Warning that de-risking could result in foreign exchange losses

by Marlon Madden

The decision by some international financial institutions not to provide correspondent banking services to some segments within the Caribbean Community (CARICOM) could be driving legitimate businesses underground.

This is the view of CARICOM Secretary-General Dr Carla Barnett who is proposing that a study be carried out to determine the true impact de-risking is having on regional economies.

She argued that the loss of international banking relations could be resulting in regional states losing out big time on valuable foreign exchange, leading to the erosion in the progress of socio-economic development.

Barnett made the comments during the opening of the Caribbean Regional Risk Conference 2022 on Wednesday.

She explained that closely aligned with economic risks was the reputational risk that CARICOM member states have had to endure in recent times as a result of “heightened regulatory action on the anti-money laundering combating the financing of terrorism landscape (AML/CFT), and the global tax governance initiatives which devolve in unilateral action by various developing countries”.

“Changes in the international regulatory standards for global taxation and the AML/CFT regime have led to the blacklisting of several member states deemed to be non-compliant from time to time, and resulted in financial marginalisation and risk aversion by international investors,” the CARICOM SG explained.

“I believe that the full impact of the risk management practices of the international regulators, the so-called de-risking practices, needs constant study. The uncertainties and the actual loss of correspondent banking relations are likely to be driving legitimate business underground.”

She further explained that this would result in a reduced flow of export earnings into the region.

“When the formal financial markets cannot work, business resorts to informal markets to survive. Furthermore, the threat of loss of access to the international banking system can lead exporters of goods and services to keep as much of their foreign exchange earnings abroad as possible in order to be able to ensure ready access to foreign exchange when they need.

“These two results of international de-risking practices, therefore, may well result in the expansion of the informal sector and increase the likelihood of macroeconomic instability, thereby increasing some of the very risks we are seeking to mitigate. In short, the prevailing economic risks, whether global, regional or national, could result in the further erosion of the socioeconomic progress that CARICOM member states have achieved over time,” said Barnett.

She identified volatile energy prices, supply chain disruption, the ongoing Russia-Ukraine war, rising global interest rates and inflation rates, increasing commodity prices, coupled with the impact from natural disasters and climate change, as major risks that were eroding the fiscal space of regional economies.

The top CARICOM official stressed the need for adoption of an integrated approach to managing country risk, adding that “doing so will require all of us – member states, development financial institutions, regulators, academia, the private sector and civil society – to carefully consider the core relation of risk factors”.

“The operationalisation of an integrated country risk management framework robust enough to strengthen social safety nets, and with the capacity to adapt to shocks, will allow us to build back better and is more than welcomed,” she said.

“The time is opportune for country risk management to be a key imperative for the Caribbean as we forge a pathway to resilience and sustainable recovery post-COVID, and prepare for the other crises that are sure to arise.”

marlonmadden@barbadostoday.bb