Lebanon Banks Told to Boost Capital to Ease Growing Pressure

Lebanon Banks Told to Boost Capital to Ease Growing Pressure(Bloomberg) — Lebanon’s central bank instructed local lenders to raise their capital by 20% by next June and refrain from distributing dividends for 2019 to boost their liquidity and prepare for possible downgrades in credit ratings.The Banque du Liban, as the central bank is known, said in a circular that banks should boost their high-quality capital known as Common Equity Tier 1 through cash injections by 10% by the end of this year and another 10% by June 30, 2020.Banks need to bulk up capital buffers in the face of economic and political turmoil sweeping Lebanon and the threat of further credit downgrades. The cost of insuring Lebanon’s debt against default has jumped about 75% this year, the most in the world after Argentina, and its Eurobonds have been among the worst performers this year.Thousands of protesters have been on the streets for weeks, demanding the resignation of a political class they say has pillaged state coffers to the verge of bankruptcy while leaving the public with failing services. The protests prompted the resignation last week of Prime Minister Saad Hariri. A replacement has yet to be named, raising concerns the country will be unable to implement measures needed to avert economic crisis.The central bank’s request comes nearly a week after Fitch Ratings downgraded two top Lebanese lenders, Bank Audi and Byblos Bank, to CCC-, the fourth-lowest rank and one level below the sovereign. Its so-called support rating for both is “No Floor,” meaning it believes the state’s “ability to support” banks “cannot be relied on given the low sovereign rating.” A further downgrade to Lebanon’s credit rating could lead to similar moves on the banks.‘Deposit Stability’“In our view deposit stability is now at greater risk as depositor confidence has also suffered,” Fitch said.Banks reopened last Friday after two weeks of closures due to protests that saw people block vital highways and roads. Banks tightened informal restrictions on money transfers that were in place prior to the unrest, in an effort to curtail possible capital flight.To keep its lenders stable and defend the dollar peg, Lebanon relies on inflows from millions of Lebanese living abroad. However, capital inflows needed to finance the large current account and fiscal deficits have slowed as confidence has dwindled, while outflows have gathered pace.Capital outflows reached $ 3 billion in the first nine months of the year and a recovery hinges on political stability and implementation of deep reforms to restore confidence, according to the Institute of International Finance economists including Garbis Iradian.Under PressureLast month, S&P Global Ratings placed Lebanon’s B- grade on negative watch saying “pressing societal demands and limitations on Lebanon’s institutional capacity to address them could further test depositor confidence and weigh on foreign exchange reserves.” Moody’s Investors Service — which rates Lebanon at Caa1 — has done the same.Capital flight in the first nine month of this year is estimated at about $ 3 billion, equivalent to 5% of gross domestic product, according to a report by Institute of International Finance economists including Garbis Iradian. The dollarization of deposits has grown to about 80%, they said.Lebanon’s “prospects for recovery of non-resident capital inflows hinge on achieving political stability — formation of a new government — and implementation of deep reforms, which would support confidence both at home and abroad,” they said.(Updates with central bank’s circular in second paragraph.)\–With assistance from Ben Holland.To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.netTo contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Mark Williams, Paul AbelskyFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

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