THE HOYOS FILE: Looming threat to our financial system
I understand only too well, having been at the receiving end of it all my journalistic life, the need of CEOs and their PR staffers to describe the glass as half-full rather than half-empty.
In Barbados we have the perfect example of this in the leading lights of our government and financial authorities, who have the enviable disposition of being pumped up about our prospects even when almost all of the indicators point the other way.
For example, we have a Governor of the Central Bank who maintained for perhaps the better part of two years that we need not worry because the economy was stable.
That our Government was doubling the national debt in five short years while having almost no major capital projects to show for it, while those it did put on show were often separately financed through some dreadful BOLT, seemed not to faze the financial leadership of Barbados.
They would say things like, “When the global financial crisis, which was not of our own making, has passed, you’ll see, the tourists will return in their numbers like before and our economy will naturally start to grow again.”
That’s my paraphrase of 4 999 speeches made by those in financial authority since the Dems took office. And has it come to pass? Well, not quite. As the International Monetary Fund (IMF) intoned last week, that did not happen, as Barbados had not been able to emerge, as have many other countries, from said Wall Street greed-induced fiscal meltdown.
Joining the ranks of “glass half-full” financial generals is the acting CEO of the Financial Services Commission (FSC), Warrick Ward, who as reported in the DAILY NATION of Thursday, February 13, 2014, at Page 6 that our financial system “remains resilient” and was “unlikely to collapse based on current projections”.
His fellow general, director of insurance and pensions Randy Graham seems to have also joined up as he added that “The FSC in its regulatory practices encourages best practices among these regulated entities” with regards to salting away some extra cash for a rainy day, so that they would be able to “respond to circumstances like increased non-performing loans and so on”. But the financial storm is buffeting Barbados in ways many of its institutions have not felt before.
In the credit union subsector, NPLs (non-performing loans), which averaged around 5 1/4 per cent as recently as six years ago (2008), climbed to 8 1/2 per cent at June 2013, according to the IMF’s Barbados Country Report, published Jan. 24, page 15).
I singled out the credit union subsector because it plays such a big role in financing small loans and mortgages for the average person in Barbados.
Overall, says the IMF, under the current financial outlook (which is not good, as we know) but without any other major “shock” to the system, the sector’s current NPL ratio of nearly 14 per cent to total loans will rise to almost 20 per cent within three years.
That means, if I understand it in my layman’s mind, that one out of every five dollars lent by the sector in 2017 will either not be repaid or will take a lot longer than expected. And you think it’s hard to get a loan or a mortgage now? Just wait a few years.
Now here is what I think the FSC folks were relying on in their glass half-full statements: Under this current-outlook scenario, the CAR, or capital adequacy ratio, of the total financial system, which is now well above ten percent minimum requirement, being at around 16 per cent, would fall to 11 per cent, which is still above the panic zone of ten per cent and below.
But if tourism continues to decline or oil prices start to rise, the CAR will drive right up to around 25 per cent, and two banks (about 40 per cent of total banking assets) would fall under the minimum ratio (same report, page 26). And if oil prices rise sharply and economic growth is hampered, both because of “geopolitical” tensions, then we can expect the total NPL ratio to reach 33 per cent, one-third of all loans, or one dollar out of every three loaned.
With these institutions having to dig into their own capital to help salvage the situation, the effect on the CAR of the banks would become more significant, with three banks (controlling 60 per cent of all banking assets) becoming undercapitalised by a sum close to five per cent of gross domestic project (same report, same page.)
And who would then bail out the banks? Not the penniless Barbados Government. You know, it troubles me as a layman, and as a journalist, when I can go on the Internet, drink my coffee, and after leisurely reading the same reports that are being commented on by our officials in financial authority, find a lot more to be concerned about than they seem to be letting on.
I have found this with every Central Bank report of the last few years, every Moody’s or Standard & Poor’s report, and every IMF Country Report.
It does not make me smarter. Just less trusting of all those in authority over our country’s financial affairs.