Britain’s vote to exit the European Union is likely to have a positive short-term impact on Lebanon’s economy, while negative repercussions will only affect Lebanese investors in the real estate and stock markets in the U.K., economists said. “Brexit will result in a decline in the euro currency and since our local currency is pegged to the U.S. dollar, our import bill from the EU will go down,” economist Ghazi Wazni said.
Wazni said that around 30 percent of Lebanon’s imports, valued at $6 billion, come from the EU and the decline in the euro will definitely cut the country’s import bill. “A huge percentage of our imports come from the EU while we only export 15 percent of our products to Europe,” he said.
On the other hand, Wazni said, Lebanon’s trade relations with the U.K. are minimal as the country’s imports from Britain stand at $600 million per year only while exports to the country are valued at $40 million.
“Our import bill from the U.K. will definitely go down but we already have minimal trade relations with this country so the decline in the pound won’t make a huge difference,” he said.
Also, Wazni said that the surge in gold prices following Britain’s voting to exit the EU will have a positive impact on the country because Lebanon’s Central Bank has the second most gold reserves in the MENA region. “The value of our gold reserves will go up,” he said.
The Central Bank has around 9 million ounces of gold reserve and its market value is over $12 billion.
But according to Lebanese law, the Central Bank cannot liquidate or sell the gold unless Parliament votes in favor of this step.
Economists stress that gold is used as a last defense line to keep the Lebanese pound stable.
Wazni’s remarks were echoed by Nassib Ghobril, head of the research department at Byblos Bank, who said that the immediate short term impact of Brexit on Lebanon will be seen in the country’s import bill from the EU. “Imports from the EU will be less expensive so we will have more purchasing power,” he said. “Also, the price of our imports from England will drop even if we do not buy many of our products from this country,” he added.
He reiterated Wazni’s remark on the increase in the value of gold reserves at the Central Bank as a result of the hike in the price of gold.
Ghobril added that the drop in oil prices also as a result of the British vote to leave Europe will have a positive impact on the Lebanese economy because trade deficit will go down and balance of payments will improve.
Oil and fuel oil make up Lebanon’s largest imports.
Despite the short-term positive effects that are expected to be seen in Lebanon following England’s exit from the EU, economists who spoke to The Daily Star believe that Brexit will still have negative repercussions, but mainly on Lebanese investors in the U.K. “Lebanese investors in the stock markets in the U.K. will see the value of their investments go down following the vote,” Ghobril said.
His views were repeated by Wazni, who said that the Beirut Stock Exchange is too small and won’t be affected by the movement of the global financial markets, but Lebanese investors in financial markets in the U.K. will definitely be negatively impacted by Brexit.
“Also, Lebanese who own houses in the U.K. will see a drop in the value of their investments,” he said.
For Marwan Barakat, head of research at Bank Audi, Britain’s vote to exit the EU is expected to delay any possible increase in interest rates by the U.S. Federal Reserve which, in turn, will prompt the Lebanese government to refrain from increasing interest rates while cutting down banks’ profitability.
In Barakat’s view, the Lebanese banks may contemplate increasing interest rates to improve profitability if the Fed takes this step.
Barakat said that return on assets in the Lebanese banking sector is less than 1 percent today and return on equity stands at 10 percent, which are historically low figures for banks. “These have been generated by low interest margins,” he said. “We were hoping to witness an increase in interest rates to improve the percentage that we get on our treasury users in order to improve our spreads, which are at very low levels today, but this will not happen anymore,” he added.
However, in Ghobril’s opinion, even if the Federal Reserve decides to increase interest rates it will not have any impact on interest rates in Lebanon for the short and medium terms because the spreads between dollar rates in Lebanon and dollar rates in the U.S. are significant.
“A small interest rate increase of 25 basis points is not going to make a difference,” he said.
Ghobril added that Lebanon needs to reduce its fiscal deficit, which is the weak point in the economic chain. “This way Lebanon does not have to continue in having high interest rates in a bid to attract funds to finance the deficit,” he said. “We can start reducing the deficit gradually which will alleviate the pressure of having to attract funds and deposits to finance the deficit through high interest rates,” he argued.
By Dana Halawi
Copyright © 2019, The Daily Star. All rights reserved.