The Currency Engine
Lebanon is a basket of volatility. Political turmoil, electricity blackouts and refugee influxes, to name a few, constantly waver in magnitude. Yet, one aspect of daily life in Lebanon seems to remain stable: its currency. Since the 1990s, the Lebanese pound (LBP) has remained pegged to the US dollar at a value of 1507.5 Lebanese pounds per dollar. The US dollar circulates within the Lebanese money supply and is used as legal tender alongside the pound.
Pegged currencies offer an interesting debate on whether or not they are stabilizing for the economy in question. Pegged currencies often mask market conditions and foster inefficiencies in financial markets. Furthermore, pegged currencies do not always respond to inflationary pressures experienced within the economy. Some countries, such as Argentina and Mexico, experienced some financial crises in the 1990s as a result of the same ‘peg’ regime. However, such financial turmoil was not as prevalent in Lebanese markets.
The pegged currency regime in Lebanon is an interesting feature of its economy. Despite current domestic sectarian strife and regional distress, the bond markets in Lebanon seem to be doing reasonably well. In September, 2013, the Lebanese central bank (Banque du Liban) sold 1.1 billion worth of bonds, outperforming other bond markets in the region. Since 2008, Lebanese bondholders have received the highest returns (about 12%), beating Israeli, Jordanian and Turkish bond returns. This is an interesting development despite the raging Syrian civil war across the border.
The fixed exchange rate regime plays an interesting role in the bond market’s strange ‘immunity’ to political developments. To examine this ‘immunity’ we’ll have to look at who is buying the bonds: Lebanese commercial banks! Roughly three-quarters of deposits in commercial banks are in US dollars. Furthermore, these USD inflows are mainly coming in as remittances from Lebanese diaspora making their wealth abroad. The World Bank estimated roughly 7.5 billion dollars in remittances last year. Although capital flows from foreign investors have decreased due to the Syrian conflict, the stable inflow of remittances has helped mitigate this. Fransabank in Beirut observed a 3% growth in bank deposits in the first half of 2013 mainly due to inflows from Lebanese households abroad. The pegged Lebanese pound has helped keep Lebanese expats confident in depositing their savings in Lebanese commercial banks. In turn, this has helped keep bond markets stable and has allowed commercial banks to buy out some government debt. If the Lebanese pound was allowed to float in an environment of political instability, perhaps this confidence from abroad would diminish. The dollar peg is the linchpin of this robust relationship between Banque du Liban, the commercial banks and remittances from Lebanese expats.
Although fixed exchange rate regimes can be quite harmful to some economies, it does not seem to be the case for Lebanon at present. Obviously, a more vigorous evaluation is required to understand the costs and benefits of the dollar peg on the bonds market. For now, it seems to be a pillar of stability that the country requires in order to function in an environment of politically instability.
N.C
Lebanon is a basket of volatility. Political turmoil, electricity blackouts and refugee influxes, to name a few, constantly waver in magnitude. Yet, one aspect of daily life in Lebanon seems to remain stable: its currency. Since the 1990s, the Lebanese pound (LBP) has remained pegged to the US dollar at a value of 1507.5 Lebanese pounds per dollar. The US dollar circulates within the Lebanese money supply and is used as legal tender alongside the pound.
Pegged currencies offer an interesting debate on whether or not they are stabilizing for the economy in question. Pegged currencies often mask market conditions and foster inefficiencies in financial markets. Furthermore, pegged currencies do not always respond to inflationary pressures experienced within the economy. Some countries, such as Argentina and Mexico, experienced some financial crises in the 1990s as a result of the same ‘peg’ regime. However, such financial turmoil was not as prevalent in Lebanese markets.
The pegged currency regime in Lebanon is an interesting feature of its economy. Despite current domestic sectarian strife and regional distress, the bond markets in Lebanon seem to be doing reasonably well. In September, 2013, the Lebanese central bank (Banque du Liban) sold 1.1 billion worth of bonds, outperforming other bond markets in the region. Since 2008, Lebanese bondholders have received the highest returns (about 12%), beating Israeli, Jordanian and Turkish bond returns. This is an interesting development despite the raging Syrian civil war across the border.
The fixed exchange rate regime plays an interesting role in the bond market’s strange ‘immunity’ to political developments. To examine this ‘immunity’ we’ll have to look at who is buying the bonds: Lebanese commercial banks! Roughly three-quarters of deposits in commercial banks are in US dollars. Furthermore, these USD inflows are mainly coming in as remittances from Lebanese diaspora making their wealth abroad. The World Bank estimated roughly 7.5 billion dollars in remittances last year. Although capital flows from foreign investors have decreased due to the Syrian conflict, the stable inflow of remittances has helped mitigate this. Fransabank in Beirut observed a 3% growth in bank deposits in the first half of 2013 mainly due to inflows from Lebanese households abroad. The pegged Lebanese pound has helped keep Lebanese expats confident in depositing their savings in Lebanese commercial banks. In turn, this has helped keep bond markets stable and has allowed commercial banks to buy out some government debt. If the Lebanese pound was allowed to float in an environment of political instability, perhaps this confidence from abroad would diminish. The dollar peg is the linchpin of this robust relationship between Banque du Liban, the commercial banks and remittances from Lebanese expats.
Although fixed exchange rate regimes can be quite harmful to some economies, it does not seem to be the case for Lebanon at present. Obviously, a more vigorous evaluation is required to understand the costs and benefits of the dollar peg on the bonds market. For now, it seems to be a pillar of stability that the country requires in order to function in an environment of politically instability.
N.C