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Banque du Liban's stimulus programme under scrutiny

March 21st 2018

Banque du Liban's stimulus programme under scrutiny

In recent months, a series of developments relating to the annual stimulus package issued by Banque du Liban (BdL, the central bank) have cast doubt on the sustainability of its programme and the compliance of the commercial banking sector with the scheme. This has prompted public criticism of oversight of the scheme and how the funds are allocated. On March 5th the BdL governor, Riad Salameh, announced that the most recent US$500m in subsidised-interest funds for 2018 had been used up only a month after its was made available. There have been claims that the scheme was benefiting property speculators rather than the potential homeowners that it was established to help amid efforts to stimulate broader economic activity.  

Since 2013 the BdL has injected emergency funds into various key sectors in order to prop up the country's faltering economy. The bulk of the stimulus funds, totalling about US$1bn annually, have been injected into the real-estate market in the form of subsidised-interest-rate mortgages, although loans have also been made available to prioritised productive sectors. Real estate accounts for around 15% of GDP and a large share of bank lending, and the BdL hoped boosting the sector would stimulate broader economic growth. Historically, local property developers have catered to wealthy expatriates and Gulf Arab nationals through the construction of high-end, luxury projects, mostly around the capital, Beirut, that also offer the developers higher margins. As a result, property prices are often out of range of most Lebanese households. The stimulus programme aimed to support needy domestic consumers. Since the start of the economic downturn that coincided with the beginning of the Syrian war in 2011, real-estate transaction activity has been driven primarily by the BdL-subsidised housing loans.

Banks see rapid take-up of loans

Lebanese banks claim that the high level of domestic demand for homes was the reason that the 2017 stimulus funds were used up by the autumn of 2017. In response, the BdL approved a further US$500m worth of housing loans denominated in Lebanese pounds in October 2017. According to Mr Salameh, these funds were completely disbursed within two months. The rapid pace with which the stimulus money has been utilised has fuelled rumours in the press and within the financial sector that banks have misused the stimulus provisions by lending subsidised mortgages to borrowers for speculative purposes (to buy and then resell with a mark-up at a profit) rather than to buyers looking to live in the properties.

It appears that the central bank did not set the conditions for the original loans in a way that would have excluded banks from lending to speculators and professional investors rather than to the Lebanese of more modest means the BdL had intended. When it first offered the loans, the BdL stipulated that the stimulus funds were for those who could not afford homes without the subsidies, up to a certain value limit, but rules regarding who not to lend to were not as clearly defined. However, given that the BdL appears to have failed to put the appropriate formal conditions on the funds, it does not appear that commercial banks were in breach of any regulations. 

The rumours gathered momentum when the stimulus package for 2018 was announced a month later than usual at the beginning of February 2018, and the BdL has since responded by clarifying the lending conditions. Banks may have lent using the stimulus funds to people who did not need the subsidies to afford a home, although before the most recent rules were introduced; those that, for example, inherited a home, could still get subsidised mortgages. New conditions were introduced through BdL Circular 485 in February, which restricted lending from those that own more than one home. Furthermore, the BdL said that it would no longer provide liquidity for subsidised loans, but that it would only pay the difference between the market rate and its reduced offer, now at 4.75%. For the first time, the central bank capped stimulus funds for housing loans at US$500m, which were then allocated among participating banks.

Latest funds also quickly taken up

Some local press outlets claimed that the new measures were introduced in early 2018 because the BdL learned that banks were not lending in line with the stipulated qualifications. This explanation has also been echoed by some Lebanese economists, who say banks were more comfortable lending to well-capitalised speculators who were perceived as less risky investments. For some, this has reinforced the notion of  unethical conduct among Lebanese banks. Yet given that the rules have subsequently been tightened, it does suggest that the appropriate structure was not in place initially, Mr Salameh, in conjunction with most commercial banks, has preferred to highlight unprecedented levels of demand for housing from local consumers as the main reason for the rapid take-up.

A recent increase in minimum interest rates for subsidised mortgages of 0.5 percentage points has also led some local economists to the conclusion that BdL intends to slow market activity, amid fears that previous lending to unintended mortgage recipients—such as local speculators—could heighten the risk of mortgage loan defaults in 2018. Others, including real-estate developers, read the interest rate rise—and the associated lending restrictions—as a sign that the BdL is running out of liquidity. Again, Mr Salameh and bank economists have disputed this claim.

They say the changes are natural as banks were forced to raise interest rates on Lebanese pound deposits in order to retain liquidity after the surprise resignation of the prime minister, Saad Hariri, in November 2017. Fearing the economic repercussions of political instability, many depositors converted their savings to US dollars, forcing banks to increase interest rates on local-currency deposits. Mr Salameh has stated that the rise in rates for subsidised mortgages is necessary to fund the higher rate of return on these deposits in order to prop up inflows, which have indeed shown signs of recovery in early 2018.

In the absence of further information, it is impossible to make a definitive assessment regarding what led to the stimulus changes or the early depletion of funds. It is likely, however, that the real-estate sector will slow over 2018, and final asking prices may continue to fall as fewer consumers will be able to access the credit, which will further dampen prospects for broader economic recovery.

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