Bloomberg News

Salameh Says European Recession Wouldn’t Affect Lebanese Economy

September 28, 2011

Sept. 28 (Bloomberg) -- Lebanon’s economy would probably be unaffected by a European recession because the Arab country maintains a peg to the dollar and most deposits are in the U.S. currency, central bank Governor Riad Salameh said.

“Lebanon will not be affected by a recession in Europe as the Lebanese economy essentially is dollarized,” Salameh, who has been governor since 1993, said in an interview in New York with Pimm Fox on Bloomberg Television’s “Taking Stock.” “A crisis on the euro will not affect us,” Salameh said, adding, “Banks in Lebanon do not hold sovereign bonds in Europe in substantial amounts.”

About 66 percent of deposits in Lebanon are in foreign currencies, 90 percent of which are in U.S. dollars, he said. Bank deposits will grow between 7 percent and 10 percent this year, Salameh said. Lebanese lenders have limited exposure to Europe because of central bank regulations that restrict the scope of their investments.

Concerns that Europe’s debt crisis may plunge the global economy into a recession dominated talks of policy makers, investors and bankers when the International Monetary Fund and the World Bank held their annual meetings in Washington last weekend. The IMF has predicted “severe” fallout should Europe fail to contain the debt crisis.

Greek Prime Minister George Papandreou won parliament’s backing yesterday for a property tax that would help plug the country’s budget shortfall, taking it a step closer to securing an 8 billion-euro ($11 billion) aid package next month.

Foreign Investment

Lebanon’s banks largely avoided the global financial turmoil of 2008 and 2009 because Salameh banned them in 2004 from buying comparatively risky non-Lebanese assets such as non- investment-grade paper and derivatives.

The stability of the Lebanese pound, which has been pegged at about 1,500 to the dollar since the 1990s, coupled with interest rates that were as high as 8 percent in 2008, have attracted a steady flow of funds into the country. Bank deposits grew 10 percent last year to $110 billion. The central bank has about $33 billion in foreign liquidity in addition to gold valued at more than $16 billion, according to Salameh.

Domestic political wrangling and unrest in neighboring Syria slowed the Lebanese economy this year. The IMF sees 2011 growth of 1.5 percent, the lowest since 2006. Lebanon’s gross domestic product expanded 7.5 percent in 2010. Inflation is forecast to reach 5.9 percent this year, according to the IMF, while Salameh estimates consumer prices will rise 6 percent.

Salameh sees signs of growth even as the economy slows.

“The banking sector is performing well, credit is expanding and profits are increasing and total deposits represent three times our GDP,” he said.

Lebanon’s construction industry has grown almost 30 percent in the last three years and prices of real estate have multiplied by an average of five times since 2006, he said.

“Housing is attracting a lot of the credit of the banks,” Salameh said, adding that the central bank “put out prudential circulars to prevent bubbles.”

--Editors: Digby Lidstone, Jennifer M. Freedman

To contact the reporters on this story: Massoud A. Derhally in Beirut, Lebanon at mderhally@bloomberg.net; Pimm Fox in New York at pfox11@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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