Moody’s Investors Service, the international rating agency, published this week its “Banking System Outlook” report for Lebanon in which it explained the rationale behind its “stable” outlook for the sector over the coming 12 to 18-month period. In detail, the agency attributed said outlook to an expected timid rebound in economic growth, especially after the formation of the new government, which came as a breath of fresh air for depositors and investors alike after months of uncertainties. The sector’s “stable” outlook also mirrors banks’ sustained ability to attract enough deposits to cater for the public and private sectors’ funding needs. Nevertheless, Moody’s emphasized on the crucial need for the government to embark on the reform journey to ensure fiscal sustainability on the long run and help restore confidence in the economy.

With respect to the operating environment of Lebanese banks, and despite being currently characterized by relative stability, the agency commented that it is still subject to various challenges. In fact, Moody’s projected Lebanon’s real GDP growth to accelerate from 1.0% in 2018 to 1.3% in 2019 and 1.5% in 2020, remaining rather slow as the repercussions of the long-awaited reforms and investment projects need more time to be felt. The agency noted that these projects, especially those under the government’s Capital Investment Program (CIP), coupled with the necessary fiscal reforms will unlock the pledged funds of the CEDRE conference held in Paris in April 2018. Nevertheless, any deterioration of the local political and geopolitical environment that leads to a disruption in the much-needed reform schedule will in its turn reduce confidence levels, further disturb economic activity, and add to businesses’ suffering from worsening infrastructure conditions. In parallel, Moody’s expected the large twin-deficit in Lebanon’s external and fiscal balances to still prevail over the outlook period. The report also foresaw a flat credit growth over the covered period (compared to a 3% drop in 2018), which should end with a small increase, and this due to the prevalent high interest rates and modest economic growth. The agency noted, however, that demand for credit should soon witness an uptick in light of BDL’s $1.1 billion stimulus package for 2019. More on this front, Moody’s highlighted that the tourism sector, which constitutes one of the major pillars of the Lebanese economy, has been exhibiting a robust performance whereby the number of tourists arriving to Lebanon soared by 6% in 2018 to about 2 million visitors and hotel occupancy reached a solid 65%. The agency projected tourism activity to further blossom during the upcoming period as Saudi Arabia recently lifted its travel ban on the country. On the other hand, the agency underlined the struggling construction and real estate sectors, which were largely affected by political tensions and BDL’s halting of its subsidized housing loan schemes.

As far as financial risks are concerned, Moody’s stated that banks’ large and ever-increasing exposure (sovereign instruments account for 55% of banks’ assets and are 7x their aggregate Tier 1 capital as at year-end 2018) to the “heavily-indebted” sovereign (debt-to-GDP ratio estimated at 141% as at year-end 2018) is considered a major risk for banks. In this vein, Moody’s projected the country’s fiscal deficit-to-GDP ratio to remain elevated at 9.5% in 2019 and 9% in 2020, compared to 10.5% in 2018. On the deposits front, Moody’s foresaw that Lebanese banks will be able to continue attracting customer deposits (especially from the Lebanese diaspora), which are estimated to grow by $6.5 billion in 2019, compared to a $5.6 billion increase last year, helping as such cover both fiscal and current account deficits and maintain stability in the country’s economy and financial system. Deposits should also be bolstered by the higher interest rates offered by banks in light of the attractive returns they have been earning on their placements with the Central Bank, always according to the agency. The agency further praised the banking sector’s ability to maintain deposit growth even during the toughest of times, with the worst reaction to shocks being limited to a conversion of deposits to the greenback. In the same context, the agency clarified that the associated risks of any future slowdown in deposit inflows are mitigated by the Central Bank’s ample reserves (foreign currency reserves amounted to $32.5 billion by end of 2018), which also anchor the stability of the local currency’s peg against the U.S. Dollar. Solvency-wise, Lebanese banks’ capital buffers were described by Moody’s as “modest” given banks’ significant exposure to government debt and the complex environment in which they operate. However, the fact that banks are already compliant with Basel III capital requirements favors a stable outlook on their regulatory capital ratios over the outlook period. As far as profitability is concerned, Moody’s outlined that Lebanese banks will be under the pressure of various factors like “higher funding costs, limited new business, and higher provisioning charges”. Nonetheless, BDL’s financial operations have been strengthening banks’ revenues, which are projected to accelerate by the end of the outlook horizon if needed reforms and investments were accomplished. The restored stability of the local political environment should also allow banks to lower the interest rates offered on deposits.