ﻣﻮﻗﻊ ﺻﺪﻱ اﻟﺒﻠﺪ

Supervisor
Elham AbolFateh

Opinions

"Financial Times":Lebanon tension spurs questions over Middle East currency pegs

Wednesday 22/November/2017 - 02:26 PM
Sada El Balad
By Jonathan Wheatley and Roger Blitz:
The rumbling crisis in Lebanon has raised questions about the country’s currency peg — the bedrock of its relative financial and economic stability — and prompted a sterner examination of other fixed foreign exchange regimes across the region.

The Lebanese pound came under pressure this month with the shock resignation of Saad al-Hariri، the prime minister، on a visit to Riyadh. Behind his departure، many observers concluded، was the escalating rivalry between Saudi Arabia and Iran.

Such tensions have fuelled the war in Yemen and were behind the blockade imposed on Qatar، one of the six members of the Gulf Cooperation Council، by Saudi Arabia and the rest of the GCC. If fractures in the GCC deepen، say analysts، the resiliency of their currency pegs will be questioned.

“The GCC countries vowed to stick to their pegs as a group،” says Simon Quijano-Evans، emerging markets strategist at Legal & General Investment Management. “If those dynamics turn in the wrong direction، markets will speculate on who will be first to leave the peg، through economic necessity or geopolitical pressure. That now includes Lebanon، too.”

Lebanon’s peg is underpinned by the central bank’s $42.5bn of foreign reserves، representing about 80 per cent of GDP.
The rumbling crisis in Lebanon has raised questions about the country’s currency peg — the bedrock of its relative financial and economic stability — and prompted a sterner examination of other fixed foreign exchange regimes across the region.

The Lebanese pound came under pressure this month with the shock resignation of Saad al-Hariri، the prime minister، on a visit to Riyadh. Behind his departure، many observers concluded، was the escalating rivalry between Saudi Arabia and Iran.

Such tensions have fuelled the war in Yemen and were behind the blockade imposed on Qatar، one of the six members of the Gulf Cooperation Council، by Saudi Arabia and the rest of the GCC. If fractures in the GCC deepen، say analysts، the resiliency of their currency pegs will be questioned.

“The GCC countries vowed to stick to their pegs as a group،” says Simon Quijano-Evans، emerging markets strategist at Legal & General Investment Management. “If those dynamics turn in the wrong direction، markets will speculate on who will be first to leave the peg، through economic necessity or geopolitical pressure. That now includes Lebanon، too.”

Lebanon’s peg is underpinned by the central bank’s $42.5bn of foreign reserves، representing about 80 per cent of GDP.
The central bank، under the governorship of Riad Salamé، maintains its reserves by borrowing from the banking system، which in turn has an unusually high level of deposits، equal to more than three times the size of the economy. About 60 per cent of these deposits are in foreign currencies، mostly US dollars.

This represents the strength of Lebanon’s currency peg and its Achilles heel. Bank deposits not backed by foreign currency assets were $113bn at the end of September، more than two and a half times the central bank’s reserves.

“This is a classic fractional reserve system،” says Farouk Soussa، Middle East economist at Citi. “You know there is an amount that will cover a fraction of liabilities، but in any shock you want to be the first to access them.”

If depositors withdraw en masse، banks will struggle because they have loaned their deposits to the central bank.

“That is why borrowing from the banking system by the central bank is so pernicious،” says Mr Soussa. “It has borrowed the banking system’s first line of defence.”
While the peg has held، pressures have been clear elsewhere. The yield on Lebanon’s eurobond maturing in April 2019 rose from 5.14 per cent on November 3 to 8.4 per cent on November 10. It has since eased back، but only to about 7.7 per cent.

In contrast with some investors، reassured by Lebanon’s resilience in the past and now taking advantage of buying assets at lower prices، Mr Soussa cautions against complacency.

Lebanon’s economy، he argues، is much weaker today than it was in the years before the outbreak of the Syrian civil war in 2011.

For now other pegs in the region have withstood the rise in geopolitical tensions.

The strain has been clearest in Qatar، where the blockade has caused liquidity problems، pushing the value of the riyal more than 7 per cent below the official rate in the offshore currency market.
“We are starting to see signs of real pressure on the peg،” according to Joseph Mouawad، EM analyst at Carmignac.

Elsewhere، as in Lebanon، some strain has shown up in sovereign bonds and in equity prices. Yet the recent recovery in oil prices has eased some pressure on fiscal and external accounts، though these remain stretched in some places.

Bahrain’s currency is commonly viewed as being at most risk of de-pegging. The IMF estimates that the price of oil needs to reach $99 a barrel for Bahrain to balance its budget، about $37 above its current level. The kingdom has been seeking financial assistance in recent weeks from its neighbours.

Most analysts are confident that، on balance، Saudi Arabia would rather bail out Bahrain than jeopardise its own peg.
“The authorities know that de-pegging will cause speculation to rise in other countries. It is not that much effort for Saudi Arabia to support Bahrain،” says Wike Groenenberg، EM strategist at BNP Paribas.
However، Tarek Fadlallah، head of Nomura Asset Management in Dubai، says that while the risk of depegging is minimal in the next one to three years، it is a virtual certainty in the next five to 10.

“Without a significant devaluation in the dollar، de-pegging will be necessary to keep non-oil economies competitive and meet growth and employment targets،” he warns.


Edited by Rasha Mohamed

Comments

ads

Poll

What do you think about our new design?

What do you think about our new design?
ads