Covid19, debt, among financial stability risks in 2020

TIGHTENED FINANCIAL CONDITIONS because of covid19 and growing household and corporate debt were among the phenomena that could put global and local economies at risk, the Central Bank said in its financial stability report for 2019.

The four main risks according to the report also included environmental disasters and risk factors associated with cyber attacks.

The report, released on Tuesday, indicated that grappling with the fallout from covid19 severely affected the prospects for growth for TT, and by extension the Caribbean.

The bank noted the impact of a fiscal bailout to facilitate pandemic relief as "high risk." That need to assist people and businesses financially affected could lead to a high sovereign concentration (domestic spend) of TT’s finances, and the erosion of fiscal buffers to facilitate recovery could ultimately erode the public sector’s debt servicing and financing activities. This would lead to a deterioration in financial sector liquidity and public sector loan portfolios, the bank said.

The report rated growing household indebtedness because of a sluggish economy and decreased household balance sheets as an elevated risk that could lead to a deterioration in the quality of consumer loan portfolios.

The report also pointed out the risks that came with a rapidly growing trend of digitalising financial services, such as disruption of those services because of cyber attacks.

Regardless of the risks, the pandemic and the necessity to manage associated shocks were expected to exacerbate the economic challenges already coming out of 2019, which had a connection to what was described as a “sluggish” year for energy.

The report does not seem to be far off from the mark as it was announced by Minister of Finance during one of the Ministry of Health’s virtual press conference in early May, that TT is expected to spend about $6 billion dealing with the effects of covid19.

During that press conference Imbert said the nation had already invested close to a billion dollars in initiatives to combat the virus spearheaded by the Ministry of Social Development, the Ministry of Health and the Office of the Prime Minister, the Ministry of Agriculture, the Ministry of National Security and the Ministry of Finance.

Domestically the government’s attempt to deal with financial shocks from the virus also put a strain on financial assistance initiatives leading to several complaints of inaccessibility to grants food cards and other forms of government assistance.

The virus also took a toll on financial buffers, including the Heritage Stabilisation Fund, into which the country may have to dip to plug the now $14 billion budget deficit.

The Central Bank said despite the slow year for energy the domestic financial system on the whole was healthy. The report said higher earnings from the non-energy sector improved government’s financial position between 2018 and 2019, and growth in consumer credit drove private sector lending forward.

The report said there were healthy capital buffers in the banking sector and in the insurance sector there was favourable growth as returns on equity averaged at 17 per cent and 12 per cent for life and non-life insurance sectors respectively.

The report also said despite concerns over the rise in electronic payments cash is still an important payment instrument.

For 2019 Central bank recorded 39 million cash withdrawals valued at about $56 billion.

Regulatory frameworks for financial institutions and payment systems and risk based supervision through regulatory agencies were chief among Central Bank’s efforts to ensure financial stability.