Banks likely to raise interest rates on dollar

Average interest rate on U.S. dollar in Lebanon is higher than international average due to risk premium

A Lebanese banker counts U.S. dollars at BLOM Bank's head office in Beirut October 22, 2008.

A Lebanese banker counts U.S. dollars at BLOM Bank's head office in Beirut October 22, 2008.

REUTERS/Jamal Saidi

16 December 2016

BEIRUT: Lebanese banks are poised to increase interest rates on dollar deposits gradually after the U.S. Federal Reserve said it is contemplating raising rates three more times in 2017. The U.S. Federal Reserve raised interest rates by a quarter point Wednesday and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation, according to Reuters. Bankers interviewed by The Daily Star said it was only natural that Lebanese lenders follow suit in the future.

The average interest rate on the U.S. dollar in Lebanon is higher than the international average due to the risk premium.

Some bankers and economists explained that raising the interest rate on the dollar will be an effective way to attract foreign currency back to Lebanon.

But it is unlikely that most banks will raise the interest rates on the dollar spontaneously, instead preferring to wait until the Federal Reserve progressively increases these rates in the following years.

“The average interest rate on the dollar in America after yesterday’s hike is between 0.5 and 0.75 percent only. There is talk that by 2018, the interest rates on the dollar in America will reach 3 to 4 percent. If this happens then definitely the Lebanese banks will raise the rates,” economist Ghazi Wazni told The Daily Star.

He added that banks want to raise interest rates on the U.S. currency to beef up their dollar reserves which fell substantially after the Central Bank’s financial engineering.

The Central Bank requested in August that Lebanese commercial banks use surplus funds, which they generate by selling local-currency government bonds from their portfolio and buying Eurobonds simultaneously, as provisions in Lebanese pounds to be included in their Tier 2 capital.

The debt swap has allowed the Central Bank to beef up its foreign currency reserves and enabled the commercial banks to make hefty profits in a very short period of time.

Wazni said that some Lebanese banks are now offering 6 to 6.5 percent interest on dollar deposits that exceed $1 million.

“Many banks are offering these rates provided that the minimum deposit is $1 million with a three-year maturity,” he added.

A number of leading banks have even offered 20 percent profit up front for any person or company that deposits $10 million or more for at least a three-year period.

According to financial circles, a leading bank has offered between 10 percent to 20 percent instant profit in the form of Lebanese pounds and 5 percent annual interest on a $10 million or more deposit.

One of the aims of this financial product is to find new uses for the excess cash in Lebanese pounds that resulted from the Central Bank’s financial engineering which started in May 2016.

Makram Sader, the secretary-general of the Association of Banks in Lebanon, said that raising the interest rates on the dollar depends on the policy of each bank.

“The Fed’s decision to raise the interest rate on the dollar by 25 basis points is the issue. The issue is the trend which the Fed will follow in the coming few years, if the Fed raises these rates gradually over the next two to three years. And naturally this will impact Lebanon,” Sader told The Daily Star.

He added that anyone who denies that the hike in interest rates will not impact Lebanon is like someone hiding behind his finger.

“This all depends on the trends in the United States and Europe. A number of Arab Gulf States have already raised interest rates on the dollar. These countries are competing with Lebanese banks and for this reason these lenders will not sit idle,” he explained.

But Wazni warned that any increase on interest rates will have a negative impact on public finances in Lebanon.

“In 2017 we will have $2.3 billion [of] Eurobonds which will mature that year and I expect banks to demand higher interest rates on the issue if the government wanted to replace it. This will surely increase the cost of debt servicing and ultimately the public debt which is already very high,” he stressed.

© Copyright The Daily Star 2016.

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