April 18, 2019

Lebanon deposits interest rates escalates on leadership vacuum

Lebanons banks are paying the highest interest rates on deposits in almost nine years as lenders seek to shore up their capital to cope with political uncertainty and the high borrowing needs of the government.

The weighted average rate on customer deposits in Lebanese pounds climbed to 6.71 per cent at the end of May, the highest since December 2009, according to the most recent central bank data. Average rates on dollar deposits rose to 4.11 per cent, a level not seen since February 2008. Similar interest rates in Jordan were at 4.38 per cent at the end of May.

Non-residents contributed 24 per cent of the overall deposits of Lebanons banks at the end of May, the central bank data show. With at least three times as many Lebanese living abroad than at home, Lebanon has been sustained by remittances, mainly from the Gulf and Africa, which banks use to buy government debt.

Deposit rates will only begin to decline once Prime Minister-designate Saad Hariri forms a new government and starts taking steps to rein in the fiscal deficit, according to Jassem Ajaka, professor of economy at the Lebanese University. The budget shortfall may climb to 10.6 per cent of gross domestic product this year, the most since at least 2015, according to the International Monetary Fund.

His resignation in November rescinded a month later led to an outflow of capital and roiled markets in the Arab worlds most indebted country. Hariri has struggle to pull together a cabinet since the Iran-backed Hezbollah group emerged in a stronger position in Mays parliamentary elections, leaving the fiscal-consolidation plans in flux.

Lebanon will likely see its debt reach 180 per cent of gross domestic product in five years from 150 per cent in 2017, according to the IMF that is on par with Greece, which underwent the worlds biggest debt restructuring.

The rise in rates paid on deposits is due to “the continuing high borrowing needs of the government and the need to stimulate growth,” said Nassib Ghobril, the chief economist at Beirut-based Byblos Bank. “There is lack of credible political will to reduce the fiscal deficit through reforms so far.”

Bank deposits are expected to grow by five per cent this year, Central Bank Governor Riad Salameh, told Lebanons Annahar newspaper 11 July. An offer by Bank Audi to pay 15 per cent interest on deposits converted from US dollars to Lebanese pounds supported the local currency and he encouraged other banks to take steps that will benefit the pound. Reserves, which fell to about $41.5 billion from more than $43 billion at the end of October, stand at about $44 billion, the newspaper reported.

Trade routes to the Gulf have closed and the influx of 1.5 million refugees has strained Lebanons fragile infrastructure.

Original Article

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