Lebanon secures new deposits in $1.4 billion boost to dollar reserves

Governor Riad Salameh said in an interview with Bloomberg TV that Lebanon remains committed to preserving the Lebanese pound’s peg of about 1,507.5 to the dollar, which has been in place for more than two decades, and has “ample” cash to do so.

“Contrary to what is being said, the supply of dollars is ample in the market,” he said. “Today, the central bank has closed deals of deposits with private, non-resident institutions, whereby in the second half of August our reserves went up by $1.4 billion to reach $38.6 billion. This is private non-resident money and not government money.”

Salameh’s comments are likely to go some way toward reassuring investors increasingly worried that dwindling inflows of cash from abroad could undermine Lebanon’s ability to repay its debts and defend its currency.

Fitch Ratings last week cut Lebanon’s credit ranking deeper into junk territory, taking one of the world’s most indebted nations down to CCC. Credit default swaps, which reflect the cost of insuring debt holdings against the risk of default, have scaled record highs in recent weeks as investors fret that the Lebanon’s day of financial reckoning is looming.

To keep its banks stable and able to defend the peg, this tiny, open economy has for decades relied on deposits that are constantly replenished mainly by the millions of Lebanese living abroad. Those inflows have dwindled as concerns have risen, with deposit growth entering negative territory in May for the first time in more than a decade, according to Goldman Sachs Group Inc.

The central bank has already set aside $1.5 billion to cover in cash on behalf of the government the next maturing Eurobond in November, he said.

“The policy of the central bank is to back the solvency of the state because it’s in the interest of Lebanon and the interest of monetary stability,” Salameh said. “It’s like our commitment to the peg.”