Lebanon Central Bank to Continue Intervening in Bond Market

Lebanon’s central bank will continue intervening in the bond market to keep interest rates stable after Standard & Poor’s downgraded the country’s rating earlier this month, Governor Riad Salameh said today.

“Our interventions are restricted to the local markets in order to maintain stability in the medium- and long-term rates of interest on Lebanese government paper whether it is dominated in Lebanese pounds or U.S. dollars,” Salameh said in an interview.

S&P cut Lebanon’s rating to B-, six levels below investment grade, from B on the impact of the Syrian civil war on the country’s economy. Lebanon has seen its debt-to-gross domestic product rise to 140 percent from 135 percent, Salameh said.

The Syrian war, which has killed at least 100,000 people since 2011 according to estimates quoted by the United Nations, has slowed Lebanon’s economic growth as security concerns battered tourism. The World Bank last month cut its forecast for economic growth this year to 1.5 percent from 2.3 percent. The Syrian conflict had so far cost the country an estimated $2.6 billion, the World Bank said.

While financial markets haven’t reacted to the downgrade, “this doesn’t mean that we don’t move and take initiative to remove or reduce the political risks resulting from not forming a government capable of undertaking reforms to cut” the ratio of debt to gross domestic product, Salameh said in a speech. Lebanon has had no government for at least six months.

Hezbollah Role

Hassan Nasrallah, leader of Beirut-based Shiite militia Hezbollah, said the different political factions in Lebanon should be “realistic” about the preconditions they’re setting for Hezbollah to participate in forming a new government.

One of the conditions set by political rivals is for Hezbollah to end its armed participation in Syria’s conflict, which Nasrallah rejected in a speech today. The militia has been fighting alongside troops loyal to Syrian President Bashar al-Assad.

Still, deposits into Lebanese banks are rising and may climb 7 percent this year, Salameh said. Deposits by non-residents may reach $8 billion in 2013, or 20 percent of GDP, Salameh said citing World Bank figures.

The central bank will offer lenders 1.2 trillion Lebanese pounds ($796 million) at an interest rate of 1 percent, Salameh said. The funds are intended to be used as credit to “productive sectors” in the country, he said.

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