The sharp escalation of violence in Lebanon in recent weeks has had no impact on the country’s financial stability, its central bank governor has said. In a telephone interview with Emerging Markets, Riad Salameh said that despite a spate of bombings and days of fighting between Lebanese troops and militants in the north, financial markets have remained sanguine.
“Effectively the financial markets have been steady despite the recent deterioration in security that we had,” Salameh said. “I think that the level of confidence is still high in general in the financial situation of the country given the strong balance sheet of the central bank.” Investor confidence has been underpinned by strong donor support for the beleaguered sovereign, he said.
The governor said that there has been no demand for dollar purchases against the Lebanese pound in foreign exchange markets; interbank rates on the currency remain low; banking activity remains normal; and yields on Eurobonds have not changed substantially. Salameh said that the central bank has not taken any special measures in the wake of renewed tension. “The central bank will continue the same policies,” he said.
Spreads on Lebanon’s benchmark 10-year Eurobond climbed around 10 basis points as the violence unfolded, but this is still a rather limited move compared with the widening of around 70 basis points since the Paris donor conference in January 2007 pledged $7.6 billion in financial assistance to Lebanon. Lebanese troops battled Sunni Islamist militants based in a Palestinian refugee camp and dozens were killed in Lebanon's bloodiest internal feuding since a 1975-90 civil war.
Salameh dismissed concerns that the violence could herald a return to the dark days of Lebanon’s previous conflict. “The issues that are leading to such violence are political and therefore it is not a fundamental split in the country,” he said. “The political issues can be resolved politically which is what the government is working on.”
Ben Faulks, sovereign credit analyst at Standard & Poor’s in London, noted that part of the $2.4 billion aid pledged in January at the Paris III summit should be delivered relatively quickly in the form of budgetary assistance. In addition, $1.3 billion will be directed to the private sector, which will not immediately assist the government, although it should ultimately bolster tax revenues.
The remaining funds are contingent upon conditions laid down in Paris, including the restructuring and privatization of Electricite du Liban and the telecoms sector. A tall order at a time when parliament has not met for six months, and the Christian community from whom the next president needs to be elected in September is divided between the Free Patriotic Movement of Michel Aoun and the rival March 14 Forces.
“The continued political impasse is not conducive to bold structural reforms, so it is extremely difficult for the government to make meaningful progress on the pledges made at Paris III,” Faulks told Emerging Markets.
There are other sources of uncertainty over the funding, the first being that it is set to be disbursed over five years – a very long time indeed in Lebanese politics. Moreover, around $2.7 billion of the funds are project finance, but Faulks noted: “As yet it is still not clear whether donors will pigeon-hole these funds for specific projects they want to assist, or if the government will be free to use them on work already underway.”
For more analysis on the Lebanese economy, see "Lebanon Eurobond issue on schedule".