Lebanon economic report pot

1 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 TABLE OF CONTENTS CONTACTS Research Marwan S. Barakat (961-1) 977409 marwan.barakat@banqueaudi.com Jamil H. Naayem (961-1) 977406 jamil.naayem@banqueaudi.com Salma Saad Baba (961-1) 977346 salma.baba@banqueaudi.com Fadi A. Kanso (961-1) 977470 fadi.kanso@banqueaudi.com Nathalie F. Ghorayeb (961-1) 964047 nathalie.ghorayeb@banqueaudi.com Sarah F. Borgi (961-1) 964763 sarah.borgi@banqueaudi.com Marc P. Harb (961-1) 959747 marc.harb@banqueaudi.com Executive Summary 1 Introduction 2 Economic Conditions 3 Real Sector 3 External Sector 6 Public Sector 7 Financial Sector 8 Concluding Remarks 12 LEBANON ECONOMIC REPORT PRIORITIZING STABILITY OVER GROWTH • Economy impacted by regional spillover effects on investment, trade and tourism Economic performance was sluggish on the overall, but the performance of some defensive sectors helped avoid recessionary conditions, the IMF having estimated growth at 2% for full-year 2012. While the wait-and-see attitude governing investors amidst uncertainties continues to delay major investment decisions, consumption managed to report a “relative” resilience, partly supported by the favourable incoming of Lebanese expatriates and the spending of Syrian refugees. • An overall flight from quality phenomenon was witnessed within the economy The imports of luxury products reported a drop of 23% in 2012, while those of mass consumption products rose by close to double-digit rate. The flight from quality is actually witnessed internally at various levels, with the sales of new cars reporting a positive growth for low cost brands and a net contraction for luxury brands, the sales of property transactions showing a negative growth for high end apartments in Beirut along with a positive growth in low to middle cost housing, and the 5-star hotels reporting net contraction in occupancy while furnished apartments reporting close to full occupancy levels. • Worrisome public finances strained by sluggish growth and higher spending According to the latest available statistics released by the Ministry of Finance, Lebanon’s fiscal deficit rose by 47.6% year-on-year to US$ 2,059 million in the first nine months of 2012, breaking two consecutive years of improvement to hit the highest shortfall since the same period of 2009. In parallel, public debt, at US$ 57.7 billion at end-2012, managed to sustain its declining streak when measured against GDP. Still, at its current 135% level, Lebanon’s debt ratio remains one of the highest within the emerging world, at a time when debt and fiscal issues have been at the forefront of the radar screen of investors around the world. • Growing trade deficit generating balance of payments deficit On the back of a 5.1% export growth and a 5.6% import growth, Lebanon’s trade deficit widened by 5.7% to reach US$ 16.8 billion in 2012, after having increased by 15.9% in 2011. With regards to financial inflows, they reached US$ 15.3 billion in 2012, rising from the low base seen in 2011, year during which external accounts were hit by quite weak net inflows in the first month of the year subsequent to the previous government’s collapse. As such, the totality of financial inflows remained insufficient to fully counterbalance Lebanon’s rising trade deficit, the balance of payments recording a net deficit of US$ 1,537 million in 2012, following another deficit of US$ 1,996 million a year earlier. • Healthy expansion in LP money supply and BDL’s foreign assets The foreign exchange market saw net conversions in favor of the Lebanese Pound over the year 2012 despite local uncertainties and lingering concerns about the repercussions of the security developments in Syria on the local front. This enabled BDL to reinforce its foreign assets to reach US$ 35.7 billion at end-December 2012, up by US$ 3.5 billion since year-end 2011, its highest growth in three years. Accordingly, BDL’s foreign assets covered 83.7% of LP money supply and 20.3 months of imports at end-December 2012, which spots the light on the Central Bank’s strong ability to defend the currency peg and meet demand for foreign currencies should any pressures arise. • Satisfactory banking activity growth in a year of challenging operating conditions The Lebanese banking sector witnessed in 2012 a year of satisfactory activity growth in a challenging operating environment characterized by persistently narrow banking margins in a prolonged low interest rate environment globally, growing provisioning requirements amidst regional uncertainties, and a weaker fee income generation capacity in a slow economic growth context. Banks’ activity managed to pull out an 8.0% year-on-year growth throughout 2012, with total assets reaching US$ 151.9 billion at end-December 2012. But the sector reported a 0.6% contraction in domestic net profits in 2012, depicting further pressures on banks’ bottom lines. Bank Audi sal - Audi Saradar Group - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: research@banqueaudi.com The content of this publication is provided as general information only and should not be taken as an advice to invest or engage in any form of financial or commercial activity. Any action that you may take as a result of information in this publication remains your sole responsibility. None of the materials herein constitute offers or solicitations to purchase or sell securities, your investment decisions should not be made based upon the information herein. Although Bank Audi Sal Audi Saradar Group considers the content of this publication reliable, it shall have no liability for its content and makes no warranty, representation or guarantee as to its accuracy or completeness. 2 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 The past year was characterized by the further deterioration in the Syrian situation with spillover eects on the Lebanese economy, namely in the realms of investment, trade and tourism. Economic performance was sluggish on the overall, but the performance of some defensive sectors helped avoid recessionary conditions, the IMF having estimated growth at 2% for full-year 2012. While the wait-and-see attitude governing investors amidst uncertainties continues to delay major investment decisions, consumption managed to report a “relative” resilience, partly supported by the favourable incoming of Lebanese expatriates and the spending of Syrian refugees. While household consumption managed to report a healthy growth, an overall ight from quality phenomenon was witnessed within the economy, with the imports of luxury products reporting a drop of 23%, while those of mass consumption products rose by close to double-digit rate. The ight from quality is actually witnessed internally at various levels, with the sales of new cars reporting a positive growth for low cost brands and a net contraction for luxury brands, the sales of property transactions showing a negative growth for high end apartments in Beirut along with a positive growth in low to middle cost housing, and the 5-star hotels reporting net contraction in occupancy while furnished apartments reported close to full occupancy levels. Lebanon’s sluggish aggregate demand actually led to a growth in imports of 5.6% driven both by price eects and quantity eects. In parallel, exports rose by 5.1% over the year 2012, driven by maritime exports as land exports continued to contract amidst the security escalation in Syria. As such, a growth of 5.7% in Lebanon’s trade decit in 2012 added to the 15.9% rise reported in the previous year. With the totality of inows unable to fully oset the country’s trade decit, further pressures were reported on the balance of payments that recorded a decit of US$ 1.5 billion in 2012, after a circa US$ 2 billion decit in full-year 2011. At the monetary level, a relaxed mood governed the foreign exchange market throughout the past year. The year’s net activity was more to the favour of the Lebanese Pound in 2012, as there were more conversions from foreign currencies to Lebanese Pounds than the opposite since the beginning of the year, with the Central Bank’s foreign assets reaching a high of US$ 35.7 billion at its end. The signicant growth in banks LP deposits close to that of FX deposits led to a net contraction of deposits dollarization by 1.1% over the year, moving from 65.9% at end-December 2011 to 64.8% at end-December 2012. At the public nance level, a considerable deterioration in the government decit was reported in the past year. With the 10.8% growth in public expenditures outpacing the 3.4% rise in public revenues that were adversely impacted by the economic slowdown, a 47.6% rise in the government public nance decit was reported over the rst 9 months of 2012 to reach US$ 2.1 billion. Still, as debt service remains higher than the overall decit, a primary surplus persisted, amounting to US$ 0.6 billion, the equivalent of 2% of GDP in annual terms. The government decit was nanced by additional indebtedness which reached US$ 57.7 billion at end-December, of which 58% in Lebanese Pounds and 42% in foreign currencies. At the banking sector level, activity growth was moderate on the overall, yet coupled with continued pressures on banks bottom lines. The growth in customer deposits of US$ 9.3 billion over the year 2012 was quite close to the one reported over the previous year. The growth in lending by US$ 4.1 billion over the 12 months of 2012 was yet 8% less than that of the previous year. Banks operating conditions continue to be tough amidst an atypical domestic and external operating environment characterized by pressures on spreads and margins, slow fee income growth generation and growing provision requirements as a precautionary measure facing regional developments’ spillovers. Amidst such an environment, the sector reported a 0.6% contraction in domestic net prots in 2012, depicting further pressures on banks’ bottom lines. At the capital markets’ level, prices reported a relative standstill while trading volumes continued to contract. The Stock Market price index slightly decreased by 1.6% in 2012, following a reduction of 19.8% in 2011. Subsequently, valuation ratios went even lower, with a Price to Earnings ratio of 7.0x and a Price to Book value ratio of 1.10x. The market increasingly suers from weak liquidity and bad eciency, with the trading volume declining by 20% to reach a new low of 4.1% of market capitalization in 2012. In parallel, the xed income market reported some uctuation in bond prices throughout 2012, with the 5-year CDS spreads managing to contract by 17 basis points during the year to reach 455 basis points by end-December. 3 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 INDUSTRIAL EXPORTS AGRICULTURAL EXPORTS 1. ECONOMIC CONDITIONS 1.1. REAL SECTOR 1.1.1. Agriculture and Industry Atypical environment with an improving external driver The agricultural sector managed to report an improvement in its external component while the internal one was subjected to a practical stagnation within the context of a comparatively contained local demand in 2012. On the one hand, outgoing agricultural products were on an upward path last year, a fact partially linked to higher demand stemming from Syria on account of a shortage of goods in the conict stricken country. On the other hand, inward agricultural products were hindered by limited demand patterns resulting from the relatively adverse impact of politico-security conditions. In details, agricultural exports amounted to US$ 222.0 million in 2012, rising by 10.4% from 2011, year during which they had increased by 3.6%. Indeed, their progress remains more or less tied to the higher demand from neighboring Syria which received alone circa 20% of overall agricultural exports, up by 13.1% in absolute terms, subsequent to a decline of 6.3% recorded in 2011. With regards to GCC countries, they also exhibited additional demand for Lebanon’s agricultural products by importing 9.5% more in 2012, following another rise of 8.5% in 2011. Exports of agricultural products to the Gulf, accounting for nearly 38% of total agricultural exports, were mostly enhanced by the fact that these countries were seeking to counter the shortfall of such goods usually imported from Syria. On the internal front, the sector was at the image of the macroeconomic dynamics that prevailed throughout 2012. As a matter of fact, a weaker local demand has curtailed imports of agricultural products which reported a slight decline of 0.2% following a 10.6% increase in 2011, year during which consumption was more resilient despite the declining tourism activity. In parallel, the number of Kafalat guarantees, a facility that usually compensates for the lack of bank loans to the sector (circa 1% of total loans), reported a decline of 23.8% in 2012 along with a hesitancy to initiate new projects related to agriculture. With regards to the industrial sector, it followed almost the same path as that of the agricultural sector. As a matter of fact, its external activity was boosted by higher demand from the Syrian side while its internal one was subjected to the contained economic growth. At the level of exports, those of industrial products were up by 4.8% in 2012 following a practical stagnation in 2011. Indeed, apart from agricultural produce, Syria imported machinery, electricity generators, chocolate, sugar, tissues and towels. Internally, the performance of the industrial sector was no dierent than the general trend of the economy. Accordingly, investors were more or less dissuaded from initiating new projects in the jittery environment seen throughout 2012. Consequently, imports of industrial machinery declined by 9.5% year-on-year during the rst ten months of 2012 and the volume of Kafalat guarantees extended to the industrial sector was down by 19.3% in 2012. In sum, activity within the primary and secondary sectors showed an improving performance on the external front while the domestic drivers remained aected by a combination of adverse factors that prevailed throughout 2012. Yet, such external trends raise the question of the level of competitiveness of the agricultural and industrial sectors as Lebanon’s observed exports growth was driven by the current atypical regional circumstances and not by a wider access of Lebanese produce to international markets. 4 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 EVOLUTION OF CONSTRUCTION INDICATORS CONSTRUCTION 1.1.2. Construction A protracted attening phase The performance of the construction sector during 2012 was no dierent than that seen in 2011. As a matter of fact, all indicators pointed to an ongoing sluggish activity, on both the demand and the supply sides of the market, within the context of weakened economic conditions resulting from the adverse developments in the local as well as the regional arena. In details, the year 2012 registered a decline of 10.1% in the number of property sales transactions from an already low base seen in 2011. Statistics from the General Directorate of Land Registry and Cadastre show that those sales were evenly distributed between built and non-built areas. In parallel, the gures on the value of transactions pointed to a minor upward correction in the value of transactions as it edged up by 3.8% to attain US$ 9.2 billion in 2012. The improvement remains also negligible as it stems from a low base, and stays below the 2010 level. A breakdown of transactions by region shows that the aforesaid trajectory was tied to an increase in the value of transactions within regions characterized by their relatively lower price status, namely Nabatieh, Bekaa and the South. As to the rest, they reported a practical stagnation or a decline in the value of transactions and came as follows: Beirut (-1.1%), Kesserwan (-0.1%) and Metn and Baabda (+0.5% each). This reects an ongoing trend among buyers favoring farther regions where prices are more consistent with their purchasing power on the overall. The retreat in demand has led to a downward adjustment on the supply side of the market. Indeed, the at performance of the market has hindered the appetite of developers who are now taking more time to launch new projects. Figures released by the Order of Engineers of Beirut and Tripoli show that the area of newly issued construction permits, an indicator of forthcoming projects, registered a slowdown of 11.7% in 2012 compared to the gures of 2011 with most regions posting year-on-year declines. Likewise, cement deliveries, an indicator of ongoing projects, showed a decline of 3.2% in the rst 11 months of 2012. It is important to highlight that due to the role it has in providing holiday homes to tourists and Lebanese Diaspora, construction has been aected by the sluggishness of the tourism sector, the latter being deterred by the arising regional tensions. Construction costs, on the other hand, registered a moderate growth of 4.9%. Whereas material costs have been stagnating, reecting the slowdown in demand, labor costs registered a double-digit growth of circa 29%. Property prices on the other hand did not follow the general downward trend of the market. In fact, they have remained somehow at on account of their sticky nature based on structural factors: the real and non-speculative nature of demand, the low institutional and household leverage and the scarcity of land. 5 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 EVOLUTION OF THE NUMBER OF TOURISTS TRADE AND SERVICES 1.1.3. Trade and Services Tertiary activity pressured by hazardous politico-security conditions Throughout 2012, a combination of sporadic events in the local arena, coupled with the chronic eects of the Arab turmoil, in particular the situation in Syria, weighed on Lebanon’s trade and services sector. These instabilities somewhat curtailed consumption and investment spending and as such, the year ended with a decline in the number of tourists and clearing activity on the one hand, and, a rising, yet at a weaker pace, airport momentum on the other hand. Pertaining to the Port of Beirut, indicator of maritime transport which handles the bulk of foreign trade services, its activity was mostly on an upward path, somewhat attributed to diverted trade activity from other disturbed routes. Regardless of the decline in the number of transshipments (-9.4%) and vessels using the Port (-1.9%), the tonnage of loaded and unloaded merchandise went up by 8.2% annually to reach 7,226 thousand tons in 2012. The number of containers handled by the Port (excluding transshipments) rose by 8.5% on a yearly basis to attain 634,969 containers in 2012. In details, the tourism sector was the main casualty of this jittery situation. The statistics released by the Ministry of Tourism showed that the number of tourists declined by 17.5% to reach a total of 1,365,215 in 2012, the lowest level seen since 2008. Noteworthy is that such a downward movement was mainly linked to the performance of the sector during the second half of the year. As a matter of fact, the number of tourists declined by 7.8% year-on-year during the rst half of 2012 but then the drop hastened to a double-digit rate of 26.1% year-on-year during the second half of 2012. Such a trend is tied to the impact of the regional developments on land travel and mostly to the announcements issued by several governments within the Arab Gulf region, dissuading their nationals to visit the country since mid-May 2012. Indeed, the number of Arab tourists, usually accounting for nearly 40% of those visiting Lebanon, was down by 21.2% in 2012. Their number actually contracted in particular during the second half of 2012 (-42.0%) after rising by 7.0% during the rst half of the year. Activity within the Airport was more or less positive as it was boosted mainly by the arrivals of the Lebanese expatriates and that of Syrian refugees. This is reected by the 5.7% increase in the number of passengers (excluding the transiting ones) in 2012 with arrivals going up by 2.8% and departures by 8.5%. Yet, the year 2012 was one of a dual nature for the Airport as the strong activity during the rst half of the year was somewhat curtailed by the slowdown seen in the second half. According to statistics released by the Directorate of Civil Aviation, the number of passengers at the Airport increased by 13.7% year-on-year in the rst half of 2012 then contracted by 0.4% in the second half. The slower activity at the level of the tourism sector as well as the airport reected on the performance of the hospitality sector in 2012. In fact, the occupancy rate of ve and four stars hotels within Beirut was at 54% in 2012, against 58% in 2011 and 68% in 2010, as per Ernst & Young. Concerning clearing activity, it revealed a slowdown in spending dynamics, mainly at the level related to the investment component in the country within the context of a comparatively contained economic growth. Accordingly, the value of cleared checks went down by 1.5% to US$ 71,019 million in 2012, a performance mainly linked to the slowdown seen in the second part of the year during which the value was down by 4.6% year-on-year, after having risen by 2.0% in the rst half of the year. 6 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 IMPORTS OF CONSUMPTION AND INVESTMENT GOODSFOREIGN SECTOR INDICATORS 1.2. EXTERNAL SECTOR Growing trade decit generating balance of payments decit Lebanon’s 2012 trade activity managed to exceed that of 2011 in terms of volume despite the cloudy regional and local conditions. The sum of exports and imports went up by 5.5% to reach US$ 25.8 billion in 2012, following an increase of 9.9% seen in 2011. The growth of imports remained more or less moderate due to a comparatively contained local demand and exports managed to progress at a higher yearly pace along with a rising activity at the Port of Beirut which handles a good chunk of Lebanon’s trade services, coupled with an increasing demand from the country’s main external markets. In details, exports totaled US$ 4.5 billion in 2012, up by 5.1% from 2011, year during which they had increased by a mere 0.3%. Such a rise is tied to a higher activity with Lebanon’s main export markets, namely Switzerland, Iraq, UAE, KSA and Syria. Aggregate exports to these countries, which account for nearly 40% of the total, progressed by 13.2% in 2012 following a drop of 5.8% posted in 2011. Noteworthy is that exports to Syria reported an increase of 37% subsequent to a decline of 3% in 2011. In parallel, the improvement in the exports’ growth rate is tied to an increase in the merchandise handled by the Port of Beirut (+10% in 2012 v/s -17% in 2011) as well as the Airport (+12% in 2012), not to mention the fact that both handle the bulk of outgoing merchandise. This performance managed to oset the 6.8% drop seen at the level of Masnaa, Abudieh, Arida and Kaa border points. The rise in exports is nally linked to those of jewelry which account for nearly 38% of the total and were up by 15.5%, benetting from a price and a quantity eect. Imports increased by a moderate rate of 5.6% to US$ 21.3 billion in 2012. Such a trend is the result of a relatively contained private demand due to the sporadic developments in the local arena as well as the volatility in the neighboring one. Accordingly, the growth of imports of consumption goods eased to a single-digit rate of 8.9% in 2012 and that of investment goods was practically unchanged as investors remained dissuaded from initiating new projects within such a domestic environment and the chronic eects of the Arab Spring. Overall, Lebanon’s trade decit widened by 5.7% to reach US$ 16.8 billion in 2012, after having increased by 15.9% in 2011. Despite such a weaker rise, Lebanon’s external constraints remain at the forefront of macroeconomic issues as the trade decit, as a percentage of GDP, has been in the 40% area since 2011 after posting a ratio of circa 37% in 2010. With regards to nancial inows, they reached US$ 15.3 billion in 2012, rising from the low base seen in 2011, year during which external accounts were hit by quite weak net inows in the rst month of the year subsequent to the previous government’s collapse. The net overall result was that the totality of nancial inows remained insucient to fully counterbalance Lebanon’s rising trade decit, the balance of payments recording a net decit of US$ 1,537 million in 2012, following another decit of US$ 1,996 million in the previous year. 7 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 PUBLIC INDEBTEDNESS PUBLIC SECTOR 1.3. PUBLIC SECTOR Worrisome public nances strained by sluggish growth and growing spending The general diculties of the year 2012 reected directly on public nance performance. As a matter of fact, weaker economic activity, coupled with strenuous politico-security circumstances, have placed a heavy burden on the government and have furthermore hindered the much needed reforms aimed at alleviating public nance imbalances. According to the latest available statistics released by the Ministry of Finance, Lebanon’s scal decit rose by 47.6% year-on-year to US$ 2,059 million in the rst nine months of 2012, breaking two consecutive years of improvement to hit the highest shortfall since the same period of 2009. In parallel, the primary surplus, which excludes the debt service, was down by 58.1% over the same period and stood at US$ 649 million. Fiscal revenues were up by 3.4% year-on-year to reach US$ 7,187 million in the rst nine months of 2012. Such a mild increase is attributed to a decline of 8.7% year-on-year in revenues related to Treasury transactions which somehow oset the 4.0% increase of those related to budget transactions. With regards to the former, resources were curtailed by the corresponding declines of 20.0% and 59.5% of deposits and other Treasury transactions. As to the latter, their rise stemmed mainly from tax revenues which progressed by 5.6% on an annual basis with miscellaneous taxes being the main contributor to this category (+9.3% year-on-year to US$ 2,488 million). As to non-tax revenues, they remained more or less unchanged annually and amounted to US$ 1,615 million, of which US$ 1,066 million were in the form of telecommunications revenues (-1.5% year-on-year). Total expenditures rose by 10.8% year-on-year to US$ 9,246 million in the rst nine months of 2012. Their trend was attributed to a more than two-fold increase in outlays related to Treasury transactions which oset the 4.8% decline reported by those related to budget transactions. Within the former, all components reported a rise with the most signicant movement registered by withdrawals on municipalities and other Treasury transactions. Within the latter, general expenditures were down by a mere 2.8% as the 41.9% decline in spending from previous years’ budgets oset the 53.9% increase in the transfers to the national electricity company. Interest payments and foreign debt principal repayment were both down by 7.7% and 13.3%, respectively. Overall, the atypical politico-security and economic environment seen throughout 2012 has meant more challenges for Lebanon’s scal accounts. The IMF’s estimates showed that the shortfall is set to widen from 6.1% of GDP in 2011 to 7.9% of GDP in 2012, thus breaking the improvement seen since 2007. The recently ratied wage adjustment also bodes ill for public nances as within the absence of revenue raising measures, they are faced with the risk of sustaining their rising negative balance towards 2013. In sum, the country is under the growing need of containing such imbalances and sustaining the downward path of indebtedness ratios. In fact, public debt, at US$ 57.7 billion at end-2012, managed to sustain its declining streak when measured against GDP. Yet, at its current 135% level, Lebanon’s indebtedness ratio remains one of the highest within the emerging world, at a time when debt and scal issues have been at the forefront of the radar screen of investors around the world. 8 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 EXCHANGE MARKET INDICATORSMONETARY SITUATION 1.4. FINANCIAL SECTOR 1.4.1. Monetary Situation Healthy expansion in LP money supply and BDL’s foreign assets Lebanon’s monetary conditions withstood well the 2012 overall challenges, with market forces tending to the benet of the Lebanese Pound, triggering a healthy expansion in LP money supply following last year’s contraction, and a strong growth in the Central Bank of Lebanon’s foreign assets within the context of new measures adopted by monetary authorities, while the LP Treasury bills market witnessed new long-term issuances. In details, the foreign exchange market saw net conversions in favor of the Lebanese Pound over the year 2012 despite local uncertainties and lingering concerns about the repercussions of the security developments in Syria on the local front. The relatively favorable activity on the FX market was coupled with the swapping of the equivalent of US$ 2 billion of LP Treasury bills held by the Central Bank of Lebanon into new Eurobonds issued by the Treasury in June 2012. This enabled BDL to reinforce its foreign assets to reach US$ 35.7 billion at end-December 2012, up by US$ 3.5 billion since year-end 2011, its highest growth in three years. Accordingly, BDL’s foreign assets covered 83.7% of LP money supply and 20.3 months of imports at end-December 2012, which spots the light on the Central Bank’s strong ability to defend the currency peg and meet demand for foreign currencies should any pressures arise. Mainly driven by FC-to-LP conversions and the substantial growth in LP net claims on the public sector, LP money supply expanded by LP 6,434 billion in 2012 (the equivalent of US$ 4,268 million). This compares to a contraction of LP 759 billion in 2011 (the equivalent of US$ 503 million). The rise in LP money supply in 2012 resulted mainly from a surge in LP saving deposits of LP 5,469 billion (the equivalent of US$ 3,628 million), which accounted for 85% of the overall growth. When adding foreign currency deposits, money supply in its broad sense (M3) grew by US$ 6,780 million or 7.0% in 2012. This money supply growth compares to a money creation of US$ 4,519 million that resulted from an increase of US$ 3,666 million in net bank lending to the private sector and from a US$ 2,446 million rise in the State’s indebtedness towards the banking system (excluding valuation adjustments), within the context of a negative change in net foreign assets (excluding gold) of US$ 1,592 million. The US$ 2,261 million dierence between the growth in money supply and money creation corresponds to a net monetization of nancial claims in 2012. In parallel, the LP Treasury bills portfolio held by the public increased by US$ 62 million in 2012 to reach US$ 5,229 million at end-2012 as compared to a contraction of US$ 81 million in 2011, within the context of net conversions in favor of the Lebanese Pound and a 50 bps rise in LP interest rates across the board in March 2012. Yet, as a measure of disintermediation, the share of LP Tbs held by the public to LP Money Supply (M2) went down from 13.3% at end-2011 to 12.1% at end-2012. As for crowding out eects, the share of the State in bank credits continued its downward trajectory, falling from 46.1% at end-2011 to 45.1% at end-2012, which underlines a growing bank interest in lending to the private sector at large. 9 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 1.4.2. Banking Activity Satisfactory activity growth in a year of challenging operating conditions The Lebanese banking sector witnessed in 2012 a year of satisfactory activity growth in a challenging operating environment characterized by persistently narrow banking margins in a prolonged low interest rate environment globally, growing provisioning requirements amidst regional uncertainties, and a weaker fee income generation capacity in a slow economic growth context. Banks’ activity managed to pull out an 8.0% year-on-year growth throughout 2012, with total assets reaching US$ 151.9 billion at end-December 2012. Bank deposits, a traditional growth driver for the sector at large, registered a similar 8.0% yearly increase, moving from US$ 115.7 billion at end-December 2011 to a new high of US$ 125.0 billion at end-December 2012. The US$ 9.3 billion in additional deposits at Lebanese banks proved 9.1% higher than that achieved over the previous year. But unlike the previous year, the 2012 deposit growth was more or less equally attributed to additional funds in both local and foreign currencies. As a matter of fact, with domestic politico-security tensions taking their toll on FX market activity at the beginning of 2011, the Lebanese banking sector had seen an almost exclusively FX-driven deposit growth in the full-year 2011. Last year however, with activity on the FX market witnessing more conversions to the benet of the Lebanese Pound, about 49% of total deposit growth at Lebanese banks was attributed to local currency funds which grew almost steadily month after month last year. Within this context, banks’ deposit dollarization ratio edged down, moving from 65.9% at end-December 2011 to 64.8% at end-December 2012. During the second half of 2012, deposit dollarization reached lows not seen since the beginning of 2011. A look at bank deposits by type of depositor shows that the non-resident deposit increase almost maintained its year 2011 pace (+US$ 2.8 billion), though still accounting for a circa 19% share in total deposits. In parallel, deposits from the resident sector grew in 2012 13% more than they did in the previous year, accounting for almost 70% of total deposit growth last year. As such, Lebanese banks continue to rely strongly on a stable and steady depositor base, with deposits accounting for about 82% of total banks’ balance sheets, thus conveying to the sector its deposit-rich prole. Additional liquidity at hand for Lebanese banks allowed them to continue extending funding to the economy at large, especially as their liquidity status is more than favorable. As a matter of fact, within the context of a low loan-to-deposit ratio standing at 34.8% at end-December 2012, Lebanese banks boast a high primary liquidity ratio. Close to half their deposits in foreign currencies are covered by readily available funds in the form of foreign currency placements at the Central Bank and at highly rated banks abroad. BANKING ACTIVITY 10 4 th Quarter 2012 ECONOMICS LEBANON 4 TH QUARTER 2012 Within this environment, Lebanese banks saw last year a 10.4% increase in lending activity, with loans to the private sector reaching a new high of US$ 43.5 billion at end-December 2012 and progressing at a pace almost similar to that of 2011 with a US$ 4.1 billion increase in lending volumes during 2012. The growth in total loans was attributed to foreign currency loans to the extent of 70%, which leaves US$ 1.2 billion in additional lending volumes last year driven by loans in local currency. This falls pretty much in line with the trend observed over the previous couple of years when Lebanese banks, encouraged by the Central Bank’s measures aimed at fostering local currency lending, increased their share of LP loans in the total. As a result, the loan dollarization ratio extended its decline, reaching 77.6% at end-December 2012, against 78.4% at end-December 2011 noting that last year’s level was the lowest in more than two decades. The breakdown of bank loans by type of borrower reveals that the resident sector continued to be the major beneciary of funds extended by banks (+US$ 3.6 billion in 2012), while non-resident sector loans progressed by a mere half a billion dollars last year. The 2012 lending growth was not realized at the expense of asset quality. In fact, the doubtful loans to gross loans ratio practically maintained its 3.5% level in 2012, with around 74.7% of doubtful loans provisioned for. Also, Lebanese banks continue to display a satisfactory capital adequacy ratio (11.6%) higher than the minimum requirement. Banks also continued to ameliorate their sovereign risk prole, as evidenced by declining exposure to the State throughout last year. Though remaining relatively high, the ratio of banks’ foreign currency sovereign bond portfolio to their equity base stood at 103.5% at end- December 2012, against 118.2% at end-December 2011 and levels above the 200% mark a few years ago. Last but not least, Lebanese banks’ protability continues to be weighed down by a tight spread environment adding to slower fee income generation and growing provisioning requirements within the context of regional security developments. On the overall, such downward pressures on banks’ revenue base oset the quantity-eect tied to satisfactory lending activity growth and as per the latest available statistics, the sector reported a mere 0.6% decline in domestic net prots on a yearly basis in 2012. 1.4.3. Equity and Bond Markets Capital markets holding relatively well Lebanese capital markets managed to relatively sustain their levels in 2012 despite local political bickering and concerns about the spillover eects of security developments in Syria on the local front, with the equity market posting limited price declines and the Eurobond market recording slight price rises and net contractions in the cost of insuring debt. The Beirut Stock Exchange actually saw some selling pressures during the year 2012 due to the prevailing local political uncertainties and concerns about the repercussions of security developments in Syria on the local front. Also, some market players refrained from adding new positions despite favorable fundamentals that highlight the attractiveness of Lebanese stocks relative to regional peers. In fact, the BANKS LIQUIDITY STANDING BANKS SOVEREIGN EXPOSURE [...]... CAPITAL MARKETS PERFORMANCE 11 4TH QUARTER 2012 ECONOMICS LEBANON 2 CONCLUSION: SYRIAN SPILLOVERS ALONG WITH MITIGATING EFFECTS It was normal amidst the atrocities of the regional turmoil, especially in neighboring countries, that the Lebanese economy gets adversely impacted The Syrian unrest has created a cautious environment for investment and tourism within Lebanon, while the country’s land exports sufered... There rises a material opportunity at the horizon to capture back Lebanon s steady state output level, signiicantly widening its potential output and gradually bridging its cyclical output gaps at large 4th Quarter 2012 12 Bank Audi sal - Audi Saradar Group - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: research@banqueaudi.com ...4TH QUARTER 2012 ECONOMICS LEBANON BSE traded at a weighted P/BV of 1.10x with some shares trading even below 1.00x, as compared to a much higher P/BV ratio of 1.52x in the region In addition, the BSE traded at a weighted P/E... environment of iscal restraint across the globe, it is very important for Lebanon to tighten the belts as much as possible and foster its monetary and inancial stability with a containment of its persistently large public inance imbalances, as its debt and deicit ratios forecasts for 2013 still fall in the top decile worldwide Finally, if Lebanon proves to be successful in addressing short and medium term... end-December 2012 As to the cost of insuring debt, Lebanon s ive-year CDS spreads contracted by 17 basis points to reach 455 basis points at end-2012 Finally, it is worth mentioning that after issuing a 5.5-year US$ 600 million bond in March 2012 and tapping an existing bond maturing on November 27, 2026 through the issuance of a US$ 350 million bond, Lebanon s Ministry of Finance conducted in November... from the insecurity of shipping routes in Syria Although such spillover efects were partly ofset by other mitigating factors, the net outcome on the Lebanese economy was certainly not positive Still, Lebanon well managed to preserve its overall stability, avoiding recessionary conditions in its real economy, avoiding unwarranted pressures on its currency’s exchange rates and avoiding an outlow of capital... According to the same IMF forecasts, inlation is expected at a moderate 5.7% in 2013, close to the one estimated for 2012 (6.5%) The year started with no monetary pressures whatsoever, prolonging the trend reported all throughout 2012, where the Lebanese Pound was more demanded than foreign currencies on the foreign exchange market At the current BDL reserve level of US$ 32 billion, covering 75% of Lebanese... Even at the public inance level, the forecasts of the IMF do not suggest any deterioration trend The deicit to GDP ratio is expected at 8.3% for 2013, keeping the debt ratio around the 135% threshold Lebanon s debt ratio has been actually stable for the past couple of years after a streak of four years of gradual improvement since 2006 when it had reached as high as 180% Still, such public inance imbalances... to US$ 408 million in 2012 versus US$ 513 million in 2011 The total turnover ratio, measured by the annualized trading value to market capitalization, reached 4.1% in 2012 against 5.2% in 2011, which spots the light on the slowdown in activity on the BSE due to lower investor appetite for Lebanese stocks amid concerns about political and security drifts In parallel, the Eurobond market saw some local... long term outlook bodes favorable on the overall As the extraction of oil and gas from its territories will start to materialize, it can move the country from one state to a completely diferent one As Lebanon s oil and gas reserves are projected according to the most conservative estimate at the size of its public indebtedness, the extraction of natural resources can put an end to the country’s most . Introduction 2 Economic Conditions 3 Real Sector 3 External Sector 6 Public Sector 7 Financial Sector 8 Concluding Remarks 12 LEBANON ECONOMIC REPORT PRIORITIZING. and the 5-star hotels reporting net contraction in occupancy while furnished apartments reported close to full occupancy levels. Lebanon s sluggish aggregate