The Central Bank of Lebanon has been cooperating with Euromoney for more than 20 years.
The world today is facing major challenges. In the United States, there is a presidential election, but also the Federal Reserve is more and more inclined to raise interest rates. If this trend is to continue, it will pose problems in the emerging markets, especially in countries known earlier as the BRICS countries, and which are facing difficulties in obtaining foreign currencies and are really indebted. Europe is not spared. The Brexit issue is paralyzing the financial markets all over Europe. Everyone is waiting for the results of the referendum that will take place on June 23. Negative interest rates have impacted the banking performance in Europe and the Basle new regulations are complicating and changing the banking industry. In other parts of the world, the eyes are today on China that witnesses a slowdown in growth and difficulties in the banking sector that could be aggravated if global interest rates reach higher levels.
In our area, we have already coped with lower oil prices and the recent increases in oil prices have been a relief for Arab countries and also for Lebanon. The remittances coming to Lebanon are today in line with our expectations and we do expect to see an increase of 4-5% in the deposit base in Lebanon. This is important because our country relies essentially on the transfers of Lebanese working abroad, and the strong banking sector in Lebanon is attracting them more and more and encouraging them to do their business from here.
BDL has faced several crises in Lebanon. However, our financial sector has shown resilience. Lebanon has risks, but the returns are consequent with these risks. Our objective as a Central Bank is to maintain confidence and monetary stability, and always innovate by creating financial engineering tools that would keep high levels of liquid foreign assets, so as to reassure the markets about the stability of the Lebanese pound.
Recently, the Central Bank has embarked on a financial engineering process that is based on an exchange of Government bonds in US dollars and Treasury bills in Lebanese pounds between the Ministry of Finance and the Central Bank. This financial engineering has already contributed in creating 3 billion dollars of extra foreign reserves in the BDL account.
This is important because we do believe that a strong balance sheet is essential to maintain stability in interest rates, and that stability is necessary for a constant economic development at acceptable funding prices.
The significant injection of liquidity that we have done as a Central Bank has targeted various sectors in order to increase internal demand and contribute to economic growth at a time where external demand is weakening due to the regional political situation and to lower oil prices. We expect a 2% growth for this year, and I believe that this growth, although insufficient to meet what we need to balance our national economy, is acceptable considering what is happening all over the area.
If we look around, we see that today Lebanon is a country that has the ability to fund both its public and private sector without relying on IMF funds or an aid from other countries. That is due to the confidence in our solid banking sector. The ratios required by Basle 3 are higher compared to other countries. Liquidity in foreign currency is high. That is why, although we are rated B-, we can see that our interests structure is hovering around countries rated BB+ or BBB. We intend to maintain our non-conventional approach to the economy, by injecting liquidity into targeted sectors. We consider the knowledge economy as a promising sector in Lebanon. Therefore, we have increased the possibility of banks to invest in this sector from 3% to 4% of their own funds. So far, banks have committed around 300 millions $ into this sector and we have started to see a rising interest, through the funds and startups that are being launched in Lebanon. According to the latest estimates, the capital value of this sector exceeds 600 million dollars.
We are proud that Lebanese banks have contributed to the launching and creation of this sector that shall provide thousands of jobs to the youth. We have also enlarged our credit enhancement program, by encouraging banks to grant medium-term loans to artistic creative works produced in Lebanon. We believe that the Lebanese can succeed in this sector that can provide work opportunities for all the Lebanese social categories.
The new regulations that concern banks and their working methods worldwide are changing the environment. Today, the Basle approach is to get rid of the concept of “too big to fail”, which we will not adopt in Lebanon as we believe that in Lebanon any problem in any bank can create doubts about our system.
But there are also other directions taken by Basle related to the possibility and the potential of banks to maintain secondary markets in the debt market to have less leverage and also to reinforce a decrease in the mismatching.
This is why I believe that it is important to have our own tools to organize and develop a secondary market in Lebanon. The Capital Markets Authority (CMA) in Lebanon has worked seriously and cooperated with the World Bank to establish working guidelines. We have also sought to have multilateral agreements with various countries and we have just signed an agreement with Germany.
It is also our target to sponsor the launching of an electronic trading platform. The Lebanese Government has decided to go ahead and privatize the Beirut Stock Exchange (BSE). Thus, we are going to coordinate and try to present to the market a single package that will include both the BSE and the electronic trading platform. The BSE is a historical institution in Lebanon, and we believe that the markets in Lebanon will be better served by one group of market makers than by several competing groups. The electronic trading platform is of the same importance, since it will facilitate the access of people from around the world to the Lebanese markets. And that is our intention. We know that when there are well monitored and well-organized tools, and when there are market makers, knowing that will be the major criteria in our decisions to grant one license to one financial entity, and when you have this liquidity, all these factors will create a worldwide interesting and accessible market. As such, the Lebanese who are already interested in the banking sector, can also be attracted to other aspects of the Lebanese economy, and the easiest way is to trade the debt and equities of Lebanon. That market will also provide a market for gold, and we know that traditionally Lebanon has been a market for gold, and that there is international interest to come to that market. In times of calendar, we hope to launch all this by the end of the year. The delay now is related to the Government decisions on the privatization of the BSE. The Government has already taken the first step and we have prepared the necessary documentation so that the BSE becomes a company. And if the Government approves the second step in order to proceed with the privatization, we could do that quickly. This vehicle shall be monitored by the CMA which has also established its own Court. So we will take this opportunity to create our own ecosystem and to have our legal base where companies from all over the world can be registered as part of this coming financial market. I think that this market will also help the digital economy, as it will create another exit for those who have funds or for successful corporations, as well as a new dynamics in that field.
I wish full success to your conference.