THE ISSUE: Stability concerns valid
THE INTERNATIONAL MONETARY FUND (IMF) is scheduled to release its latest global financial stability report this month. At a time when concerns remain about the state of Caribbean economies, as well as the high debt profile the region has, it is natural, and some would say expected, that individuals would raise questions about the state of financial stability in the Caribbean and wider region.
This is so given that countries like Barbados rely heavily on foreign direct investment and foreign exchange earnings. The inflow and outflow of such funding would by its very nature impact on the region’s financial sector.
The perception of the Caribbean’s financial stability was certainly shaken in 2009 when Trinidad and Tobago finance giant C.L. Financial and its subsidiary, CLICO and sister company British American Insurance, collapsed. Barbados and other countries in the Caribbean are still feeling the effects of this.
The importance of financial stability and what steps were being taken to ensure it existed in this part of the world was highlighted recently by David Kloeden, programme coordinator of the Barbados-based Caribbean Regional Technical Assistance Centre (CARTAC). CARTAC is an IMF entity.
“One of the main failures exposed by the financial crisis was the inadequacy of the data used to measure and monitor financial activities and the lack of appropriate tools available to policymakers to mitigate potential threats to financial stability,” he said at a recent press conference at the Central Bank.
“Also, until the financial crisis, neither banks nor the market really appreciated the relationship between inter-connectiveness and financial stability, or the extent and potential impact of firms’ indirect exposure to each other. So because of this, the IMF as a whole has increased its focus on stability inter-connectiveness.”
Kloeden said that given the impact of the global financial crisis on the region, his organisation was “very well placed to launch a new work stream on financial stability and our relations with our individual members allow us to work on the country level, data collection and policy issues as well as at the regional level, which is extremely important in ensuring that the regional and country level approaches are well integrated”.
In the case of Barbados, the recently-released Financial Stability Report 2015, produced by the Central Bank, in partnership with the Financial Services Commission, found that Barbados’ financial system remained sound and was capable of withstanding adverse shocks.
The first ever Caribbean Regional Financial Stability Report, also released recently, concluded that “the overall level of financial stability in the Caribbean has improved significantly over what obtained during the height of the recent global financial and economic crisis”.
When the IMF released its last Global Financial Stability Report last October, it said “financial stability has improved in advanced economies”. This reflected “a strengthening macro financial environment in advanced economies as the recovery has broadened, confidence in monetary policies has firmed, and deflation risks have abated somewhat in the euro area”.
“Despite these improvements in advanced economies, emerging market vulnerabilities remain elevated, risk appetite has fallen, and market liquidity risks are higher,” it added.
“Although many emerging market economies have enhanced their policy frameworks and resilience to external shocks, several key economies face substantial domestic imbalances and lower growth.”
While Barbados and the world awaits the latest instalment of this report, a gauge of current stability was given by the Financial Stability Board (FSB) after its most recent meeting, in Tokyo.
The FSB said it was established “to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability”
In a Press release issued following the Japan meeting, the FSB said it “discussed current financial vulnerabilities against the background of a weakening economic growth outlook, low price pressures, high debt levels and low productivity in many advanced and emerging economies”.
“Against this backdrop, the credit outlook has deteriorated for weaker corporate issuers and some sovereigns, particularly some affected by the sharp falls in commodities prices,” it said.
The FSB added: “Much progress has been made through financial reforms to strengthen the resilience of financial institutions and markets in recent years. Nonetheless, many banks continue to face a range of challenges to profitability and must do more to adjust their business models to a low growth/low nominal interest rate environment and strengthened regulatory framework.
“Continued economic uncertainties and recent episodes of market volatility have re-emphasised the importance of continued progress to implement fully the agreed reforms and to identify and address new vulnerabilities as they arise.”