Economist Jeremy Stephen has poured further cold water on Minister of Finance Chris Sinckler’s recent Budget, saying it had not taken into consideration the serious threat posed by de-risking to the very survival of the vital international business sector.
Among the measures announced by Sinckler in his March 30 Financial Statement and Budgetary Proposals was a controversial two per cent levy on all foreign exchange transactions.
Stephen observed that the levy was due to take effect here on July 1 but the process for implementation had not yet been spelt out by Government.
And while it was among the proposed short-term solutions to conserving foreign exchange, the economist said when taken with a lack of domestic legislation, it “showed a clear disregard for the whole effect of de-risking”, which is the umbrella term used to describe strategies adopted by global banks to lower the overall risk exposure of their asset portfolio in response to tighter regulatory standards imposed by national and international regulatory bodies.
This has led to termination of correspondent banking relationships with local banks, as well as strategic market repositioning, withdrawal from selected markets, closure of the accounts of selected clients and classes of clients, and relocation of business , particularly to the US, to take advantage of regulatory arbitrage.
Antigua and Barbuda, Barbados, Belize and Jamaica are among regional states which have reported that they have begun feeling the impact of de-risking.
Addressing business leaders at a breakfast seminar this morning at the Lloyd Erskine Sandiford Centre, Stephen said “not only now are we raising the whole spectra of de-risking, but we also have a two per cent commission to pay on top of any transaction that you are going to do and there is no clarity although two weeks from now it seems as if it is going to be business as unusual”.
He further warned that the measures would make more challenging to do business in Barbados.
“The whole point I am making is that we have domestic policies that are not paying attention to a lot of these external policies. Suppose all the banks had to be de-risked in Barbados? Now you have a compounded issue where you still need to use US dollar on a credit card, but purchase something out of Europe you have to pay a two per cent fee but you are not certain if the transaction will clear,” Stephen said.
He suggested that commercial banks and other financial institutions in the region could not afford to sit back and wait for their ties to be severed, but that they must begin to form closer ties with financial institutions in Asia and Africa.
The University of the West Indies lecturer also suggested that local and regional financial institutions consider block chain technology to help mitigate the challenges surrounding de-risking.
“I am just saying there are several alternatives that we need to open our minds to now. Even if we can’t engage in a meaning full relationship that has economies of scale there are options.
“Last but not least, advocate for clarity with respect to budgetary proposals that are now out but might also come up in the near future because with the impending incidents of de-risking you definitely need clarity especially in these times,” he added.
Meanwhile, pointing to the “unprecedented” increase in regulations over the past decade due to perceived abuses of the financial system, BIBA President Gregory McConnie said the issue of de-risking had reached a critical point.
“Loss of access to basic financial services and payment mechanisms can really only result in the unbanked seeking alternative methods in order to up their business, and that can only lead to an even larger unregulated or black market,” warned McConnie.
He also said the issue of US banks cutting ties with some businesses here had been “extended to some international business sector customers where commercial banks would have seen these customers as too high risk to maintain banking relationships with.
“Competitiveness and attractiveness of Barbados as a place to invest and to carry on business continues to be eroded by the challenges we have with the ease of doing business that seem to just continue to mount. This has been exacerbated by the significant impending budgetary tax increases that we expect will almost certainly drive inflation to near double digit levels and also likely to have a shrinking impact on the economy,” he said, adding that the lack of clarity on how they will be implemented did nothing to quell investor uncertainty.
“As serious as the issues of ease and cost to doing business, as well as the negative impact of potential uncertainty are, we think that ultimately they pale in comparison to the very serious implications that de-risking, taken to its ultimate extreme, could have on the overall economic development of Barbados,” McConnie warned.
Legal Counsel at the Central Bank of Barbados Sadie Dixon gave the assurance that the concerns regarding de-risking were being addressed at the highest level among regional states and the international community.