Cablegate: Central Bank Governor: Despite Booming Economy,

VZCZCXRO4323
PP RUEHBC RUEHDE RUEHDH RUEHKUK RUEHROV
DE RUEHLB #0920/01 2291353
ZNR UUUUU ZZH
P 171353Z AUG 09
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 5544
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHFR/AMEMBASSY PARIS 3540
RUCNDT/USMISSION USUN NEW YORK 4071
RUEHNO/USMISSION USNATO 4016
RHMCSUU/CDR USCENTCOM MACDILL AFB FL
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 000920

SIPDIS
SENSITIVE

DEPT FOR NEA/FO, NEA/ELA
EEB/IFD/ODF RDEMARCELLUS
F FOR RNAPOLI
IO FOR A/S BRIMMER
P FOR DRUSSELL, RRANGASWAMY
DRL/NESA FOR WHITMAN, BARGHOUT
STATE PASS TO USAID ESCOTT
TREASURY FOR SAHERN AND CKNOWLES
COMMERCE FOR CLOUSTOUNAU/TSAMS/NWIEGLER
PARIS FOR JMILLER
USUN FOR WOLFF/GERMAIN/SCHEDLBAUER
NSC FOR SHAPIRO/MCDERMOTT
OVP FOR HMUSTAFA

E.O. 12958: N/A
TAGS: ECON EFIN EIND ECPS PGOV KCOR LE
SUBJECT: CENTRAL BANK GOVERNOR: DESPITE BOOMING ECONOMY,
LEBANON STILL NEEDS A GOVERNMENT TO MOVE FORWARD ON REFORM

REF: A. BEIRUT 899
B. STATE 81177

SUMMARY
-------

1. (SBU) The Lebanese economy is booming, with tourists
pouring in, hotel occupancy rates high, bank deposits rising,
and growth set to beat all forecasts. Nonetheless, Central
Bank of Lebanon (CBL) Governor Riad Salameh told the
Ambassador August 14 that Prime Minister-designate Saad
Hariri needs to form a government that can take on the
fundamental economic problems facing the country, including
electricity provision, water management, telecom
privatization, and environmental protection. Salameh
described the efforts the CBL had undertaken to promote
growth and development, but said the new government should
take advantage of record capital inflows to finance
infrastructure development that would increase job creation
and promote growth. He believed turning over state assets to
Lebanon's resilient private sector would benefit Lebanon, but
said political buy-in is crucial, though difficult, because
of the political class's dependence on the patronage
state-owned institutions provide it. He asked that the
United States be patient with Lebanon in its demands for
increased budget transparency. End summary.

ECONOMY BOOMING THIS SUMMER...
------------------------------

2. (SBU) Salameh began his meeting with the Ambassador,
PolOff, and EconOff with a dizzying run-down of Lebanon's
strong economic indicators as the summer tourist season
progresses. He declared that consumer confidence is high,
tourists are still arriving, and the Gulf tourists who would
normally return home for Ramadan (which begins around August
21) are indicating they will stay for part or all of the
fasting month. Hotel occupancy rates are at 70% across
Lebanon, and approaching 100% in Beirut, said Salameh.
Because of the strong summer season, Salameh announced he had
increased his GDP growth estimate for 2009 to 6%, which would
bring GDP to approximately $32 billion at the end of the
year. He saw inflation running at a modest 3%.

3. (SBU) Meanwhile, depositors are still placing more capital
in Lebanese banks, Salameh affirmed, and he predicted the
growth in deposits could reach an astonishing 20% in 2009.
High interest rates on Lebanese pounds (LL) have resulted in
the conversion of $13 billion in deposits into LL, according
to the Governor, and the banks have $25 billion in cash
deposited at the CBL. He added that the Saudi government
still has $1 billion in reserves at the CBL, and the Kuwaitis
$500 million. With so much liquidity in the banking system,
Slameh explained that the CBL had issued circulars o allow
banks to offer subsidized interest on stdent loans, loans
for investment schemes to create jobs, as well as for
environmentally friendly projects.

...BUT WE STILL NEED A GOVERNMENT
TO TAKE ON LEBANON'S PROBLEMS
---------------------------------

3. (SBU) Despite the booming economy, Salameh stressed that
Lebanon needs a government to take on the important reforms
and infrastructure upgrades necessary for economic growth.
The huge tourist influx this summer merely highlights the
country's needs, in Salameh's view, as electricity, water,
and telecommunications infrastructure are stretched to the
limit. "We cannot take one more tourist," he said, noting
that in addition to power outages and dropped cell phone

BEIRUT 00000920 002 OF 003

calls, polluted water and environmental degradation can cause
health problems that will drive tourists away. Salameh
believed PM-designate Saad Hariri was intelligent to take his
time in forming a cabinet that can tackle these problems,
rather than caving to political pressures that could result
in a do-nothing government. He saw Hariri as "aggressively
pro-business and pro-reform," but worried that most of the
other politicians in Lebanon would not be so anxious to move
forward on reform initiatives.

WHILE DEBT IS BAD,
GOVERNMENT INVESTMENT CAN REAP PROFITS
--------------------------------------

4. (SBU) Salameh lamented that since Fouad Siniora took over
as Prime Minister in 2005, the GOL has run an average annual
budget deficit of $3 billion. Such spending is
unsustainable, he pronounced, and absolute debt levels
continue to increase. Nonetheless, he believed the GOL
should take advantage of the current abundance of liquidity
in the banking system to partner with the private sector and
undertake desperately needed infrastructure projects in the
electricity and water sectors. With the attractive interest
rates available to the private sector under the previously
mentioned CBL investment programs, the GOL could reap
benefits from investing now, said Salameh, while setting up
the economy for further growth. If the GOL does not use the
excess liquidity to invest in Lebanon, thought the Governor,
then Lebanese banks would simply start lending abroad.

PRIVATIZATION:
BRINGING THE POLITICIANS ON BOARD
---------------------------------

5. (SBU) Salameh pointed to the resilience of Lebanon's
private sector, and said the GOL should not delay in turning
its assets over to it. He found it essential that the
private sector be brought into electricity generation to
break the monopoly of state-owned Electricite du Liban, whose
production capacity does not meet Lebanon's needs. He
believed the GOL should move forward on privatization of the
two mobile telecom licenses by floating the companies on the
Beirut Stock Exchange (BSE), which would "make the people
feel involved," and avoid the difficulties of selling to
foreign companies in the depressed international market.
Likewise, he announced his plan to sell 25% of CBL-owned
Middle East Airlines (MEA) on the BSE, hopefully in the first
quarter of 2010.

6. (SBU) The main obstacle to privatization in Lebanon,
opined Salameh, remains the political class, which uses
state-owned institutions as patronage instruments. He noted
that he had looked into divesting the CBL of its 35% share in
Intra, the holding company which runs the Casino du Liban
(CdL), but ran into problems because Amal leader Nabih Berri
had staffed the Casino with his followers, and did not want
to lose the ability to employ his supporters. Other
politicians had similar interests in other sectors, noted
Salameh. He also noted Druze leader Walid Jumblatt's recent
statements against privatization as a sign of the
difficulties of building political consensus on offloading
state assets. He said he had worked hard to build the
political support necessary to float 25% of MEA on the stock
exchange, but would have to make further efforts if he wished
to sell more of it.

BUDGET TRANSPARENCY
-------------------

7. (SBU) The Ambassador discussed Ref B demarche on

BEIRUT 00000920 003 OF 003

encouraging central budget transparency with Salameh, noting
that CBL-owned assets such as MEA and the Casino du Liban do
not issue public financial statements. Salameh responded
that MEA announces its results at an annual assembly, but
that it runs as a private company, not a public entity. He
reiterated that the Casino was part of a holding company of
which CBL is merely a minority shareholder. In any event, he
stressed, it was his intention to remove these entities from
the CBL's books as soon as practicable. Meanwhile, on budget
transparency generally speaking, Salameh asked that the USG
be "patient" with Lebanon, with its intractable political
problems which make initiatives like budget reform difficult.
He stressed that U.S. support for Lebanon and its
institutions inspires confidence in the GOL among investors
and lenders, which is essential to keeping the country afloat.

COMMENT
-------

8. (SBU) For those of us used to dealing with Lebanon's
unruly political leaders, the Governor is always refreshingly
on point. Though his complaining about deficit spending
seems to contradict his assessment that the GOL should take
on more debt for infrastructure spending in the current
liquidity glut, it is true medium-term investment that could
bring improvements that would ultimately reduce GOL spending.
His plea for "patience" on budget transparency likely
reflects a long experience and deep understanding of the
political motivations behind the lack of transparency in the
current system. Nonetheless, he remains one of our key
allies in promoting reforms and is expected to be one of the
experts PM-designate Hariri will hopefully rely on for
economic advice. End comment.

SISON

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