Q&A: Abundant Banking Liquidity: A Blessing or a Burden?
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In this issue, the phenomenon of liquidity over-abundance in Lebanese banks and the burden of finding avenues for this cash through real estate routes and other investment vehicles are discussed. The same set of questions was addressed to Nassib Ghobril, Chief Economist at Byblos Bank and Marwan Mikhail, Head of the research department at BlomInvest.
Today's key topic in the Beirut financial markets is the phenomenon of liquidity over-abundance in Lebanese banks and the burden of finding avenues for this cash through real estate routes and other investment vehicles.
Our Q&A revolved around four key questions:
1. What are the reasons behind the high liquidity that Lebanese banks currently have?
2. What tools and products do banks have at their disposal to invest this cash in?
3. Can releasing money into the market create a real estate bubble?
4. Is liquidity a healthy phenomenon in the long-term?
Nassib Ghobril
Chief Economist at Byblos Bank
Nassib Ghobril was the award winner of 'Best Economist in Lebanon and the Diaspora for 2009'. Ghobril has 13 years in Finance and Banking and considered to be a media reference on matters concerning these sectors. Before becoming Chief Economist at Byblos Bank four years ago, Ghobril had stints in the US where he spent 4 years researching and consulting on economic and financial issues.
1. It's true. There is massive capital coming into or existing in Lebanese banks. The first reason is due to regulatory requirements. Every bank needs to guarantee in cash 15% of all foreign currency deposits. This liquidity is placed in the Central Bank, but it's not for lending purposes.
The second reason is the massive capital inflows that resulted from the global financial crisis. People forget that we had a favorable regional environment lately and in 2008, especially in the last quarter of it, large amounts of money went into Lebanese banks. These banks received an average of $970 million per month in deposits, mostly from Lebanese expatriates, but also from other Arab and foreign depositors. This happened despite the uncertainties of the May 7 events in Lebanon.
After the Doha Accords in July 2008, the average monthly deposits were about $2 billion per month. When the financial crisis hit in September of that year, there were fears that deposits would leave, but in fact there was just a slowdown in growth. In 2009, we have seen an unprecedented rate of cash inflows to banks, on average $1.5 billion per month in deposits, and during June, July and August, that monthly figure went to $1.8 billion. Why this happened is because Lebanese banks proved resilient to the global crisis. No bank destabilized or was forced to shut down, and there were no bailouts, so investors worldwide cash out from capital markets, or took out their deposits and put them here. The other important factor for depositing cash here is the differential rates that banks offer. Deposits in Lebanese Pounds earn 7% while in US dollars the figure is 3%. The global rates are for 1% or less.
2. High liquidity in Lebanese Pounds has created a challenge for banks because 86% of loans are in US dollars. Banks now have three alternatives to turnover this cash for which it pays depositors 7%. The Central Bank takes over a portion of that cash and issues certificates of deposits with returns at a higher rate. For its part, the Central Bank has adopted policies to facilitate private sector lending in local currency. The Lebanese citizen suddenly saw numerous private lending institutions in the media advertising loans at reduced rates for homes, healthcare, education and business startups. Whereas in the past these loans would cost from 12%-15% today's rates range in the 4.5%. Deposits can create a burden, especially during 'wait and see' periods when banks hold off on loaning people during a security crisis in Lebanon. The third route is through treasury bills. Private banks lend money to the government in Lebanese Pounds by purchasing Treasury bills that return high yields.
3. Prices for real estate in Lebanon have grown significantly and cheap loans are likely to increase demand and thus increase property prices beyond reasonable levels.
I believe the price/m2 of land is over inflated but the thing is that Lebanese real estate never witnesses a drop. Property prices might level off and stabilize at some point, but they never drop. So a bubble is not in the offing.
4. Healthy, yes. Given what's happening globally, I would rather have cash than be looking for some. We just need to find more ways of dispensing it in the market.
Marwan Mikhail
Head of the research department at BlomInvest
Marwan Mikhail has years of experience in international finance and banking in both the private and public sectors. Before joining Blom Bank, he spent 4 years with the International Monetary Fund (IMF,) became advisor to the ministry of economy, as well as worked as an economist for the ministry of finance as part of a UNDP assisted program. Today, he heads the research department at BlomInvest, Blom Bank's investment arm.
1. The liquidity that banks have is due in large part to the difference in interest rates that Lebanese banks pay depositors, as compared to other markets in Europe or the US. The Central Bank is hesitant to decrease those interest rates fearing people will pull out their deposits. It is looking for a breakeven point, but we don't know what interest rate the Central Bank will decide on.
However, after the financial crisis hit in September/October 2008, people lost confidence in their respective markets and looked for avenues to safeguard their cash. Lebanon was able to weather the storm and thus benefitted from these circumstances to attract foreign and expatriate deposits who found in Lebanon a safe haven for their money, and a way to diversify their income.
With Dubai being hit and other Arab markets feeling the effects, Arabs once again looked at the Lebanese banking sector as a shield for their cash. This is despite the fact that listed banks on the Lebanese stock exchange suffered a setback, but that did not prevent depositors from coming in numbers. Following 2008, Arab tourists played a big role in bringing foreign cash inflows to the country, by way of tourism spending and other investments like in real estate. We can see this from the balance of payments, the difference between how much money comes in and how much comes out. In 2008, the balance of payments stood at $2.3 billion, whereas in 2009, the figure is in excess of $4.5 billion. Investments in real estate are included in those figures.
2. There are not many opportunities available at the Lebanese banks' disposal for investing their cash in corporate and commercial bonds, mortgage lending and the like, which exist mainly in the west. We do not have this complex business structure to allow for such investments. So banks buy Treasury Bills and Eurobonds (foreign currency) that the government issues periodically. The cost of Eurobonds, which takes into account the country risks, is higher than Treasury bills and thus they yield less returns for investors, but they do offer banks a way out from excess liquidity in foreign currency. The government however is issuing more than it needs to deal with the budget deficit. It has about $6 billion in deposits at the Central Bank. It's as if the government is trying to play a role in absorbing the banks' high liquidity in Lebanese Pounds and foreign currency, but this is wrong. The Central Bank is offering private lending institutions a way to subsidize loans at 4.5%, such as in housing, real estate, transportation (car loans) and personal loans.
3. We do not have a speculative market in Lebanon, i.e. people buy to live and use the property and not to resell. It is an end-user market and we continuously see a growing demand for real estate and prices going up. We are in fact catching up in terms of prices and not overpricing. There were many periods in Lebanon when prices were stable for a long time and we have a limited amount of land available. We don't have deserts and large spaces where people can buy property. Prices by the way never fall and so we won't have a bubble. Right now, we have more demand than supply, but in one or two years' time, we might see more supply than demand. It is not just the Lebanese expatriates and Arabs who are buying. The middle class has currently a strong interest in medium size apartments for their families. Housing loans require that your monthly payments do not exceed 1/3 of your income, so this puts a limit on the size of the apartment one can purchase.
4. If we find a good placement for this money, yes liquidity is healthy for the long run.
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| Read full story in REAL's September issue |
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