System still at risk, warns economist
Money in the bank, but financial system still at risk – new report
Despite a high level of liquidity in the banking system, Barbados and other tourism-dependent Caribbean states remain financially vulnerable, one of this island’s leading economists today warned.
Presenting the key findings of the first Regional Financial Stability Report during a session, which was streamed live this morning from the Central Bank of Barbados, Deputy Governor Cleviston Haynes pointed out that the banking sector, which currently accounts for two thirds of the region’s financial system, was well capitalized.
However, he acknowledged that over the past seven years, the incidence of non-performing loans has increased, while credit growth has slowed, especially in services-led economies, which he said were hardest hit by the global economic downturn.
The Deputy Governor did not identify any Caribbean countries by name, even though he pointed out that the negative impact had registered in their credit ratings. This is in the wake of the recent downgrading of Barbados by international credit rating agencies Standard & Poors and Moody’s to the level of junk.
“We all recognize that the region faces significant economic imbalances, including low growth, high fiscal deficits, balance of payment deficits and a high level of sovereign indebtedness,” said Haynes.
With commercial banks currently accounting for 81.1 per cent of the total system, the Central Bank spokesman also highlighted what he said was a growing tendency by banking institutions to put their eggs into the real estate sector.
However, he warned that this concentration of credit should be monitored, lest that sector falls into decline and commercial banks wind up in a position where they were unable to recover
“That is a potential risk to financial stability if we are unable to get data on what is happening with our real estate prices. That is an area for further work,” said Haynes.
The economist also warned of the risks associated with holding foreign exchange deposits in the banking system, saying countries with floating currencies were at greatest risk. However, he assured that there was no immediate danger posed to region, based on the current level of
Overall, the financial sector is said to be responsible for about 120.3 per cent of the region’s collective GDP, and while there is clear domination of the market by commercial banks, insurance companies make up 19.8 per cent and credit unions 6.6 per cent of market, according to the just-released findings of the report.
Though acknowledging that some financial data was missing, Haynes said the Caribbean was also vulnerable to “systemic risks”. He explained that based on the small number of financial institutions, failure of one could “create spill-over across the rest of the financial sector.”
However, Haynes said, “we believe at present our individual institutions are strong enough to avoid the systemic risk, but of course we have to monitor these entities and the impact that macro economic imbalances could have on the performance of our institutions.”
The report, which focused mainly on five-year period from 2009 to 2014, also showed that on average the region’s debt to GDP ratio stood at 66.9 per cent in 2014. Barbados currently has a debt to GDP ratio of over 100 per cent.
“So that is one of the constraints in which countries are operating within the region, and clearly, the level of indebtedness can have some impact overall on your financial stability in situations where countries decide to restructure their debt, for example,” he acknowledged.
He also suggested that the situation in countries with “very large external imbalances” should be improving by now, given the recent decline in world oil prices.
“All of these primary macro-economic indicators are going in the direction in which we would not want to see them go, although it is true that what is happening is that because of the fiscal imbalance and high level of indebtedness, countries have been focused on reducing their fiscal deficits, and what we are seeing therefore are that fiscal deficits are now moving
in the right direction,” the Deputy Governor said.
However, he concluded that financial integration was still a way off for the Caribbean Community (CARICOM, stating that there was need for more discussion on the development of decision making frameworks, harmonization of laws, implementation of accountability mechanisms, as well as memoranda to facilitate information sharing between jurisdictions, among other things.