Central Bank: Households in debt a risk to banks

The Central Bank has warned that growing household indebtedness, high government debt and rapid digitalisation pose risks to TT’s financial stability as the pandemic persists.

In its financial stability report for 2020 which was released on Wednesday, the bank said while household debt contracted over the year, financial institutions remained exposed to shocks of loan deferrals.

“Rising unemployment and depressed income levels and exacerbated by renewed restrictions may have increased the financial sector’s vulnerability to households.

“While extended loan deferral programmes have helped cushion the immediate shock to banks’ financial soundness indicators, asset quality and profitability may become compromised as loan obligations become due following the end of moratoria.”

The Central Bank said erosion of fiscal buffers to support covid19 relief, a sluggish domestic economic environment, cyber-attacks and a slowdown fueled by low energy sector activity and the covid19 pandemic were key triggers.

It pointed out that public sector debt servicing and financing activities, deterioration of household balance sheets, disruption in financial services and decline in profitability, investor confidence and share performance, were all contagion channels that occurred in the local economy.

“Reduced energy demand and production, coupled with dampened non-energy sector activity due to pandemic containment measures, weighed on economic activity which contracted by 8.8 per cent during 2020.

“Ministry of Labour data revealed that the number of people retrenched increased to 2,744 in 2020 compared to 1,530 in 2019.

“Food inflation rose, averaging 2.8 per cent in 2020 compared to 0.6 per cent in 2019, fueled by rising food prices globally and supply challenges.”

The bank said with the rise of covid19 cases in the second quarter in 2021, reinstatement of containment measures can further impinge on an already fragile recovery with knock-on effects for the financial sector.

“Higher food prices in the future can further reduce disposable income in an environment where the private sector may already be facing debt servicing difficulties.

“Sovereign credit ratings were BBB with a negative outlook from Standard and Poor’s global ratings and Ba1 with a negative outlook from Moody’s Investors Service based on the economic and fiscal challenges stemming from the covid19 crisis and lower oil and natural gas prices.”

It said however that external buffers were useful in mitigating the effects of the pandemic as the increase was driven by external borrowings and withdrawals from the Heritage and Stabilisation Fund.

“In 2020 gross official reserves rose marginally to US$7 billion in 8.5 months of import cover from US$6.9 billion over 7.7 months of import cover in 2019.

“However, greater external borrowing increased external debt by 20.5 per cent to US$4.7 billion in 2020.”

The Central Bank has recommended co-ordination of financial system regulation and small enterprise policies in the domestic economy that can support mechanisms which aid small business lending and mitigate credit risk.

“Remedying small enterprise funding challenges can contribute to realising the dual objectives of safeguarding financial stability and encouraging small enterprise growth.

“Allocating resources to strengthening transaction-based financing infrastructure can improve regulatory efficiency while reducing reliance on public sector financing.”