Transcript lebanese enterprises diagnosis

WORKING MEETING ON
WHICH SOCIO-ECONOMIC PROGRAM
FOR LEBANON ?
LEBANESE ENTERPRISES DIAGNOSIS:
LACK OF FINANCIAL LOANS OR LACK OF
FINANCIAL OPPORTUNITIES
by
Dr Makram Sader
Secretary General
Association of Banks in
Lebanon
10 April 2006
Crown Plaza Hotel
Beirut - Lebanon
1
O- Economic Background
I- Corporate Sector: A Diagnosis
1- Credit Supply / Demand Problem?
2- Lebanese Corporate Sector: Demand Side:
Earnings & Debt Servicing
II- From Diagnosis to Causes
III- What to do?
1- Financial Intermediation Level
2- Public Authorities Level
3- Corporate Sector Level
2
0- Economic Background
Macroeconomic Imbalances
1-Low economic growth
2-Resources gap (Saving/Investment) :
Current Account Deficit
Public Expenditures
Private Spending
Bank Credit
Access to international capital markets
3
Table 1- Key Economic Indicators
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
USD million
-2337
-3040
-3483
-3933
-4405
-3219
-2970
-3711
-2783
-2486
-3487
-3756
Current Account / GDP
%
-25.7
-27.3
-26.8
-25.2
-26.1
-19.1
-17.9
-21.9
-15.1
-12.5
-16.0
-16.9
GDP, constant prices, %
%
8.0
6.5
4.0
4.0
2.3
-1.2
1.2
4.2
2.9
5.0
6.0
0.0
USD million
9110
11119
12997
15595
16854
16877
16593
16947
18379
19895
21768
22203
Current Account
GDP, current prices
GDP, deflator
Inflation annual percent change
Index
%
464.809 514.079 559.832 632.967 658.553 663.813 644.755 631.976 666.043 686.642 708.771
8.2
10.3
8.9
7.7
4.5
0.2
-0.4
-0.4
1.8
1.3
3.0
722.94
2.0
Sources : World Economic Outlook database, IMF, 2005
4
I- Corporate Sector: A Diagnosis
1-Credit Supply / Demand Problem?
 Not an issue of crowding out or shortage in the supply
of credit
 Issue of credit demand and lack of good or profitable
opportunities
5
Table 2- Evolution of Commercial Banks’ assets structure
Million USD
End of period
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
(%)
Credit to the private sector
3634
4960
6701
8563
10492
12798
14432
15241
15223
15715
15760
16825
17319
24.63
Credit to the public sector
2346
4195
4980
7771
8667
11898
14488
15437
15301
17630
13934
16023
17709
25.18
Deposits at BDL
810
1651
2168
2759
4001
4245
4431
4731
6972
7823
18671
19690
20376
28.97
Deposits at non resident banks
3860
3509
3647
3772
5322
5642
4705
6883
7368
8239
8053
11058
10475
14.90
Others
343
430
709
1094
1401
1910
2389
2741
2801
3154
3698
4189
4446
6.32
Total
10993
14745
18205
23958
29884
36493
40445
45034
47665
52561
60115
67786
70325
100.00
6
1993
1997
2000
2005
Private & Public Loans
55
64
68
50
BDL & Foreign banks (Liquid Assets)
42
32
26
44
Fixed Assets
3
4
6
6
100
100
100
100
Total
 2000-2005: the growth of credit to the private sector
leveled or stabilized
 Large liquid assets invested
– Domestically at BDL
– Abroad in the form of Foreign Assets
7
Table 3- Credit to the Private Sector
1993
1994
1995
1996
USD million
3634
4960
6701
8563 10492 12798 14432 15241 15223 15715 15760 16825 17319
Nominal growth rate of credit
(%)
6.8
36.5
35.1
27.8
22.5
22.0
12.8
5.6
-0.1
3.2
0.3
6.8
2.9
Nominal growth rate of GDP
(%)
38.1
16.6
17.8
13.3
12.1
6.8
-
-1.9
2.3
8.2
6.4
9.2
2.0
Credit to the private sector / GDP
(%)
47.4
53.4
59.3
65.1
66.7
75.3
84.8
91.4
89.2
85.1
80.3
78.5
79.2
Credit to the private sector
1997
1998
1999
2000
2001
2002
2003
2004
2005
Sources: Bank of Lebanon- Ministry of Finance-Ministry of Economy
Credit to the private sector
USD million
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
0
Fe 5
b06
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
8
Table 4- Lending rates
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Average lending rate
(%)
12.0
13.0
13.7
13.1
11.8
11.5
10.6
10.7
9.4
7.6
7.4
6.9
8.2
Inflation rate
(%)
29.0
8.0
10.6
8.8
7.8
4.0
0.3
-0.4
-0.4
1.8
1.3
3.0
2.0
Real interest rate
(%)
-17.0
5.0
3.1
4.3
4.0
7.5
10.4
11.1
9.8
5.8
6.1
3.9
6.2
Real GDP growth rate
(%)
7.0
8.0
6.5
4.0
4.0
3.0
1.0
0.0
2.0
2.9
5.0
6.0
0.0
9
2- Lebanese Corporate Sector: Demand side:
Earnings and debt servicing
 Bank credit / Bonds & Equities : High debt / equity
(negative debt leverage)
 EBITDA / Debt service < 2:
– [E] Non performing Loans: Settlements’ efforts
– [T] Law of tax settlements and installments
– [D&A] CNSS: Charges on salaries
 ROIC < WACC (weighted average cost of capital) = cost of
debt
10
Total Loans to private sector
Problem Loans (NPL'S)
Provisions & Unrealised Interests
2000
2001
2002
2003
2004
2005
2000-2005
1. Total Loans
24888
25253
24947
24686
28381
28566
2.8%
2. NPL'S
4828
5575
6791
7311
6910
6625
7.1%
3. Provision & Unr. Int
3129
3493
4236
4457
4228
5431
8.1%
4. NPL'S / Total Loans
19.4%
22.0%
27.2%
29.6%
24.3%
23.2%
5. Prov.& U.I./ NPL'S
64.8%
62.7%
62.4%
61.0%
61.2%
68.4%
6. Net Loans
21759
21760
20711
20229
23753
23930
2.0%
7. Unreserved NPL'S
1699
2082
2555
2854
2682
2094
5.8%
8. UR NPL'S / Net Loans
7.8%
9.6%
12.3%
14.1%
11.3%
8.8%
11
Problem Loans (NPLs) / Total Loans
- 1998/1999: 12/14%
- 2000-2002: 22-27%
- 2003: 30%
- 2004/2005: 24/23%
(Settlements under BDL circulars)
12
II- From Diagnosis to Causes
Structural
Operating Environment
Input cost
&availability
of resources
Distorted
Investment
Structure
Deep cost /price
Distortions
-REER
-Huge inflow of funds
/capital
(Dutch disease)
Inadequate
Financial
Intermediation
Impediments
CNSS, EDL
Port
Health, Education
Transport
Tax policies
Weak Corporate Governance
13
Lack of comparative advantages (Inputs/Resources)
+
Excessive investment in non tradables (real estate,
restaurants, hospitals, schools, universities, repairs &
maintenance)
↓
- Low productivity: low earning  low investment
- Low job creation: low income creation, social
subsidies & transfers
- Weak interactivities links -Input/Output Exchange
(Leontieff Matrix)
14
Do these structural imbalances require structural
changes/ reforms??
The sustainability of such a structure is costly
(Subsidies, protection, social transfers, debt…)
15
The structural adjustment requires:
- Reallocation of resources (capital, human, land, etc…)
job creation, exports of goods & services generation
- It’s a time consuming process
(10/20/30 years)
- How to manage the transitional period?
Do we need an IMF program??
16
III- What to do?
1 – At the Financial Intermediation level
 Strategic position of the banking sector to initiate the
reallocation process
-Modern , well endowment in capital funds, human
resources, management, IT, procedures, local and
external networks, large deposit base….
-Catalyst, financier, advisor
 Commercial Bank Credit policies to be revisited
- From real estate guarantees to cash flow, corporate
finance and project finance based credit assessment and
guarantees
-Basle II requirements
17
V- What to do?
1 - Financial Intermediation level
 Determining role of Investment banking
- Through Special financing schemes: adequate and
diversified
- In Corporate financial restructuring
Coupled with refinancing structure/fund mechanism???
This process requires: -Large & L.T funds -----Beirut Donors
Conference
-Adequate legal framework
-Well functioning capital markets
18
2 - At the public authorities or government level
c/o The Way to Beirut Pact (phase I- July 2005)
Promote private sector competitiveness and enhance private
investments
 Domestic and external competition
– Trade & competition policies (inc. quality issues, IPP)
– Subsidies, public enterprises
– Private monopolies
 Administrative burden
– Corruption, red tape, contract enforcement
– Business entry/exit, bankruptcy laws
19
 Costs of utilities (transport, energy, ICT), public
infrastructure
– Privatization
– Public investment planning, sectoral, regional clusters
 Access to finance
– subsidies
– Prudential regulations
 Development of capital markets
– Establish an independent regulatory authority
– Enhance stock market activities
– Promote the development of new products
– Attract well-seasoned human capital
– Attract multinationals to use Lebanon as a platform for
their regional expansion
20
 Legal framework governing private sector activities
– labor , commercial , capital markets, investment park,
offshore and bankruptcy laws…
 Quality system and accreditation
 Incentives to private investments, and in particular
 incentives for investments in the less developed regions
 Access to information on various sectors of the economy
 Start ups and SMEs facilitation and support programs
21
3. At the Corporate Sector Level:
More Corporate Governance
Corporate laws
and regulations
Listing
requirements
Corporate by –laws
Separation ownership /
Management
Protect minority interest
International
Accounting, Disclosure,
Audit, Guidelines and
Standards
Dispute Systems and
bodies.
22