The agreement on a new electoral law for Lebanon avoids a political crisis, but highlights the limitations of the country's sectarian-based political system, Fitch Ratings said in a report issued on Monday.
"High and persistent political and security risks are reflected in Lebanon's low sovereign rating, affirmed at 'B-'/Stable in February 2017, alongside high public debt and anaemic economic growth," the agency noted, adding that political progress since November appears to have boosted the Lebanese diaspora's confidence in the country's economy.
"Deposit growth was 8.2% yoy in April 2017, sufficient to fund government borrowing, which depends on the channelling of deposits and remittances via the financial system, and ensure moderate credit growth to the private sector. Foreign-exchange deposits were 11% higher than a year earlier, and gross foreign-exchange reserves were 7.6% higher, although they had declined from February and March levels," it explained.
The agency also pointed out that deposit growth may have been boosted by the presidenti election and the formation of a government, having dropped to less than 5% yoy for much of 1H16.
However, reserves and deposits had also been boosted by a financial engineering operation by Banque du Liban, which sold eurobond holdings and foreign exchange-denominated certificates of deposit (CD), worth around USD13 billion to banks over several months last year. At the same time, BdL offered to discount at a premium equivalent amounts of Lebanese pound T-bills and CDs held by banks. The operation buoyed growth in non-resident deposits, as banks offered attractive conditions for foreign-exchange deposits to participate in BdL's operation. The risk is that as the effect of this operation wanes, deposit growth will again come under pressure.
Recent political developments can help sustain positive sentiment, Fitch Ratings noted, but rising public debt, up 8.6% yoy in March 2017, means that Lebanon remains vulnerable to a recurrence of political paralysis that dents confidence and deposit and remittance flows.
"Tougher US sanctions against Hezbollah could also directly or indirectly affect foreign flows into Lebanon and its banking sector, although these have not yet been formally proposed as a bill," the reported warned.