Lebanon's governor central bank will continue financial operations in 2019

LONDON, Dec 14 - Lebanon's central bank will stick to its financial operations in 2019, central bank governor Riad Salameh told Reuters, adding a rise in global interest rates is concerning policymakers in the heavily indebted country.

Lebanon - which has the world’s third highest debt-to-GDP ratio and suffers from stagnant growth - has faced increasing pressure in recent months amid a political stalemate that has prevented the formation of a government since elections some seven months ago.

Over the past three years, the central bank has carried out various forms of financial engineering and operations to shore up its reserves and currency.

"The present financial operations that we are running as a central bank are sufficient to fulfil the objectives of the central bank in terms of attracting asset liquidity," Salameh said, adding they would continue in the same form in 2019.

"If you look over the past twelve months and despite all the challenges and turmoil, our balance sheet has been stable."

Its financial system has encouraged commercial banks to place foreign currency in the central bank for high returns, as Salameh seeks to maintain high foreign reserves to defend the Lebanese pound’s dollar-peg.

As a result, commercial banks have gradually stopped subscribing to weekly treasury bill auctions which has left the central bank to buy up government debt - incurring losses on the difference between interest it receives on this and the high interest rates it pays out to commercial banks to keep money flowing in.

Salameh said the bank had ample foreign currency to maintain its targets of keeping the Lebanese pound stable and also be able to back the government's foreign currency needs.

"We are trying to maintain our foreign assets, we are not in a drive to increase them, and that is why we kept our interest rates unchanged over the past year," said Salameh, who attended an investment conference in London.

However, ratings agency Moody's sounded some alarm bells when it changed Lebanon's outlook to negative from stable on Thursday citing an increase in risks to the government's liquidity position and the country's financial stability.

Lebanon has been mired in political wrangling, with rival parties unable to form a government since May's parliamentary election.

Meanwhile the bigger global backdrop has added to policy makers' woes were rising global interest rates, said Salameh.

A stronger dollar and rising U.S. Treasury yields have inflicted a lot of pain on emerging markets throughout 2018. The U.S. Federal Reserve is expected to deliver another rate hike when meeting next week, and a Reuters poll showed the majority of economists expected two increases in 2019.

"It is a concern. It will add to our cost to fund the public sector and the private sector and that cost is here because Lebanon is essentially funded by credit and therefore the interest rates are important."

Yields on Lebanese dollar-denominated sovereign bonds have risen sharply higher in the past weeks. Many issues now yield more than 11 percent.

Salameh also said he understood the government was planning to tap capital markets through a eurobond sale in the first quarter of 2019.