Banking in Barbados could become even less profitable than it was prior to the global recession – the likely fallout of Government’s ongoing debt restructuring exercise, the head of the economics society has strongly hinted.
Economics Society president Shane Lowe gave the assessment on Monday night as he addressed an economic symposium at the Errol Barrow Centre for Creative Imagination on the topic How Has the Barbados Economy Coped with the Great Recession.
Although the nation’s bread and butter tourism industry continued to do well, its contribution to overall economic activities had “waned a bit”, said Lowe.
This, he said, couple with a range of other factors including non-performing loans and a decline in local and foreign investment, had negatively impacted economic growth, which also squeezed the profitability out of commercial banks.
“Barbados’ recovery has lagged many of our peers. So to answer the question how have we coped: not very well. There has been a shift in tourist arrivals from the UK more so to the North American market, and so while arrivals are growing they are not contributing as much as they once did to economic activity. A weakening in investor confidence has actually slowed private investment both on the foreign side and domestic side,” Lowe explained.
“Another important factor, which is more a forward outlook, is the impact of the debt restructuring.
“Barbados’ domestic debt is quite evenly distributed across a number of financial institutions and creditors. The NIS [National Insurance Scheme] and the Central Bank alone hold just over half of the debt. The commercial banks hold about 19 per cent of the debt, and that is central bank debt. If you break that down most banks have treasury bills and government securities $1.8 billion of it is mandated by the central bank. There is also another substantial portion lent to the central government directly in terms of loans to state owned entities.”
As Government rolls out its debt restructuring programme, domestic holders of government paper are being asked to exchange their old debt for new instruments, to be repaid over a longer period at slashed interest rates.
Lowe told the modest gathering that while local banking remained well-capitalized, it was less profitable when compared to the rest of the region, except in the Organization of Eastern Caribbean State (OECS) where a number of indigenous banks have failed.
“Given that the sector is less profitable than its regional counterparts you would expect that as interest rates on the banks debt fall naturally they will earn less. So the real question is, not withstanding that banks are pretty well capitalized in Barbados and they have sufficient buffers to withstand most shocks, what does the future of the sector look like, how profitable will it be especially since it is less profitable than its regional counterparts?” he queried.
The economist predicted that as a result of government’s measures to create more cashflow the economy would naturally slowdown in the short-term and there would be a need to attract more domestic and foreign investment “to compensate for that decline in economic activity”.
Improving the ease of doing business would be a critical spoke in the wheel of economic recovery, he said.
And with the country currently in an International Monetary Fund (IMF) programme, Lowe said it was critical that it meet its targets in order to secure the needed funding in an effort to improve its balance of payments.
With the IMF loan already attracting development funding from the Inter-American Development Bank and Caribbean Development Bank, Lowe said if these funds did not materialize owing to Barbados’ failure to meet the targets, the country would be “still be in a precarious position”.
“While the programme is projecting to improve our reserves position, a lot of it hinges on IMF funding and funding from the multilaterals, both of which are contingent on the country meeting the targets it has set for itself,” Lowe said.
Despite the need for commercial banks to “find an environment where it can accelerate loans to a domestic private sector, who will again need to drive this economic recovery”, said Lowe, the good news was that with more reserves from IMF and other multilateral funding, “the risk of devaluation should decline and “that should prompt more persons to invest”.