The fact that banks are becoming more conservative in their control of assets has become increasingly obvious.
by TK Maloy -Source: Annahar
BEIRUT: While the banking sector is not going on the record about a possible liquidity crisis; the slowing of most loan activities, banks limiting ATM withdrawals to only their cardholders, the beginnings of a capital outflow trend, and a slowing of capital inflows, suggest that banks are holding tightly to the over $172 billion held in deposits.
The fact that banks are becoming more conservative in their management has become increasingly obvious.
At debate, in part, is what does liquidity mean. When bankers or a bank economist note the $170 billion plus held in deposits, it is useful to consider, how much of that considerable sum is actually available, immediately.
The textbook definition of liquidity is that it is a measure of the “ease with which assets can be converted to cash.” Liquid assets ideally can be converted to cash quickly if necessary to meet financial obligations, according to standard usage of the term by the US Federal Reserve.
A variety of sources in response to Anahar’s questions about the state of the financial sector, including any liquidity problems, gave answers ranging from a simple “that is the case” to a more voluble “that’s a lie.”
Based on an unofficial survey, Annahar found foreign bank cards, such as American Wells Fargo, were no longer accepted at Bank Audi, Bank of Beirut, Fransabank, BLC, and Byblos. These cards are not being honored to keep cash within a bank’s own network.
Additionally, while not at the level of a run or panic, various depositors across a number of Lebanese banks are asking to convert their Lira holdings to dollars, or in the case of some very large depositors, asking to transfer their accounts abroad, according to bank managers interviewed.
The concern of individual depositors is becoming tangible, but as of now, there is no suggestion of rapid capital outflows.
The highest, recent, historical figure for capital outflows was 4 percent after the assassination of former PM Rafik Hariri; 5 percent in 2006 during the Israeli war, and an estimated 1.5 percent during the recent Saad Hariri resignation as PM in Riyadh.
A prominent banker, who spoke to Annahar on condition of anonymity, said that exchanges between currencies (LBP-USD) have become more complex than a simple exchange-rate peg.
This can be traced back to recently instated Banque Du Liban conditions on the amount of LBP subject to foreign currency exchange in order to preserve foreign reserve holdings.
Several banking officials have confirmed that their institutions have stopped giving out any kinds of loans, for the time being, again on condition of anonymity.
“We don’t get new clients; don’t give out loans, and incentivize people to decrease their debt,” one banker said.
Another bank economist pointed out that what is being viewed by some as a liquidity problem is simply banks taking a conservative and cautionary stance given the ongoing demands on the sector.
“Of course, there is a cash flow problem in the economy – among wholesalers, retailers, developers, and contractors in the market – companies delaying payments to each other –, which is leading to firms having problems servicing loans.”
The drop in capital inflows is not so much attributable to a lack of confidence in the Lebanese banking sector. Instead, it has been an ongoing problem based on the marked decrease in remittances from the Lebanese Diaspora, some bankers noted.
These workers find themselves receiving lower wages due to economic slowdowns in Gulf countries, in part as a result of the drop in oil prices but also the expense of the Yemen war and other geopolitical tensions.
Capital inflows have also slowed to banks, which require more deposits than ever based on the increase in the government’s financing needs after public-sector wage increases led to a widening of the fiscal deficit from 7.2 percent of GDP in 2017 to 11.5 percent of GDP in 2018.
It has long been noted, such as in last year’s IMF consultation that foreign-deposit inflows have been a key source of financing for the large current account, and budget deficits. But this “deposit growth has eased in recent years,” the IMF noted. Deposit growth was 3.8 percent in 2017—below the average growth in previous years – and currently stands at an estimated at 2 percent to 7.3 billion in 2018.
Georgi Azar and Christina Farhat contributed to this report.