Lebanon’s economic revival to be slow

S&P said it continued to observe structural imbalances in the financial sector stemming mainly from sharp growth in lending

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International rating agency Standard & Poor’s said Lebanon’s path to recovery over the next few years will be slow, but maintained a stable outlook of the country’s banking sector. “[S&P] anticipates that real GDP growth will recover only gradually from an estimated 1.5 percent in 2011 to 5 percent in 2014, after an 8.2 percent average from 2007-2010,” a statement by S&P said.

The rating agency dismissed the possibility of any quick rebound in growth rates, as regional and local instabilities continue to take a toll on the country’s various economic sectors. “We do not expect growth to match pre-2011 rates in the medium term, since they mainly resulted from a convergence of several key factors, including political and macroeconomic stability, and the global low interest rate environment, which drove capital inflows into Lebanon,” the statement added. However, S&P maintained the country’s Banking Industry Country Risk Assessment at relatively stable “group 8.”

BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems at group 1, to the highest risk at group 10. Other countries in BICRA group 8 include Argentina, Kazakhstan, Latvia, Nigeria, Tunisia and Uruguay.

Lebanon’s scores on the two main BICRA components, however, reflect discrepancies between risks on the national economy and banking industry. The report said risks on the Lebanese economy remain very high placing the country in the second most risky group 9. The banking industry in Lebanon scored far better, placed in group 6, which reflects overall stability and less acute risks. The overall position – group 8 – reflects the combination of the scores of the two components. “The growing instability in Syria, and the uncertainty associated with Lebanon’s extended political transition during the first half of 2011 are weighing negatively on investments and main business sectors such as tourism and financial services,” S&P said.

The industry risk score – group 6 – is based on their assessment that the country still faces high risks in its banking institutional framework and competitive dynamics, coupled with “intermediate risk” in funding. S&P said it continued to observe structural imbalances in the financial sector stemming mainly from sharp growth in lending. This is particularly due to the growth in finances made to the construction sector, which has consistently exceeded overall growth in GDP, the report said.

Imbalances in the countries’ financial accounts also put strains on the banking sector, said the report. “Lebanon’s average current account deficit in 2008-2011 – representing an estimated 20.7 percent of GDP – is a weakness, in our view, for the banking system, where financing relies highly on continued investor confidence,” it said.

Despite the lower medium-term GDP growth prospects, the report considered Lebanese banks’ ability to settle problematic loans, and the private sector’s ability to navigate through political crises as highly positive. This was reflected in the better score given to the industry. Citing an example, the report said the average ratio of non-performing loans and coverage by provisions improved to 4.1 percent and 60.5 percent respectively in 2011, from only 19.9 percent and 42.5 percent back in 2002.

S&P classified the Lebanese financial authorities as supportive of the banking sector. It acknowledged the government’s swift and decisive actions to prevent contagion risk or breaches in confidence. “Still, we believe that the government’s limited financial flexibility would constrain its extraordinary support to the banking sector in times of stress,” the report highlighted.

The report noted that the banking sector’s competitive landscape has become nearly overcrowded, but at the same time said it remained largely concentrated around a dozen stable banks.