The next 12-18 months remain challenging for Lebanese lenders and banks dependent on the new government’s ability to fully implement highly anticipated fiscal and economic reforms.
Moody’s has affirmed a stable outlook for Lebanon's banking system reflecting the rating agency’s expectation that economic growth will pick up slightly and deposit growth will be sufficient to allow banks to finance the government as well as the economy, despite a recent slowdown in deposit inflows.
In a report, Moody’s stated that it expects annual deposit inflows to pick up to around $6.5 billion in 2019, from $5.6 billion in 2018, provided the new government is able to implement reforms to shore up confidence.
Capital flight remains a key risk for banks and the sovereign, the Lebanese financial system maintains substantial foreign liquidity against this risk, which has been centralised at the central bank.
Lebanese banks' profitability will be under pressure, higher funding costs, subdued new business and higher provisions will challenge profits.
Additionally, large banks will seek to mitigate these factors through cost control supported by digitalisation and growth abroad.
Lebanon’s fiscal deficit is expected to narrow to 9.5 per cent of GDP in 2019 and nine per cent by 2020, but it will remain large with the government relying on local banks to finance the gap.
However, according to Moody’s, the banks’ high and growing exposure to the sovereign remains the main source of financial risk, including Banque du Liban (BdL) certificates of deposit and non-reserve deposits which amounted to 55 per cent of the banks’ total assets.
Lebanon's government debt is the fourth-highest globally and it was estimated to be 141 per cent of GDP at the end of 2018.