Riad Salamé: The Central Banker who brings Stability to Lebanon

Euromoney, September 2014

Entry into Riad Salamé’s office is a curious process. You enter through the ante-room of his long-standing assistant Claude, open the door, then find a second door, padded, in the same doorframe, half an inch behind the first one. Then you open that one too and there, amid a cloud of acrid cigar smoke, is the longest serving central bank governor in the world.

It’s not clear if the double padded door arrangement is a matter of privacy or protecting Claude’s lungs from the cigar smoke (she reckons the former), but the impression it gives of some sort of bunker or inner sanctum is appropriate, because right now you couldn’t dislodge Salamé as governor of Banque du Liban with dynamite. And nobody would want to. In a country that over the years has been beset by wars both civil and external, by assassinations and now by political paralysis and a million and a half Syrian refugees in a country that had only four million people to start with, Salamé is revered by the banking and business sectors. Some want him to be president, others are just grateful that he’s here at all. “The central bank,” says one banker, “is the only place doing any thinking right now.”

Despite the formation of a new government earlier this year, there is still no president – an attempt to appoint one has just been postponed for the fourth time – and there is controversy about the proposed extension of an expired parliament too. It’s not an environment within which much can be achieved. It increasingly feels, Euromoney suggests, like Banque du Liban has ended up with all the responsibility for reviving the Lebanese economy. Does he feel that way?

Salamé’s been fielding questions for 21 years and has an unflappable diplomacy in his gravel-voiced responses. “Lebanon has experienced at the level of its government difficulties due to political splits,” he says, before detailing the uncertainty around president and parliament. “And we also have challenges due to the regional situation. The government is doing its best to run the affairs of the country but is in no position to take structural decisions that would result in reform, especially on the budget, and its influence on the economy is limited.” In this environment, he says, the central bank has “taken initiatives in order to maintain confidence in the Lebanese economy and financial sector, and in order to increase internal demand so that we keep having positive growth in Lebanon.”

In this it has been successful, achieving what Salamé calls “a real growth rate” of 2.5% last year (the IMF reckons 1.5%), with expectations of modestly higher growth this year and next. There’s no question that it’s down to central bank stimulus packages that there has been any growth at all; soft loans to the banking sector in 2013 and 2014 both triggered sufficient lending to keep the economy afloat.

This is quite an achievement given the pressures from Syria which, he says, the World Bank has estimated costs the Lebanese economy $2 billion a year (in fact, the World Bank said in September that by the end of 2014 the Syrian conflict will have cost the Lebanese economy $7.5 billion). “Yet our country had enough strength to carry on and keep a positive growth rate. The number of refugees represent probably 30% of the Lebanese population today, using the country’s infrastructure, and since the assistance coming from outside is humanitarian, it doesn’t touch on these sectors. So there is a direct cost in that sense.” There are also indirect consequences, he says: the fact that the Lebanese are split on which side of the Syrian conflict to support has created tensions that erupted last year with car bombs and suicide attacks within Lebanon. This has hit everything from consumption to tourism to investment, and led to measures such as GCC countries asking their citizens not to visit Lebanon.

Worse still, in the week before Euromoney’s visit, the ambitions of ISIS, the attempt to build an Islamic caliphate within Syria and Iraq, appeared to have spread to Lebanon as clashes took place in border towns. “It is a concern for all Lebanese,” says Salamé, “but the response was positive. All Lebanese, whatever their religion” – there are 18 recognized religions in Lebanon – “united around the government in its decision to block the expansion of ISIS. The moderates in the country have the upper hand.”

Beyond the geopolitics, there are considerable domestic challenges. A recent IMF report highlighted ugly numbers in the fiscal deficit, budget deficit and level of public debt to GDP (9.2%, 0.8% and 141% respectively in 2013), and it expected all of them to get worse (to 11.9%, 2.5% and 148% in 2015). What does he want the government to do about them?

“Our task as a central bank is to pre-empt the negative effects of these indicators on monetary stability and on confidence in the country,” he says, as usual choosing not to moan about others’ behaviour but to point out what he’s doing about it. “As long as we maintain capital inflows – and we have had a recent increase in the deposit base of the country – we will have enough ammunition to weather these difficult times.” And the government? “There is, everywhere, an awareness that reforms are needed. But the timing is not appropriate because of the lack of normal constitutional life in Lebanon. We have to live with our realities.”

“It is certain,” he says, “that the growth rate of the country had a lot to do with the deterioration in these figures. We were growing at a level of 8% and diluting the public debt in a larger economy.” Not anymore. “So the answer is to try to have better economic growth despite the difficult situation, and we are doing what we can as a central bank to create incentives to promote the economy.”

What’s interesting about these measures is that they have not been built upon a straightforward flood of liquidity – Salamé’s too wary of inflation to do that – but through considered and technical policies with well thought-out aims. An example is an attempt to boost investment in the knowledge economy, explained in detail in the following roundtable. “This sector is going to create more competitiveness for Lebanon, with new employment, and as we can match this liquidity with greater productivity, we have no fear of inflation,” he says. If the approach is successful “we are contemplating more measures that will be dedicated to enhancing exports from Lebanon,” he says, highlighting industry and agriculture.

How about oil and gas? This sector is, at once, Lebanon’s potential salvation and another cause to worry that the country will mismanage something. The expected oil and gas fields in Lebanon’s part of the Mediterranean (not enough exploration has taken place to prove them) could fix all of Lebanon’s fiscal and employment problems, but only if it’s done well and spent well. “We believe that once allocations are done, the revenues will not materialize immediately: it will take a few years,” he says. Once they do appear, “they should be used to finance, with the private sector, the development of Lebanon’s infrastructure, and regional development through municipalities.” Would a sovereign wealth fund be appropriate? “The government is looking at that. That could be the vehicle that would participate with the private sector in developing infrastructure.” Is there a natural role model among the region’s sovereign funds? “We have to adapt it to the needs of Lebanon. It would be irrational to invest these funds outside when there is a need for them in Lebanon.”

The infrastructure bottleneck is a seemingly bottomless problem for Lebanon, with the pitiful state of its electricity utility, Electricité du Liban, emblematic of broader problems. “There are sectors which need reforms that would improve the Lebanese economy and also decrease the deficits, and electricity is one of them,” says Salamé, also highlighting water supplies and transport. “If there is a political will to do it, the reforms can be done. This is a governmental responsibility. The central bank is not part of it.”

One area the central bank can claim responsibility for is the remarkable resilience of the banking sector, which has withstood every possible stress that can be thrown at it over the last 20 years. “The banking system in Lebanon is strong and safe,” he says. “The model we built prior to the resolution of Basel 3 was very close to what Basel 3 became.” This is true: solvency ratios that are new everywhere else were already in place in Lebanon. That said, rating agencies don’t like the banks’ exposure to the sovereign and keep the sovereign rating at an oddly low B-/B1 because of it. “We cannot say the banks are over-exposed to the public sector,” Salamé argues. “Since 2009 loans to the private sector have exceeded their exposure to government treasury bills or bonds.

And the rating? “The rating is low, but if you look at the market reaction to paper issued in Lebanon, you see the market is giving us a higher rating than the agencies are giving us. That has helped finance the government with a reduction in interest rates, cutting the cost of servicing the debt.” Lebanese 10-year paper is trading at 6.5%, inferring a BBB credit, not the 10% or more that a B- credit would normally pay.

Salamé’s job includes being head of the capital markets authority, and there are hopes that it will make capital raising easier. “We are creating a proper environment that would guarantee transparency, good governance and fair trading. We have to change the culture and we have to create liquidity.” Part of the process will involve the privatization of the Beirut Stock Exchange.

Despite its challenges, Salamé says Lebanon is still attracting $3 billion a year in FDI – albeit mainly in real estate rather than industry – in addition to the $7-8 billion that comes in from remittances each year from Lebanon’s vast and faithful diaspora. It’s because of this diaspora that Salamé has no problem with Lebanon hosting no less than 23 banking groups, and 11 major banks, for such a small population. “Lebanese banks are serving not just the Lebanese economy but the diaspora: that’s why their deposits are larger than GDP by almost three times. I do not want to see mergers among the 11 largest banks. I want to keep the banking risks distributed among many institutions, for stability.”

21 years in one job. How long will he stay? “My mandate still has three year to run. I am here for that.” And then? Lebanon lacks a president and plenty of people think he’s running the country, or at least the economy, already. Will he consider politics? He grins. “My priority is the central bank,” he says. “We will see later what will happen.”