Indebted households, a risk for banks

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In this photo from March 17, 2020, people are lining up to enter the Central Bank of Port of Spain. File photo / Angelo Marcelle –

The Central Bank has warned that growing household indebtedness, high public debt and rapid digitization pose risks to TT’s financial stability as the pandemic persists.

In its financial stability report for 2020 which was released on Wednesday, the bank said that while household debt contracted during the year, financial institutions remained exposed to shocks from loan deferrals.

“Rising unemployment and depressed income levels exacerbated by new restrictions may have increased the financial sector’s vulnerability to households.

“While extended loan deferral programs have helped cushion the immediate shock to banks’ financial soundness indicators, the quality and profitability of assets can be compromised as loan obligations fall due after the end of the term. moratoriums. ”

The central bank said erosion of fiscal buffers to support covid19 relief, a sluggish domestic economic environment, cyberattacks and a slowdown fueled by weak energy sector activity and the covid19 pandemic were triggers keys.

He pointed out that the debt servicing and financing activities of the public sector, the deterioration of household balance sheets, the disruption of financial services and the decline in profitability, investor confidence and the performance of equities, were all issues. contagion channels that have occurred in the local economy.

“The drop in demand and production of energy, associated with reduced activity in the non-energy sector due to the containment measures of the pandemic, weighed on economic activity which contracted by 8.8% in 2020.

“Data from the Ministry of Labor revealed that the number of people made redundant rose to 2,744 in 2020 from 1,530 in 2019.

“Food inflation has increased, averaging 2.8% in 2020 from 0.6% in 2019, fueled by rising global food prices and supply issues. ”

The bank said that with the increase in covid19 cases in the second quarter of 2021, the reinstatement of containment measures may further impinge on an already fragile recovery with ripple effects for the financial sector.

“Higher food prices in the future may further reduce disposable income in an environment where the private sector may already be struggling to service debt.

“Sovereign credit ratings were BBB with a negative outlook from Global Standard and Poor’s and Ba1 with a negative outlook from Moody’s Investors Service based on the economic and fiscal challenges arising from the covid19 crisis and falling oil prices and natural gas. ”

He said, however, that the external buffers were useful in mitigating the effects of the pandemic, as the increase was due to external borrowing and withdrawals from the Heritage and Stabilization Fund.

“In 2020, gross official reserves increased slightly to reach US $ 7 billion in 8.5 months of import coverage, compared to US $ 6.9 billion in 7.7 months of import coverage in 2019.

“However, the increase in external borrowing increased the external debt by 20.5% to 4.7 billion dollars in 2020.”

The Central Bank has recommended the coordination of financial system regulation and policies relating to small businesses in the national economy that can support mechanisms that facilitate lending to small businesses and mitigate credit risk.

“Addressing the financing problems of small businesses can help achieve the twin goals of preserving financial stability and encouraging small business growth.

“Allocating resources to strengthening transaction-based financing infrastructure can improve regulatory efficiency while reducing reliance on public sector financing. ”


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