An abbreviated version of this article appeared in Executive, August 2011
The Economist recently ran an article on Syria's economy claiming that $20 billion has flowed out of the country since the uprisings began in March. The figure was quickly picked up and the rumor mill went into overdrive. A respected financial paper the Economist may be, but it clearly did not do its homework in this case.
With the overall economy worth $52 billion at the end of 2010, and total deposits in private and state banks close to $30 billion, such capital outflows would have been crippling to Syria.
“There is obviously capital flight, but it is impossible $20 billion left the country,” said Jihad Yazigi, editor of economic newsletter Syria Report. With the rumors abounding about billions leaving Syria, it was not Damascus that came out to deny the inflated figure the Economist attributed to “one estimate” but the head of the Association of Banks in Lebanon in July.
“The $20 billion figure is ridiculous as the deposits of private banks are $11 billion and the deposit base of the whole banking system is $29.8 billion,” said Freddie Baz, chief financial officer at Bank Audi to EXECUTIVE. “Estimates range between 15 to 18 percent drop in the deposit base of private banks, so there has been a decline of around $2 billion.” Bank Audi should know, with the Lebanese giant's Syrian arm, Bank Audi Syria, the second largest private bank with some 18 branches.
According to research by Bank Audi's Research Department drawing on Central Bank sources and Thomson-Reuters, bank deposits in Syria in the first five months of 2011 dropped by $1.388 billion. By comparison, Egypt has been far more affected, with deposits dropping $4.957 billion as of May from a deposit base of $164 billion in December 2010, and in crisis-struck Yemen, down $605 million from a deposit base of $7.13 billion.
“So far the impact is very minimal on the banking business. Indicators are almost similar to Egypt in terms of resilience,” said Baz. “But I believe the Syrian economy is more vulnerable to the political turmoil than Egypt, where there were a lot of buffers to shield the economy.”
Cash based society
If massive capital flight out of Syria had occurred this year Lebanon would have been one of the major beneficiaries, with banks a long-term depository for Syrian clients, estimated in the several billions of dollars. Yet bankers said there had been no notable up-tick in transfers from Syria while total deposits in in Lebanon this year, as of May, were $3.267 billion.
Foreign exchange bureaus in Beirut interviewed by EXECUTIVE had also not observed any noticeable increase in business or Syrians coming with duffel bags stuffed with Syrian pounds (SYP). “I am exchanging the same amount of SYP as in the past, there is no change,” said one dealer in Bourj Hammoud. “And I would change the equivalent of several thousand dollars in SYP; I am not concerned that the pound could become a worthless currency.”
There are also no indicators of any crippling runs on the banks. Bank Audi Syria has seen its deposit base drop 18 percent, but noted that much of that was requested by the bank itself as private banks are required to hold deposits with the Central Bank of Syria (CBS) at zero percent interest. “In difficult times zero percent interest at the CBS is ridiculous, so we voluntarily let go of some corporate deposits,” said Baz. “My opinion is overall withdrawals are around $2 to $2.5 billion, and the major chunk of cash is in peoples' homes.”
Syria is after all overwhelmingly a cash-based economy and the country's 12 private banks have struggled to attract depositors since entering the market in 2005 due to long-standing fears of re-nationalization, as happened when the Baath party took power in 1963. Banking penetration is very low even by regional standards, with one branch for every 47,700 people.
“Loans to gross domestic product ratios, bank accounts per household and so on are all are very weak. What we have witnessed is increased de-bankerization because of the situation,” said Baz.
Dearth of data
Getting accurate statistics on the current state of the Syrian economy is complicated by the lack of official data being released by the Central Bureau of Statistics and the CBS, with the last monetary reports released in March and May respectively.
“When the crisis started Syria had a fairly healthy level of foreign reserves which meant they were able to sustain the nominal exchange rate at remarkably stable levels, but the extent to which the CBS was able to intervene in the foreign exchange markets we don't know as the CBS is not publishing updates on foreign reserves,” said an economist at one of the world's leading financial institutions that wanted anonymity.
“At the same time the central bank is looking at further conservative policies to keep depositors reassured, as the whole idea is to prevent a run on deposits in the banking system and stop the nominal exchange rate getting into a depreciation spiral and weaken the economy faster. The CBS has been managing effectively its short term issue. The problem is we don't know how sustainable that is as don't know what is happening with the reserves.” The Minister of Finance, Mohammad al-Jleilati, recently said that Syria has $18 billion in foreign reserves.
One of the few real time indicators of the economy is the Damascus Securities Exchange (DSE) although it cannot be considered a real reflection of the economy due to its small capitalization. The Middle East's youngest bourse, which opened in 2009, has witnessed a decline in trading of some 37 percent as of June 20 from its peak in January. The other indicator is the currency, but as the economist noted has remained remarkably strong, only depreciating from 46 SYP to the US dollar at the beginning of the year to SYP 47.5 as of July.
Yazigi noted that a spike in gold sales has helped stop a run on the pound. “Gold sales are up and it is one reason the currency has not fallen,” he said.
With the financial sector and the DSE weak indicators of the real state of the economy, all eyes will be on how the CBS handles the situation and what happens to the pound. “The most important point is what happens to the currency. It is the symbol of stability of the state, and if it weakens then it is tantamount to saying the state is weakening,” said the source.
A stagnant economy
The overall state of the Syrian economy is pretty grim. “By far the most affected sectors are tourism, industry, logistics and transportation, retail trade – people are saving not spending – manufacturing as no one is buying, and exports to the Arab world are down,” said Yazigi.
Tourism, which brought in $8.5 billion in revenues last year, has ground to a halt, reflected in Damascus' premier hotel, the 297-room Four Seasons, having just 12 guests over the course of a week last month.
“What matters about tourism is not just the size of its contribution to GDP – about 10 percent – but that it generates foreign currency earnings as the country is in dire need of currency,” said Yazigi. “Private investment is close to nil, including foreign direct investment,” which had surged from $110 million in 2001 to $2.9 billion in 2010. “The oil and gas sector is OK as output continues, but future investment is questionable as international companies are withholding investment,” he added. Indeed, it is the hydrocarbons and agriculture sectors that are essentially propping up the economy, accounting for 35 to 40 percent of total GDP.
Meanwhile the business of the country's largest conglomerate has essentially dried up. Cham Holding, which was established to much fanfare in 2007 and touted as a further indication of Syria's opening economy, had sanctions slapped on it in May by the United States due to the board of directors reading like a who's who of the Syrian elite and Assad's cousin, billionaire businessman Rami Makhlouf, a prominent board member. The whole board recently resigned and only five men were elected to the board, including two former ministers with no management experience, while there is no chairman due to the sanctions.
Curiously, real estate and construction is booming in Syria. “In a time of crisis and with the currency falling, people are investing in real estate as it is considered a safe investment,” said Yazigi. “The construction sector is trying to profit from the fact that the government is not being able to monitor the sector to check if buildings are going up without licenses. But the cost of building materials and labor has increased.”
The potential for a major economic slowdown is very real, primarily due to dwindling consumer confidence, which President Bashar Al Assad admitted to in his June 20 speech at Damascus University. But rather than suggest that the government has control of the situation, Assad further undermined confidence in the economy when he said: “The most dangerous thing we will face is the weakness or the collapse of the Syrian economy. A large part of the problem is psychological.” As Yazigi commented in an editorial in the Syria Report: “by merely pronouncing the word 'collapse' the president indeed only reinforced that psychological factor".
Analysts forecasts a contraction in the economy this year. “A decline of 20 percent is a conservative estimate but realistic,” said one source.
Photograph by Paul Cochrane