Syria's deteriorating economy is expected to have a negative impact on banks in neighbouring Lebanon, says Moody's Investors Service. Lebanon's banking sector has increased its exposure to Syria in recent years. Bank Audi, Blom Bank and to a lesser extent Byblos all have investments in the country.
The international credit ratings agency changed its outlook to "negative" from "stable" on the standalone bank financial strength ratings and global local currency deposit ratings of the banks yesterday. Last weekend's protests in Syria were the biggest since demonstrations began in March against Bashar Al Assad's 11-year rule. Mr Al Assad backs Lebanon's Hizbollah-dominated government.
"The deterioration of the political situation in neighbouring Syria would almost certainly weaken business sentiment in Lebanon and could disrupt trade flows between the two countries," said Stathis Kyriakides, an analyst at Moody's.
"Increased uncertainties affect Lebanese banks' operating environment and heighten the risks to their asset quality and performance."
Syria's economy appears to be losing steam, and it can afford tosustain losses for only another four months at best, according to some economists. Others have suggested to Reuters that Syria's government could borrow against the US$18 billion in reserves at the Central Bank of Syria to keep it going longer, but this would essentially be printing money, causing inflation that would undermine the Syrian pound and confidence in the banking system.
The regime could borrow more from state-owned and private sector banks, where the Damascene and Aleppine business elite put their savings.
But as the protests continue to grow and the cost of doing business with the Assad regime dramatically increases, Syrian merchants and businessmen are likely to pull their deposits.
Lebanon's cost of protecting against default on its debt is the highest in the Middle East.