EM: What are the main challenges you faced in Lebanon in the wake of Rafik Hariri's assassination?
RS: The assassination of PM Hariri led to a sudden collapse in confidence. Nevertheless, we dealt with that challenge - and at a time when there was no government in the country.
On March 14, one-third of the people took to the streets, demanding a sovereign country. The preservation of monetary stability has helped us to meet the hopes of the young who were asking for a better Lebanon.
We set about preparing for elections in the midst of fundamental changes in the political direction of the country, in light of the Syrian pull-out. The international community also focused on Lebanon at the time, either out of political concern or through economic backing. A commission to investigate the assassination was established, and that also helped restore confidence.
The challenges ahead, now that Lebanon has regained total sovereignty, is to maintain that confidence through political consensus, in order to preserve a democratic state, while implementing necessary reforms to provide employment opportunities for the Lebanese.
EM: The key decision you made this year was to support the Lebanese pound in the wake of the assassination, thereby averting a feared financial collapse. How risky was that Eurobond issue and who made the call?
RS: We had targeted certain objectives in order to preserve stability. One of them was to keep the balance sheet of the central bank strong, especially since it was being closely watched by the market. The central bank took over responsibility for the Eurobond issue. The decision came after the assassination, but it was one among many different financial tools we used.
Aside from that, preparation within the bank focused more on the people and systems that we built up in order to handle large moves on the Lebanese markets; but the decision to undertake the bond issue was dictated on the spot by the market movements.
Legally, it was the board of the central bank of Lebanon that approved all these financial moves. We had indications that the markets were very nervous, but at the same time they were still looking at the actions and initiatives of the central bank and reacting to us. So the good indicator [of interest] for us was that, despite the high level of exchange from Lebanese pound to dollar, the bank deposits did not drop by more than 3%. We did not see capital outflows.
We were confident that the bond issue would be a success, but the final size of that transaction – $2 billion – was a surprise even for us. We thought we would have to execute the $2 billion in stages, but effectively we did it in one shot.
The markets were just confident that we knew what we were doing, and therefore they came on board. A large part of the take-up was from the domestic banking sector, but we know that over 40% came from the retail market. Other investors included Lebanese expatriates in the Gulf and also local residents. There was no Chinese interest, I don't think.
EM: What effect has the loss of Hariri had on Lebanon's political and economic landscape? What reforms would you like to see the new government of Fouad Siniora implement?
RS: There has definitely been a loss for the country, especially on the economic and financial level. Hariri had a high profile and influential international contacts. We need to now take advantage of a positive international environment in order to get the proper support for the government's programme of reform.
It requires domestic political consensus. The reforms will require some action in the public sector and also the development of capital markets, as well as legislation to recapitalize the private sector.
The government has only been in place for a few weeks. From our contacts [with them], they have the will to do it, and we have to give them some time in order to see achievements. But the markets are positive.
Again, the markets are selling dollars and buying [Lebanese] pounds. There is strong demand for the Lebanese 3-year Treasury bills. They have the same yield as they had before the assassination. The balance of payments is improving again, deposits are up and we can see a sudden improvement in the tourist sector since the summer. Stocks of publicly traded companies are also up in value. The market is positive for the future.
The potential for economic growth is there, provided that there are no political obstacles. Despite all the events of this year, we are predicting growth of 1–2%, which is a good performance given the political events.
EM: How sustainable is Lebanon's huge public sector debt?
RS: We have reorganized the country's debt. The total debt is now $36 billion. Only $23 billion is in the market; the remaining $13 billion is held by outsiders like the central bank and also the countries that participated in the loans of Paris II, and by some other public entities.
So the issue for us is to curb the deficit, so we don't see the debt rise again. This is the first step that has already been organized. We are also reducing inflation. I believe that if we balance the budget, we will be able to live with this debt and reduce it progressively through privatization, securitization and also expected economic growth.
Lebanon cannot be compared to Argentina because we have always been keen not to allow non-resident ownership of Lebanese debt to exceed 14% of the total debt. So we are less vulnerable to these one-way moves of capital through international investors.
EM: What has been the impact of the end of Syria's occupation, and what residual economic influence does the Baath regime still wield?
RS: Syria and Lebanon, being neighbours, have common economic interests. We have huge movements of people between the countries. Lebanon has important interests in Syria – in services in particular. There are five or six licensed [Lebanese] banks operating there. So of course the future will mean the creation of beneficial synergies for both sides. And we think that this is the next stage. Of course, before that there are still some political issues to handle, but both countries are compelled to cooperate in the economic field.
There are many areas where both governments will have to cooperate, and energy is one of the main ones. The Lebanese government is in negotiations with the Syrians regarding energy issues. The shift from oil to gas, for example, depends upon agreements with the Syrian authorities. Once the political background is cleared, there will be a more rational approach to economic questions.
EM: What has been the impact of the high oil price on the Lebanese economy?
RS: It helps but it is also a cost. We do have transfers from the Arab world, but Lebanon now has a bigger bill for energy and that affects us. We have profited on the other side from the decline of the US dollar against other currencies. Since our economy is dollarized, we have been able to be more competitive in the region.
EM: Do you have any thoughts now of retirement? What do you hope to achieve in the coming years?
I started my third term in August. I think it is my final term! I hope that we will be able to underpin stability, keep prices under control, but also develop the banking sector to meet the culture of this country. We also hope to promote Islamic banking.