The LEBANON WEEKLY MONITOR

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1 CONTACTS The LEBANON WEEKLY MONITOR Treasury & Capital Markets Bechara Serhal (961-1) Nadine Akkawi (961-1) Private Banking Toufic Aouad (961-1) Corporate Banking Khalil Debs (961-1) RESEARCH Marwan Barakat (961-1) Jamil Naayem (961-1) Salma Saad Baba (961-1) Fadi Kanso (961-1) Gerard Arabian (961-1) Farah Nahlawi (961-1) Nivine Turyaki (961-1) Economy p.2 NET DEFICIT IN THE BALANCE OF PAYMENTS AMID A RISE IN TRADE DEFICIT PARTLY OFFSET BY FINANCIAL INFLOWS The first seven months of the year reported an increase in the trade deficit offset by a rise in financial inflows, yet without reversing the deficit in the balance of payments. Also in this issue p.3 Value of cleared checks down by a yearly 3.7% in the first eight months of 2018 p.4 Consumer price index up by 6.6% year-on-year in August 2018 Surveys p.5 LEBANESE ECONOMY TO EXPAND BY 1.9% IN 2018 AND 2.4% IN 2019, SAYS BLOOMBERG According to a recent survey conducted by Bloomberg, the Lebanese economy is expected to expand by 1.9% in 2018, 2.4% in 2019, and 3.0% in Also in this issue p.6 The Parliament ratifies US$ 120 million World Bank loan for the health sector p.6 Lebanon to hold second Oil & Gas Licensing Round in 2019 Corporate News p.7 FRANSABANK ASSETS TOTALED US$ 23.3 BILLION AT END-JUNE 2018 Fransabank registered net profits of US$ 69.5 million in the first half of 2018, edging down by 18.7% from US$ 85.5 million in the first half of 2017, as per Bankdata Financial Services. Also in this issue p.8 Net profits of SGBL down to US$ 76.9 million in the first half of 2018 Markets In Brief p.9 BOND PRICES CORRECTED UPWARD TOWARDS THE END OF THE WEEK Awaiting a new round of political talks to break the cabinet formation impasse, and amid domestic tensions triggered by unfounded rumors that were later totally dismissed, Lebanon s capital markets witnessed this week stability in bond prices, as internationals who offered their papers at the beginning of the week returned to the market as buyers towards the end of the week. As such, the weighted average yield managed to close at 10.01% on Friday after reaching 10.24% on Wednesday. The return of internationals buyers occurred at a time when Lebanese Z-spreads have exceeded Z-spreads in emerging markets by around 371 bps. On the equity market, prices remained on the decline despite attractive market pricing ratios, with the BSE price index retreating further by 0.5%. Finally, the FX market saw some LP-to-FC conversions, which called for BDL s intervention in the market as a seller of the US dollar, while the Central Bank Governor reiterated monetary stability. LEBANON MARKETS: WEEK OF SEPTEMBER 24 - SEPTEMBER 30, 2018 Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box Lebanon - Tel: research@bankaudi.com.lb 1

2 ECONOMY _ NET DEFICIT IN THE BALANCE OF PAYMENTS AMID A RISE IN TRADE DEFICIT PARTLY OFFSET BY FINANCIAL INFLOWS The first seven months of the year reported an increase in the trade deficit offset by a rise in financial inflows, yet without reversing the deficit in the balance of payments. The trade deficit increased by 3.9% year-on-year, moving from US$ 9.8 billion over the first 7 months of 2017 to US$ 10.1 billion over the same period of The coverage of imports by exports maintained its low figure of 14.7%, despite the faster growth in exports (6.4%) relative to that of imports (4.2%), maintaining the trade deficit at above 30% of GDP. But financial inflows managed to rise by 7.5% year-on-year, moving from US$ 8.8 billion to US$ 9.4 billion, thus helping somehow narrowing the deficit in the balance of payments. The latter moved from -US$ 1,015 million in the first 7 months of 2017 to -US$ 739 million in the same 2018 period. The breakdown of exports by product suggests that the lion s share continue to be that of jewelry with 24.4% over the first 7 months of 2018, followed by metals and metal products with 14.2%, food products with 13.7%, chemical products with 11.4%, electrical equipment and products with 10.0%, plastic products with 5.7% and vegetable products with 5.2%. The remaining product categories have shares of less than 5% of total exports. The breakdown of exports by country of destination suggests that UAE became the largest recipient from Lebanon with 13.5% of total exports over the 7-month period, followed by South Africa with 8.8%, Saudi Arabia with 6.8%, Switzerland with 5.9%, Syria with 5.9% and Turkey with 5.1%. The remaining recipient countries have shares of less than 5% of total exports. The breakdown of imports by product suggests that the lion s share continue to be that of mineral products with 21.8% of total imports over the seven-month period, followed by chemical products with 11.2%, electrical equipment and products with 10.5%, transport vehicles with 8.4%, food products with 6.7%, jewelry with 6.6%, metals and metal products with 6.3% and livestock and animal products with 5.1%. The remaining product categories have shares of less than 5% of total imports. LEBANON'S FOREIGN TRADE ACTIVITY Source: Lebanese customs 2

3 The breakdown of imports by country of origin suggests that China had the lion s share with 10.2% of total imports over the period, followed by Greece with 8.0%, Italy with 7.9%, USA with 7.9% and Germany with 5.8%. The remaining countries of origin have shares of less than 5% of total exports. VALUE OF CLEARED CHECKS DOWN BY A YEARLY 3.7% IN THE FIRST EIGHT MONTHS OF 2018 Total value of cleared checks, an indicator of consumption and investment spending in the Lebanese economy, declined by 3.7% year-on-year in the first eight months of 2018 pointing to a deceleration in spending during the aforementioned period. The value of cleared checks reached US$ 44,110 million in the first eight months of 2018, against US$ 45,791 million in the corresponding period of A breakdown by currency shows that the banks clearings in Lebanese Pounds amounted to LP 21,537 billion (+0.7%) in the first eight months of 2018 while those in FC amounted to US$ 29,823 million (-5.6%). Furthermore, the number of cleared checks registered 7,889,576 in the first eight months of 2018, down by 5.2% from 8,319,223 in the corresponding period of The average value per check rose by 1.6% year-on-year to stand at US$ 5,591 in the aforementioned period of The value of returned checks reached US$ 1,016 million in the first eight months of 2018, against US$ 964 million in the corresponding period of On the other hand, the number of returned checks registered 177,002 in the first eight months of 2018, up by 15.5% from 153,220 in the corresponding period of CLEARING ACTIVITY (FIRST EIGHT MONTHS OF THE YEAR, US$ MILLION) Sources: Association of Banks in Lebanon, Bank Audi's Group Research Department 3

4 CONSUMER PRICE INDEX UP BY 6.6% YEAR-ON-YEAR IN AUGUST 2018 The Consultation & Research Institute s index of consumer prices has risen by a yearly 6.6% in August 2018 compared to results of August Eight of the nine main indices registered yearly increases this August as per CRI. The highest increase was registered by the Apparel category (25.3%), followed by the Other Goods and Services category (10.8%) and the Transportation and Telecommunications category (8.3%). On the other hand, a sole index decreased, namely that of the Recreation category (-2.4%) this August. The August 2018 year-on-year Food and Beverages index increased by 5.1% since August Two of the four main indices registered increases this month, namely those of the Food category (5.9%) and the Nonalcoholic Beverages category (3.8%). On the other hand, the other two main indices registered decreases, namely those of the Tobacco Products category (-5.6%) and the Alcoholic Beverages category (-3.2%). The index for Food increased by 5.9% compared to its level last year, as six of the food group indices have witnessed increases this August. The most significant increase was registered in the Vegetables category (31.4%), followed by the Food away from home category (9.8%) and the Fats and Oils category (7.4%). On the other hand, the other six categories witnessed decreases, most significantly that of the Grains and Nuts category (-5.9%), followed by the Sugar and Confectioneries category (-3.4%) and the Fish and Seafood category (-3.2%). Apparel year-on-year prices registered 25.3% surge in August This was the result of the increases in its two main indices: the Clothing and Sewing Materials category (33.6%) and the Footwear category (5.6%). The index for Housing has increased by 4.6% in August 2018 from its level last year. This was due to the increases in the Household Energy category (6.7%), the Public Water Subscription category (1.4%) and the Municipal Fees category (1.1%). The Household Maintenance category registered no change this month. The Durable Consumer Goods index increased by 4.4% since August Two categories have witnessed increases this August, namely those of the Household Furnishings category (33.3%) and the Miscellaneous Household Products category (3.4%). Five categories recorded decreases in August 2018, most significantly the Appliances category (-6.2%), followed by the Glassware category (-6.1%) and the Kitchenware and Cleaning products and services category (-1.9%) each. The CPI component for Transportation and Telecommunications has increased by 8.3% year-on-year in August 2018, due to the increases in both of its main indices: the Transportation category (8.4%) and the Telephone Services category (7.4%). The index for education has significantly increased by 6.7% from the previous year, due to the increases in all of its three categories; namely those of Educational Books and Supplies category (7.9%), Tuition Fees category (7.4%) and School Transportation category (2.7%) this August. The index for recreation decreased by 2.4% compared to its results in August 2017, due to an equivalent decrease in the Movies and Restaurants category (-2.9%). The index of Other Goods and Services sharply increased by 10.8% since August This was basically due to the increases registered in two of its main categories, namely those of the Financial Services category (54.3%) and the Personal Care category (13.0%). 4

5 SURVEYS LEBANESE ECONOMY TO EXPAND BY 1.9% IN 2018 AND 2.4% IN 2019, SAYS BLOOMBERG According to a recent survey conducted by Bloomberg, the Lebanese economy is expected to expand by 1.9% in 2018, 2.4% in 2019, and 3.0% in It is worth noting that the survey was completed by nine economists and conducted between September 16 and September 19, which is mostly in line with the previous survey under taken in June. With regards to inflation, the country s CPI is estimated to reach 5.2% in 2018, and forecast to ease to 3.9% in 2019 and 2.8% in Lebanon s current account balance is anticipated to attain a deficit of 21.0% of GDP in 2018, a deficit of 20.2% of GDP in 2019, and a deficit of 19.4% GDP in Last but not least, the country s budget balance, as a percentage of GDP, is estimated to post a deficit of 8.5% in The latter is expected to reach deficits of 7.7% of GDP in 2019 and 7.1% of GDP in LEBANON SELECTED MACROECONOMIC INDICATORS Sources: Bloomberg, Bank Audi's Group Research Department 5

6 _ THE PARLIAMENT RATIFIES US$ 120 MILLION WORLD BANK LOAN FOR THE HEALTH SECTOR The Lebanese Parliament recently ratified a US$ 120 million World Bank loan for the health sector. The low-interest loan would be due within 23 years following a six-year grace period. The loan is for the implementation of the Health Resilience Project, which aims to give poor citizens and displaced Syrians in Lebanon increased access to quality health services. Around US$ 77 million would be dedicated for scaling up Primary Health Care capacity in order to meet the growing needs of vulnerable citizens. Around US$ 37 million would be allocated for the provision of health care services in public hospitals. The aim is to finance capitation payments of public hospitals for delivery of medical and paramedical, and emergency healthcare services to patients. It also aims to improve technical capabilities at public hospitals. Around US$ 7 million would be dedicated for project management and monitoring. This component aims to boost the capacity of the Ministry of Public Health by carrying out a comprehensive assessment of the country s hospitals. In parallel, the parliament approved three further loans, with a total value of US$ 330 million to finance and execute infrastructure projects. The loans would have varying but low interest rates. The International Bank for Reconstruction and Development would provide the Cabinet a US$ 200 million loan, at a 1.5% interest rate. The loan would finance the construction and rehabilitation of roads across the country. It includes a soft loan of US$ 45.4 million. The European Investment Bank would grant an US$ 80 million loan ( 68.5 million) to rehabilitate the pathway of Nahr Al Ghadir River and initiate a waste water treatment system. Last but not least, a US$ 50 million (KWD 15 million) loan, granted by the Kuwaiti Fund for Arab Economic Development, would finance two waste water treatment systems in the Chouf area. The loan extends over 20 years with a five years grace period, and at a 2.5% interest rate. The two systems would benefit 20 villages. _ LEBANON TO HOLD SECOND OIL & GAS LICENSING ROUND IN 2019 According to Bloomberg, Lebanon plans to hold second Oil & Gas Licensing Round in Companies interested in the offshore exploration rights in Lebanon would first have to prequalify and then those that pass would be invited to bid, according to Bloomberg. Companies that qualified to build floating storage regasification units would submit their bids on Nov , and offers would be assessed by the Council of Ministers. Lebanon has access to send its gas to Europe through Turkey and by way of Egypt s liquefaction plants. Thus, the country has enough advantages to compete in the gas market, as per Lebanon s Energy Minister. 6

7 CORPORATE NEWS FRANSABANK ASSETS TOTALED US$ 23.3 BILLION AT END-JUNE 2018 Fransabank registered net profits of US$ 69.5 million in the first half of 2018, edging down by 18.7% from US$ 85.5 million in the first half of 2017, as per Bankdata Financial Services. Net interest income amounted to US$ million in the first half of 2018, down by 6.5% from US$ million recorded in the same half of Net fee and commission income decreased by 6.0% year-on-year from US$ 34.4 million in the first half of 2017 to US$ 32.3 million in the same half of Net operating income fell by 8.7% to attain US$ million in the first half of Total operating expenses declined by 5.2% year-on-year to US$ million in the first half of Among the latter, staff expenses reached US$ 86.1 million in the first six months of this year, 3.6% lower than those reported in the same period of the previous year, and administrative and other operating expenses recorded US$ 36.6 million, 8.4% lower than those in the same period of last year. The cost-to-income ratio rose from 54.8% in the first half of 2017 to 58.1% in the same period of Fransabank assets totaled US$ 23.3 billion at end-june 2018, up by 5.7% from end Net loans and advances stood at US$ 6.6 billion at end-june 2018, up by 2.0% from end Customers deposits amounted to US$ 17.2 billion at end-june 2018, up by 3.9% from end FRANSABANK'S NET PROFITS (US$ MILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 7

8 NET PROFITS OF SGBL DOWN TO US$ 76.9 MILLION IN THE FIRST HALF OF 2018 The net profits of SGBL stood at US$ 76.9 million in the first half of 2018, falling from US$ 82.4 million in the same period of the previous year, as per Bankdata Financial Services. The bank s net interest income attained US$ million in the first half of 2018, improving by 28.0% from US$ million in the same period of Net fee and commission income increased by 45.1%, rising from US$ 20.7 million in the first half of 2017 to US$ 30.0 million in the corresponding period of Total operating income expanded by 12.6% to reach US$ million in the first half of This was accompanied by a 9.1% yearly rise in total operating expenses, which amounted to US$ 99.9 million in the first half of 2018, up from US$ 91.6 million in the same period of Among the latter category, staff expenses improved by 7.3% year-on-year to reach US$ 46.6 million in the first half of 2018, and administrative and other operating expenses edged up by 11.3% from US$ 43.3 million in the first half of 2017 to US$ 48.2 million in the first half of Operating profits declined by 5.6% year-on-year to US$ 90.7 million in the first half of The bank s total assets amounted to US$ 22.8 billion at end-june 2018, up by 5.9% from US$ 21.6 billion at end Deposits from customers stood at US$ 17.4 billion at end-june 2018, progressing by 5.6% from US$ 16.5 billion at end Loans to customers registered US$ 5.0 billion at end-june 2018, up by 1.9% from end The gross doubtful loans to gross loans ratio rose from 8.1% at end-2017 to 8.9% at end-june The loan loss reserves on doubtful loans to doubtful loans ratio fell from 81.8% at end-2017 to 72.7% at end- June Shareholders equity totaled US$ 1.8 billion at end-june 2018, down by 2.0% from end SGBL'S MAJOR BALANCE SHEET AGGREGATES (US$ BILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 8

9 CAPITAL MARKETS MONEY MARKET: LARGEST WEEKLY EXPANSION IN FC DEPOSITS SINCE MARCH 2018 The overnight rate remained stable at 5.0% this week, with the local currency liquidity remaining quite abundant on the money market. As to LP Certificates of Deposits, the Central Bank of Lebanon raised LP 26 billion from the sale of LP 25 billion in the 45-day category and LP 1 billion in the 60-day category, which brought total subscriptions in shorter-term categories to LP 1,308 billion since the beginning of the year Total resident banking deposits expanded by LP 776 billion during the week ending 13th of September 2018, as per the latest monetary aggregates released by the Central Bank of Lebanon. This was mainly driven by a significant growth in foreign currency deposits of LP 730 billion (the equivalent of US$ 484 million), which is their largest weekly expansion since March 2018, in addition to a LP 46 billion rise in total LP resident deposits amid a LP 171 billion increase in LP demand deposits and a LP 125 billion decline in LP saving deposits. These weekly variations compare to an average weekly growth of US$ 59 million for foreign currency deposits and an average weekly rise of LP 24 billion for total LP deposits since the beginning of the year Within this context, the total money supply in its largest sense (M4) expanded by LP 487 billion over the covered week, amid a LP 166 billion decline in the currency in circulation and a LP 124 billion retreat in the non-banking sector Treasury bills portfolio. On a cumulative basis, total resident deposits grew by LP 4,856 billion since the beginning of the year 2018, with foreign currency deposits growth capturing 81.0% of the total growth (the equivalent of LP 3,932 billion or US$ 2,608 million), and total LP deposits growth accounting for the remaining 19.0% (the equivalent of LP 924 billion). INTEREST RATES Source: Bloomberg _ TREASURY BILLS MARKET: SHY NOMINAL WEEKLY SURPLUS The latest Treasury bills auction results for value date 27th of September 2018 showed that the six-month category (offering a yield of 4.99%) had full allocations, while the two-year category (offering a coupon of 5.84%) and the ten-year category (offering a coupon of 7.46%) had an allocation of 25% and 68% respectively. In parallel, the auction results for value date 20th of September 2018 showed that total subscriptions reached LP 103 billion and were allocated as follows: LP 25 billion in the three-month category, LP 53 billion in the one-year category, and LP 25 billion in the five-year category. In parallel, total maturities reached LP 100 billion, resulting into a shy weekly nominal surplus of LP 3 billion. 9

10 TREASURY BILLS Sources: Central Bank of Lebanon, Bloomberg FOREIGN EXCHANGE MARKET: RISING TENSIONS WEIGH ON THE FX MARKET Elevated domestic tensions weighed on the foreign exchange market activity during this week, amid a prolonged cabinet formation stalemate and some rumors aiming at spreading confusion in the market. This prompted the Central Bank governor to dismiss concerns over the Lebanese Pound, reiterating that the monetary situation is stable, while emphasizing that the formation of a government gives a vision of where the country is heading economically and financially and reassures the international community that there is continuity and an ongoing ability for issuances to fund the country's deficit. Under these circumstances, the FX market saw some conversions in favor of the US dollar over this week. This called the Central Bank of Lebanon to intervene in the market as a seller of the greenback at the upper bound of its intervention bracket (LP 1,514). Meanwhile, the offer for the US dollar remained quite shy in the interbank market, with the LP/US$ interbank rate stayed quoted at LP 1,514-LP 1, EXCHANGE RATES Source: Bank Audi s Group Research Department STOCK MARKET: REDUCED BSE ACTIVITY FOR THE THIRD CONSECUTIVE WEEK The Beirut Stock Exchange was marked by a reduced activity for the third consecutive week. The total turnover reached US$ 4.8 million as compared to US$ 5.7 million in the previous week, down by 16.6%, mainly due to a 65.8% contraction in banking shares activity. This compared to an average weekly turnover of US$ 5.9 million since the beginning of the year Solidere shares accounted for 64.7% of activity, followed by banking shares with 33.8%, and the trading & industrial shares with 1.5%. 10

11 As far as prices are concerned, the BSE price index continued to trace a downward trajectory, retreating further by 0.5% to close at 84.42, one of its lowest levels since June 2005, and accumulating year-to-date price falls of 14.0%. In details, six out of 13 traded stocks registered price drops, while three stocks posted price gains and four stocks saw no price change week-on-week. RYMCO shares led the decline, registering a 17.0% plunge in prices to reach US$ 2.74, followed by Bank Audi Preferred shares I with -3.2% to US$ 89.9, Bank Audi s GDR price with -2.0% to US$ 5.00, BLC Preferred shares D and Solidere A shares with -1.5% each to reach US$ and US$ 5.91 respectively. AUDI INDICES FOR BSE Sources: Beirut Stock Exchange, Bank Audi s Group Research Department BOND MARKET: BOND PRICES REMAIN STABLE WEEK-ON-WEEK Lebanese bond prices were corrected upward towards the end of this week, as international institutional investors who offered their papers across the board at the beginning of the week, returned to the market as buyers, especially for shorter-term papers maturing in 2019 and Within this context, the weighted average yield managed to close the week at 10.01% after reaching 10.24% on Wednesday. This compared to a similar weighted average yield of 10.02% at the end of last week, which spots light on bond price stability week-on-week. In parallel, the weighted average bid Z-spread expanded by five basis points this week to reach 761 bps, amid relative stability in US Treasuries. In fact, the 10-year benchmark US Treasuries yields continued to hover around 3.0% after the US Federal Reserve expectedly approved its third rate increase this year, hiking its Federal Fund rate to a range of 2%-2.25%, in response to a robust economic landscape that includes low unemployment, an uptick in wage growth, and sweeping corporate tax reform. As to the cost of insuring debt, Lebanon s five-year CDS spreads, contracted slightly from bps last week to bps this week. EUROBONDS INDICATORS Source: Bank Audi s Group Research Department 11

12 INTERNATIONAL MARKET INDICATORS Sources: Bloomberg, Bank Audi's Group Research Department DISCLAIMER The content of this publication is provided as general information only and should not be taken as an advice to invest or engage in any form of financial or commercial activity. Any action that you may take as a result of information in this publication remains your sole responsibility. None of the materials herein constitute offers or solicitations to purchase or sell securities, your investment decisions should not be made based upon the information herein. Although Bank Audi sal considers the content of this publication reliable, it shall have no liability for its content and makes no warranty, representation or guarantee as to its accuracy or completeness. 12