ECONOMIC ACTIVITY REBOUNDED TO 5-YEAR HIGH IN 1Q 2016

N 45 June 2016 Page 3 Bank lending accelerates despite slowdown in deposit growth Page 4 Construction activity may be turning the corner Page 5 Fiscal deficit hits record $1.4bn in the first quarter Page 6 Alpha banks add fewer branches, staff in Q1 2016 Page 7 Latest data for Lebanon s key economic sectors Page 8 Key trends in the Lebanese economy ECONOMIC ACTIVITY REBOUNDED TO 5-YEAR HIGH IN 1Q 2016 BdL s Coincident Indicator surged by 7% yoy Fast growth in persons benefiting from credit of less than LBP25m Balance of payments posts $644.2m deficit in Q1 The Central Bank s Coincident Indicator (CI), a proxy for economic activity, surged by 7% yoy to 290 points in the first quarter of 2016, its fastest pace in over five years. Several of the country s key industries, including construction, real estate, and banking posted solid gains during the period, aided by a low base in the comparable period in. The money supply (M2) expanded at its fastest rate in three years in the first three months, as banks boosted their lending activity at the start of the year. Private sector credit grew by 7.7% yoy through March, equivalent to $830.2m in production, up from $244.3m in the first quarter of. Robust credit activity is helping prop up bank earnings despite a difficult domestic and regional operating environment. Profits at Lebanon s Alpha banks, those with over $2bn in deposits, grew by 6. yoy to a record $510.1m in the first quarter of 2016, with additional support from falling credit provisions, widening spreads, and higher fee and commission income during the period. Discernible green shoots in the construction and real estate sectors were largely behind a stronger economic reading at the start of 2016. Cement deliveries, a proxy for works at construction sites, rose by 19.3% yoy to 1.08 million tons in the first quarter, and by 0.13% yoy to 5.22 million tons in the twelve months through March, their first positive reading since 2014. Similar encouraging signs emanated from the real estate market where the value of transactions swelled by 25.6% yoy to $2.8bn in the first fourth months of 2016. As a result, credit to construction held up well at 17.9% of total private sector credit, its largest market share since 2013. Coincident Indicator (%yoy) Credit beneficiaries by amount (%yoy) 20. 15. 10. 7. LBP25m to LBP100m Less than LBP25m 5. 0. -5. 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 ext.11210

Loan growth is expected to remain robust throughout 2016, particularly in the small-size loan market, building on record performance in recent months. The number of persons benefiting from credit amounts of less than LBP25m ($16,854) surged by 19.6% to 366,262 beneficiaries in, a massive increase of 60,118 persons in one year. Personal loan growth will likely be supported by improving consumer sentiment. Consumer confidence rose by an average of 1% yoy to 98.7 points in the first three months of the year in part due to a stable security situation. Tourist arrivals, a component of the CI, rose by 7. yoy to 428,947 visitors in the first four months of the year. New passenger car sales, a proxy for consumer spending, were 3.33% yoy higher in the first four months, indicating healthy personal income levels and positive future income expectations. Improved security and resolution of the trash crisis have been helpful in attracting more tourists to the country. Tourist arrivals, a component of the CI, rose by 7. yoy to 428,947 visitors in the first four months of the year, and traffic at Beirut s airport, another component of the CI, posted healthy growth of 5. yoy to 2.08 million passengers over the same period. The government may have also played a considerable role in propping up the local economy in the first quarter of 2016. Public spending swelled by 23.1% yoy to $3.87bn in the first three months, most of which resulting from the disbursement of $502.1m in funds to municipalities representing their share of telecom revenues in previous years. A significant portion of the funds was likely used for inner-city road works and infrastructure, including municipal buildings, as local councils looked to court voters ahead of May s local elections. RISKS EMANATE FROM THE EXTERNAL SECTOR Despite a technical rebound in activity in the first quarter, a recovery remains unlikely in the near-term given domestic political deadlock, spillovers risks from the Syrian conflict, and low global oil prices. The latter is expected to increasingly put pressure on private sector deposits as a result of slow growth in inflows of remittances from expatriates in oil-exporting countries. Lebanon received an estimated $7.16bn in remittances in, $241m less than in 2014, according to the World Bank. The largest source of inflows in 2014, the latest period for which data are available, originated from Saudi Arabia with of the total. In fact, unlike loan portfolios, deposit flows were weak in the first quarter, rising by just $854m to $152.4bn, compared with an increase of $1.04bn over the same period in, as deposits from non-residents dried up. Exports slid by 10.9% yoy to $871.4m in the first four months of the year, as sales of goods to the Gulf Cooperation Council s six countries fell by a fifth to $239.4m during the period. Trade activity also continues to struggle amid falling demand in the Gulf and severed land trade routes through Syria. Exports slid by 10.9% yoy to $871.4m in the first four months of the year, as sales of goods to the Gulf Cooperation Council s six countries fell by a fifth to $239.4m during the period, according to data compiled by Economena Analytics. On the other hand, a rebound in oil prices and higher private consumption are precipitating a rebound in import activity. Total imports rose by 11.1% yoy to $6.23bn through April, including a similar increase in imports of petroleum products in the first quarter. Lower non-resident deposits and a widening trade deficit left the balance of payments in a $644.2m deficit in the first quarter adding to $9.43bn in cumulative deficits since 2011. Remittance inflows in 2014 Total exports (Jan-Apr, $m) 1,600.65 Others, 24. Saudi Arabia, 20.2% 871.35 France, 5.7% Canada, 10.7% Germany, 10.9% Australia, 11.8% ed States, 16. 246.80 Source: World Bank, Economena, SGBL Research *April 2016 estimates 2001 2006 2011 2016 Source: Customs, Economena, SGBL Research

BANKING BANK LENDING ACCELERATES DESPITE SLOWDOWN IN DEPOSIT GROWTH Private sector credit increased by $830.2m in the first quarter BdL increases funding for the knowledge economy Deposit flows from non-residents are drying up Banque du Liban s (BdL) efforts to shore up lending appear to have borne some fruit in the first quarter of the year with banks more than tripling their loan production, despite a slowdown in deposit inflows over the period. Private sector credit grew by 7.7% yoy through March, equivalent to $830.2m in production in the first three months, compared with $244.3m in the first quarter of. Much of the momentum came from non-residents, whose loans grew by 18.9% yoy, compared with an increase of 6.3% yoy in loans to residents. The latter group still holds a larger share of commercial bank loan portfolios, or 88.3% of the $55.1bn in outstanding private sector loans at the end of March. Growth in lending is expected to translate into higher bank profits, buoyed in part by rising interest rates and widening margins. Average lending rates took their cue from trends in the US policy rate to increase sharply in recent months, hitting 8.18% in Lebanese Pound and 7.31% in US Dollar by March. A series of initiatives by BdL, including a $1.5bn stimulus package in 2016, are likely behind robust lending and investment activity. Over $270m in financing have already been committed or deployed under BdL s Circular 331, which offers banks a 7 guarantee for their investments in knowledge economy businesses in Lebanon. Average lending rates took their cue from trends in the US policy rate to increase sharply in recent months, hitting 8.18% in Lebanese Pound and 7.31% in US Dollar by March. The program s success in its first two years prompted the Central Bank in April to raise the limit on bank investments under the circular to 4% of their capital from 3% previously, or close to $500m as of March 2016. Loans to small and medium enterprises backed by Kafalat guarantees also rebounded at the start of the year, growing by 24% yoy to $24.3m through March spread over 172 loans, of which 48.3% were allocated to agricultural projects. DEPOSIT FLOWS FROM NON-RESIDENTS ARE DRYING UP Robust lending activity is coming despite a slowdown in the private sector s deposit growth to 4.8% yoy at the end of March. Deposits rose by $853.5m in the first quarter to $152.4bn, down from an increase of $1.04bn over the same period in, all of which came from the resident private sector. Non-resident deposits declined by $72.2m in the first quarter, reflecting a decline in risk appetite among global investors at the start of the year. On the other hand, non-resident deposits declined by $72.2m in the first quarter, reflecting a decline in risk appetite among global investors at the start of the year. Lower oil prices are also placing downward pressure on incomes of Lebanese expatriates and investors in oil-exporting countries, likely weighing on deposit inflows to Lebanon. Deposit and loan growth (%yoy) Private sector deposits (change in Q1, $m) 3 Resident private sector loans Private sector deposits 3 1,252 3,107 2,723 2,509 2,369 1,800 941 1,036 854 387 347 Mar-10 Mar-12 Mar-14 Source: BDL, Economena, SGBL Research 2006 2008 2010 2012 2014 2016

CONSTRUCTION CONSTRUCTION ACTIVITY MAY BE TURNING THE CORNER Cement deliveries and construction permits posteddouble-digit growth in Q1 Real estate transactions reached $2.8bn by April Permits for new residential buildings fell to 5.4m sqm in Construction indicators at the start of 2016 point to a recovery in the sector s activity after several years in distress. Cement deliveries, a proxy for works at construction sites, rose by 19.3% yoy to 1.08 million tons in the first quarter, and by 0.13% yoy to 5.22 million tons in the twelve months through March, their first positive reading since 2014. Cement deliveries, a proxy for works at construction sites, rose by 19.3% yoy to 1.08 million tons in the first quarter. The prospects for cement deliveries have also turned positive in recent months supported by a rebound in the area of construction permits, a leading indicator, which surged by 14.2% yoy to 4.35 million square meters in the first four months of 2016. A low base in may have set the stage for a bounce back in 2016, particularly in the residential segment. Construction permits for new residential buildings were already at a decade low of 5.4 million square meters in, 60. of which in Mount Lebanon, according to the Order of Engineers and Architects of Beirut. However, construction execution permits, which are issued right before the start of construction works, indicate a more modest outlook for the sector s activity in the short-term. Execution permits issued by the country s two orders of engineers fell in by 4. to 9.6 million square meters, according to data compiled by Economena Analytics. A record number of construction companies also reported a drop in their project portfolios in the fourth quarter of, a business survey by the Central Bank showed. REAL ESTATE ACTIVITY REGAINS MOMENTUM Meanwhile, some encouraging signs emanated from the real estate market where the value of transactions swelled by 25.6% yoy to $2.8bn in the first fourth months of 2016. Transactions registered in Beirut, where 28% of the real estate market is concentrated, increased by 32% yoy over the period, while those in the Metn area declined by a slight 2.6% yoy. Both construction and real estate activity continue to benefit from the banking sector s ample liquidity and from Central Bank initiatives to support residential lending. Utilized credit by construction companies rose by 12.9% to $10.84bn in, equivalent to $1.24bn in production during the year and the most in any year since the conflict in Syria erupted in 2011. Utilized credit by construction companies rose by 12.9% to $10.84bn in. Close to 6 of the Central Bank s $1bn stimulus package for was earmarked for housing loans, and the rest to productive sectors. Housing loans increased by 10. to $10.92bn at the end of, equivalent to an increase of $1.04bn during the year. 3 - - - Cement deliveries (12-month moving average, % yoy) 0.1% - Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Area of construction permits for new residential buildings in Nabatieh 7.8% Bekaa 7.9% Beirut 8.9% South Lebanon 13.8% North Lebanon 1.2% Mt. Lebanon 60. Source: OEAB, Customs, Economena, SGBL Research

GOVERNMENT FISCAL DEFICIT HITS RECORD $1.4BN IN THE FIRST QUARTER Transfers of arrears to municipalities reached $502.1m Revenues were robust, reflecting improving economic activity Debt servicing costs crossed $1bn, or 41.6% of revenues Lebanon reported a record $1.44bn budget deficit in the first quarter of 2016, putting further pressure on the government to launch a fiscal reform program or risk losing its B- credit rating by Standard & Poor s. Public finances have been hit hard by a 5-year conflict in neighboring Syria which pushed an estimated 1.5 million refugees into the country and severed Lebanon s land trade routes into the Gulf. The government is also in a state of virtual paralysis amid a protracted political crisis, grounding to a halt all progress on oil and gas licensing as well as energy sector reform. The private sector, however, has been showing signs of improvement in recent months. In fact, public revenues came in at a record $2.43bn in the first quarter, 16.7% more than the same period in. Income from the Value Added Tax, a proxy for consumer and business activity, rose by 6.9% yoy to $528.2m. Income taxes, including capital gains, salaries and wages, and interest, increased by 9. yoy to $434.5m during the period, indicating resilient corporate earnings and personal income. Income from the Value Added Tax, a proxy for consumer and business activity, rose by 6.9% yoy to $528.2m. Recovery in real estate transactions and in import activity at the start of the year proved a boon for the government. Income from property taxes surged by 24.6% yoy to $246.1m in the first quarter, while revenues from customs taxes grew by 4.2% yoy to $322m over the same period. MASSIVE INCREASE IN SPENDING A spending spree in the first quarter precipitated the swelling in the deficit during the period. The government spent $3.87bn in the first three months, a massive $726.5m more than in, the bulk of which resulted from the payment of $502.1m in funds to municipalities representing their share of telecom revenues in prior years. The payment of arrears to municipalities offset significant gains to the state from lower global oil prices. Transfers to Electricité du Liban were just $152.3m in the first quarter, more than half their level and a quarter of their 2014 level during the period. On the other hand, Lebanon s large debt stock is squeezing more out of the state s coffers. Debt service costs grew by 13.4% yoy to a record $1.01bn in the first quarter, equivalent to 41.6% of total revenues. Debt servicing expenses are likely to accelerate in coming years following the government s increased reliance on longer-term debt and expectations of higher international benchmark rates. Debt service costs grew by 13.4% yoy to a record $1.01bn in the first quarter, equivalent to 41.6% of total revenues. In May, the government swapped $2bn worth of local-currency Treasury bonds with the Central Bank for an equivalent amount of Eurobonds, citing a strategy to keep interest expenses in check by increasing reliance on lower-interest-bearing foreign currency debt. Fiscal deficit in Q1 () Public revenues in Q1 (% of total) 1.4 1.1 1.1 1.1 Others 23% VAT 22% 0.5 0.4 0.7 0.4 0.60.6 0.4 0.3 0.4 0.7 0.6 0.6 0.8 0.8 0.7 1998 2001 2004 2007 2010 2013 2016 Source: MoF, Economena, SGBL Research Property taxes Customs 13% Telecom 14% Income taxes 18% Source: MoF, Economena, SGBL Research

ALPHA BANKS ADD FEWER BRANCHES, STAFF IN Q1 2016 Profits rose by 6. yoy to $510.1m in the first quarter Higher operating costs offset a decline in provisions Robust growth in domestic deposits and loans Profits at Lebanon s Alpha banks, those with over $2bn in deposits, grew by 6. yoy to a record $510.1m in the first quarter of 2016, buoyed by a decline in credit provisions, widening spreads, and a rebound in fee and commission income. Net fee and commission income surged by 11.24% yoy to $216.2m during the period, after it was hit hard by slow business activity in. Net interest income, the sector s main revenue source, rose by 8.23% yoy to $984.4m benefiting from robust loan production and a widening in spreads by 6 basis points to 1.93% in the first quarter. Profits were primarily boosted by lower provisions which had risen in recent years as a result of regional turmoil and domestic economic stagnation. Provisions for credit losses declined by 30. yoy to $106.3m in the first quarter of 2016, $46.6m less than the same period in, although a majority of Alpha banks still reported an increase in their provisions. Deteriorating asset quality promises to add more pressure on provisions in coming months. Doubtful loans inched up to 5.62% of gross loans at the end of March and to 6.36% when including substandard loans. The Central Bank introduced stricter collective provisioning requirements starting, which are likely to keep provisions elevated and may constrain growth in bank profits. At the same time, the Central Bank is encouraging banks to play a leadership role in restructuring businesses with a proven business model and which have been hit by the economic downturn. The restructuring of commercial debt is likely to help keep non-performing loan ratios and provisions in check in the short-term. Alpha Group, Q1 2016 Assets () Net Profit ($m) Bank Audi 41.0 110.2 BLOM Bank 29.3 108.2 Byblos Bank 20.1 33.8 Fransabank 20.0 37.0 Société Générale de Banque au Liban 16.5 41.4 Bank of Beirut 16.0 43.9 BankMed 15.5 35.4 Banque Libano-Française 11.6 25.8 Credit Libanais 10.3 17.4 BBAC 6.1 13.2 IBL Bank 5.7 18.3 First National Bank 4.2 7.4 Lebanon and Gulf Bank 3.8 8.4 Creditbank 3.4 9.6 Alpha Group 203.5 510.1 Source: Bankdata Financial Services, Economena, SGBL Research DOMESTIC DEPOSITS ARE GOING STRONG Customer deposits fell by 0.64% in the first quarter at Alpha banks, although they increased at 9 out of 14 of the banks, indicating divergent performance among the country s biggest banks by deposits. Domestic deposits, which make up 82.6% of the total, increased by 0.41% in 2016 through March, while those outside Lebanon were hit by translation into US Dollar as a result of depreciating regional currencies. In particular, several Lebanese banks have in recent years made major forays into the Egyptian market, where the Egyptian Pound lost 11.9% of its value against the US Dollar in the first three months of 2016. Alpha banks also appear to be placing more emphasis on their domestic portfolios. Domestic loans grew by 0.97% to $44.5bn in the first quarter, equivalent to $426.1m in production, compared with flat growth in the same period in. A FEW BANKS ARE TRIMMING STAFF Data point to growing focus on operational efficiency amid heated competition in a slowing local market. Operating expenses rose by 8.8% yoy at the start of 2016, down from 9.2% in the first three months of following a cutback in staff costs which represent an estimated 5 of operating expenses. Alpha banks expanded their local network by just two branches to 814 branches in the first quarter amid sluggish economic activity and increased cost cautiousness among lenders. As a result, total headcount rose by only 194 staff to 30,931 in the first quarter, with two banks accounting for virtually all the increase. In fact, three of the 14 Alpha banks reported a decrease in headcount, and nine others added fewer than 20 new staff as the majority of lenders scale back. Return ratios found respite in the slowing expansion in staff and branch counts. As a result, return on equity remained unchanged at 11.06% in the first quarter, while return on assets closed the quarter at 1%, two basis points ahead of March. Alpha Group net profit (Q1, $m) 373.4 440.2 428.9 479.1 510.1 2012 2013 2014 2016 Source: Bankdata Financial Services, Economena, SGBL Research

Key indicators Cleared cheques Real estate transactions Construction permits Cement deliveries Tourist arrivals Airport traffic Balance of payments Money supply: M3 BSE volumes Passenger car sales Hotel occupancy (average) Sqm, m Tons, m m m m % 69.44 8.01 12.34 5.04 1.52 7.24-3.36 123.62 74.64 39,361 56 5.53 0.89 1.28 0.39 0.10 0.44 0.36 123.49 4.96 2,793 57 5.60 0.72 1.17 0.43 0.11 0.53-0.29 124.51 24.42 2,786 51 Apr-16 5.66 0.68 1.07 0.56 3.13 3,109 55 %Y/Y YTD -1.00 22.57 10.32 2.81 1.01 4.35 6.96 1.08 7.81 0.31-6.78 2.08-31.03-0.64 5.47 0.89 207.57 36.99-2.78 11,099-3 54 PYTD 22.67 2.24 3.80 0.90 0.28 1.97-0.85 0.38 35.84 10,741 55 Indices Consumer Confidence Index - ARA Consumer Price Index Purchasing Managers' Index BdL Coincident Indicator 95.08 97.03 48.38 278.61 84.00 94.35 47.40 294.60 97.00 94.81 45.00 296.10 Apr-16 95.53 44.10 %Y/Y -1.02-2.35-10.00 5.86 %YTD -10.19-0.40-7.93-2.05 Trade Imports Exports Trade balance Port of Beirut volumes TEUs, m 18.07 2.95-15.12 1.13 1.38 0.23-1.15 0.08 1.75 0.22-1.53 0.10 Apr-16 1.61 0.24-1.37 %Y/Y 11.67 1.08 13.73 6.17 YTD 6.23 0.87-5.36 0.27 PYTD 5.61 0.98-4.63 0.25 Financial and monetary Commercial bank assets Claims on the resident private sector Claims on the non-resident private sector Claims on the public sector Resident private sector deposits Dollarization rate (average) Non-resident private sector deposits Dollarization rate (average) Private sector deposits with commercial banks Private loans / deposits Public sector deposits BdL foreign assets BSE market capitalization Gross public debt % % % 185.99 48.04 6.18 37.80 119.73 59.32 31.86 86.44 151.59 39.74 8.77 40.49 11.22 70.31 Jan-16 186.20 48.17 6.22 37.87 119.51 58.96 31.98 86.01 151.50 40.31 8.87 41.91 11.09 70.63 186.59 48.20 6.36 38.28 119.71 59.02 31.70 86.11 151.42 40.26 9.08 42.76 11.09 71.22 187.39 48.58 6.47 38.17 120.66 59.20 31.79 86.11 152.44 40.26 8.44 41.75 11.34 71.04 %Y/Y 5.90 6.31 18.89-1.99 5.24-0.19 3.15-0.95 4.80 0.40-22.70-8.17-5.06 2.31 YTD 1.40 0.54 0.29 0.37 0.93 59.06-0.07 86.07 0.86 40.28-0.33 1.27 0.12 0.73 %YTD 0.75 1.12 4.74 0.98 0.78 0.99-0.23 0.99 0.57 1.01-3.78 3.13 1.04 1.04 Public finance Revenues Value Added Tax Telecommunications Income taxes Customs Expenditures Transfers to EdL Debt service Primary balance Fiscal balance $m 9.58 2.10 1.23 1.92 473.20 13.53 1.14 4.46 0.72-3.95 Jan-16 1.11 0.31 0.11 0.25 36.90 1.33 0.04 0.23 0.03-0.21 0.64 0.11 0.16 0.08 35.73 1.15 0.05 0.23-0.28-0.51 0.69 0.11 0.09 0.10 39.27 1.40 0.06 0.55-0.16-0.71 %Y/Y YTD -11.00 2.43 14.79 0.53-64.22 0.35 18.51 0.43 7.17 111.90 9.58 3.87-42.25 0.15 16.24 1.01 584.18-0.40 40.90-1.44 YTD: year-to-date, PYTD: previous year-to-date. Source: MoF, BdL, BSE, ARA, Customs, Markit, EY, RHIA, CAS, Economena, SGBL Research PYTD 2.08 0.49 0.24 0.40 109.13 3.15 0.32 0.89-0.14-1.06

Solidere Group net profits ($m) Solidere swung to a net loss of $87.2m in, its first in over 15 years, following a slump in land sales and sluggish rental activity in the BCD. The company has a land bank of 1.8m sqm, but is struggling to close sales deals amid a protracted domestic crisis. Schengen visas issued at consulates in Lebanon ('000) The number of Schengen visas issued by consulates in Lebanon increased by 6.6% to a multi-year high of 116,986 visas in. A stronger US Dollar and a series of domestic crises are making Europe an attractive tourist, business, and immigrant destination for Lebanese. 224.2 189.2 158.8 120 110 109.8 117.0 108.5 42.6 1.9 16.4-87.2 2001 2003 2005 2007 2009 2011 2013 Source: Solidere, Economena, SGBL Research 100 90 80 70 60 97.5 85.5 75.2 63.8 2010 2011 2012 2013 2014 Source: Schengen Visa Info, Economena, SGBL Research Oustanding amount of BdL CDs () Outstanding payment cards (December ) The amount of outstanding Certificates of Deposit issued by BdL hit a record $24.5bn at the end of March 2016. The Central Bank often sells CDs to local banks and then uses the proceeds to directly finance state debt. 26 24 24.46 Debit cards made up over half of the 2.75 million outstanding payment cards in Lebanon at the end of. At the same time, credit cards are gaining in popularity with growth of 9.62% in to 570,038 cards, equivalent to 20.7% of the total. Charge 5.6% 22 20 18 19.00 Credit 20.7% Debit 50.4% 16 15.29 14 Mar-10 Mar-12 Mar-14 Prepaid 23.3%