August 29 , 2013 : With a total area of 10,452 square kilometres, Lebanon is bordered by the war ravaged Syria to the north and Israel to the South, the war in Syria has forced more than 1.2 million Syrians to enter safer places such as Lebanon; the number of refugees has reached 18,000 and now equals the local population in Saadnayel in the Bekaa valley.

The Syrian Community in Lebanon includes more than 600,000 refugees according to Antonio Guterres, the United Nations High Commissioner for Refugees. Trade has been disrupted in the country severely as Lebanese trucks are not allowed to pass between the Damascus and Amman route; Lebanese exports strongly rely on a stable Syria, as 40 percent of all exports transit through Syria to Jordan, Iraq and Turkey. Transporters now opt for the circuitous route through Suez to Aqaba, but this route is considered more expensive for exporters. Between 2009 and 2012, the share of exports transiting through Syria as a percentage of GDP declined by 0.7 percent which amounts to 28 million dollars.

Banking Reforms

Riad Salameh, Governor of Lebanese Central Bank said “The country will introduce measures to encourage start up companies in a bid to spur economic growth amid political turmoil and violence. Under the changes, to be announced this month, banks will be allowed to invest three percent of their own funds in start up firms, he said in an interview in his Beirut office. The central bank will provide banks with interest free loans for the projects, he said. Explaining it further he said “The banks will do a capital investment, not a debt investment, with these companies”. The central bank will implement a risk mechanism that will cover risks on their investments up to 75 percent, this is the second stimulus package announced by the central bank to the country hit by violence as the civil war in neighbouring Syria spills into the country. Earlier in January, the central bank had provided $ 1.35 billion to the banks at one percent interest to encourage entrepreneurship, especially small and medium enterprises, housing and the renewable energy industry. Salameh said around 25 percent of the first package is still left and it will be reallocated to allow more loans to businesses because of the slowdown in the demand for housing loans.

In the first half of 2013, the consolidated profits of five Beirut Stock Exchange (BSE) listed banks rose 1.58 percent year-on-year to reach $ 502.5 million, up from $ 494.67 million in during the same period in 2012. In an interview with the Daily Star, Marwan Barakat, head of Bank Audi’s research department said “The regional turmoil and local instability would weigh on the profits of the banking sector in the short term but added that long term prospects remained very promising due to the existence of a large output gap that banks could bridge”.

“Lebanese banks have maintained sound financial standings over this period of economic pressure with healthy liquidity, non performing loans and capital adequacy ratios” he said.

Declining Confidence

Declining consumer and business confidence will negatively impact the profitability of Lebanese banks in 2013, due to a modest growth in lending to the private sector and a contraction in the net loans portfolio of some major banks, the Daily Star reported. Loans to the private sector increased by 3.2 percent in 2013 to reach $ 44.8 billion at the end of the first half of the year, compared to a loan growth average of 9.5 percent in the last five years.  The net loans portfolio of four out of five listed banks on the Beirut Stock Exchange posted a contraction. Amidst the ruins, Bank Audi posted a 21.78 increase in net loans but the loan portfolios of Byblos, Blom, Bank of Beirut and BEMO contracted respectively by 0.48 percent, 0.67 percent, 1.37 percent and 4.39 percent.

Commenting on the downtrend Nassib Ghobril, chief economist at Byblos Bank said “The results aren’t surprising given the deteriorating political and security situation, businesses are postponing expansion plans while households are adopting cautious approach and spending less, fearing layoffs and gloomy job prospects”

According to International Monetary Fund (IMF) Lebanon’s economy is expected to grow at less than three percent for the third straight year because of the effects of the Syrian war, political instability and low business morale in the country. Lebanon, whose currency has been pegged to the dollar at about 1,500 since 1993, is the most indebted Arab country, with a debt to GDP ratio of more than 130 percent. Tourism which contributes 20 percent of the GDP, translating into 8 billion dollars is the worst affected.

Sectarian Tension

The sectarian tension has been edging Lebanon to its own civil war, Sunni and Shiite Muslims make up about 60 percent of the population with Christians accounting for the rest. The arrival of Sunni Muslims from Syrian places “ is an intense strain on the country’s sectarian balance, this will make it all too easy to put forward a xenophobic, sectarian or nationalist narrative” said James Petretta who is an associate director for the Middle East and North Africa at Maplecroft, a UK based global risk adviser.

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July 11,2013 : International Finance Magazine reports on the takeover of the traditional rate setter by an independent private company and a threadbare analysis of how the new mechanism shall prevent fraudulent rate setting by elite banks and the reforms of the benchmark rate setting process.

NYSE, Euronext has been awarded the contract by the U.K government to run the London interbank offered rate contract after the benchmark interbank lending rate was stigmatized by a rate rigging scandal that saw banks fined for fixing the rates and individual traders put on trial.

NYSE Euronext announced that a new subsidiary will improve the reliability of LIBOR, which is in the focus for its alleged irregularities in bank rate rigging and fined billions of dollars for irregularities.

Finbar Hutcheson, CEO of a NYSE subsidiary based in London said the group looked forward to “continuing the process of restoring credibility, trust and integrity of LIBOR as a key labor benchmark”. The winning subsidiary known as NYSE Euronext Rate Administration Limited is scheduled to complete the transfer by 2014. The company is confident of returning credibility through its long regulatory experience and market lending technical ability to return confidence to scandal hit LIBOR. The rates set by the British Banker’s Association, represents the rate at which global banks operating in London estimate they would expect to pay for short term loan for each other in different world currencies.  Royal Bank of Scotland, UBS and Barclays banks have been accused for rigging the bank rates and manipulating the benchmark, the banks have been fined more than 2.6 billion dollars collectively.

The Financial Conduct Authority will supervise the LIBOR administrator and the rate setting process, this comes after U.K. amended its Financial Services Act to include LIBOR under its gambit as on April 1^st, 2013.

Revised rate setting process

LIBOR will continue to be set by surveying a panel of banks about the rates at which they think they can borrow, atleast for the short term. Chief of FCA, Martin Wheatley has said he wants the new administrator to lead the process of finding ways to tie the rates more closely to the actual transactions and not take into account individual views of certain banks and wreaking havoc with the $ 300 trillion existing contracts tied to the LIBOR rate. The likely solution may be to run two parallel rates, one based on surveys to support the existing book and a transaction based rate for new contracts.

“The shift to NYSE Euronext signals diversification amid diminishing trade volumes and revenues in traditional exchange functions, this is a fantastic example of corporate evolution, this also shows how the NYSE is moving beyond equity to being a full fledged financial services organization”, said James Angel, a finance professor at George Town University’s McDonough School of Business.

He further opined “The transfer represents just the first step. Step two will be coming up with a measure that cannot be manipulated with the current one was”

Mr.Wheatley’s report specified that the new administrator should be a private company whose  primary responsibility was to distribute, compile and police the daily rate fixation process. The report also acknowledged that the winner was allowed to explore the commercial viability of the rate, the new administrator will be closely monitored by the FCA.

The LIBOR setting process has been widely criticized because it is based on estimates submitted by a small group of bankers, who use the opportunity to rig the rates to enhance their business interests, rather than relying on known and transparent financial standards. The London Interbank Offered Rate, is the rate at which banks lend to one another, and is used as a base for calculating the price of financial products globally.

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