remain in a position to absorb such deterioration as they continue to bolster collective provisioning that started in 2011 in anticipation of a potential increase in nonperforming loans, especially in Syria and Egypt.
“Lebanon’s record of regulation and supervision is adequate, in our opinion. This is vital to protect banks’ ability to capture steady flows of deposits and keep the government’s financing engines running,” it said.
The report added that the private sector’s ability to navigate through crises is another positive factor contributing to resiliency.
Sovereign exposure, nevertheless, remain the major risk factor for the banking system.
Excess funds, mainly customer deposits which remain 2.7 times larger than loans, are largely channeled toward Lebanese government debt that dominates both the domestic capital market and banks’ balance sheets.
“We consider that the combined reversal in the domestic economy and regional unrest may push up cost of risk substantially in the next few years and momentarily stall banks’ asset diversification away from sovereign exposure,” the report adds.
The current account deficit, which has soared in 2012, is also seen as a significant risk for the banking industry.
“Lebanon’s average current account deficit for the 2008-2011 period – representing 16.6 percent of GDP – is a weakness, in our view, for the banking system, which absorbs most of the government debt,” the report said.