Nov 2008 Financial News

Financial Crisis - Trinidad and Tobago is under threat - Central Bank points to need for contingency plan

Nov 19, 2008

The ongoing financial crisis has precipitated the emergence of a global economic recession that has already begun to affect the wider Caribbean, the Central Bank reports.

This country is not immune to the effects of the financial crisis. In its latest Monetary Policy Report officially released on Monday, the Central Bank said if the global recession deepens, Trinidad and Tobago is likely to face a serious challenge in the execution of its long-term strategic development plan. The Bank has suggested the country establish a contingency plan to help limit the negative effects of the crisis. It noted this week that some Caribbean countries such as Barbados have already taken the lead to put such plans in place.

The following is an excerpt from the Bank's Monetary Policy Report:
"Implications of the Financial Crisis for Trinidad and Tobago - Like its Caribbean neighbours, Trinidad and Tobago is not immune to the effects of the crisis. While the impact on the financial system can be considered mild to date, the crisis has the potential to impact activity in the real economy.

(i) Following the intensification of the crisis, the Central Bank requested all commercial banks to report on the extent of their exposure to the crisis. The evidence garnered from this survey has indicated that, by and large, direct exposure by domestic banks to the current financial crisis has been quite minimal.
Although a few financial institutions had some exposure to Lehman Brothers, Merrill Lynch and AIG, this exposure has been relatively small is relation to the total assets of these institutions.

The domestic commercial banking system remains well capitalized with a capital-to-asset ratio of close to 18 per cent and a relatively low level of non-performing loans. Unlike many commercial banks in large emerging markets that utilize foreign borrowing as a basis for lending in domestic markets, the bulk of lending by commercial banks in Trinidad and Tobago is based on domestic reports and tis has helped to limited the exposure of the domestic commercial banking system to the current crisis. Recent data for the banking system in Trinidad and Tobago indicate that short-term borrowing from foreign banks constitute less than 4 per cent of the total deposit base of the domestic banking systems.

While many of the commercial banks have access to short-term credit lines with foreign correspondent banks, the relatively strong foreign exchange position has enabled banks to liquidate these lines relatively quickly as they become due. In fact, the recent information obtained from banks suggest that there has been a marked decline in the short positions of commercial banks over the last year.
Recently though, in light of the shortage of liquidity and the severe weakening of confidence in global financial markets, a few commercial banks have reported that some of their correspondent banks have begun to increase premiums on short-term credit lines and have even moved to shorten the settlement period to compensate for any risks associated with the late settlement of outstanding positions. So far, however, the access to these lines of credit has not been severely impaired by the on-going crisis.

(ii) Impact on the Wider Domestic Financial Sector -
While commercial banks currently dominate the financial system accounting for 36.7 per cent of total financial assets and 4.1 per cent of GDP as at 2007, the insurance, mutual funds and capital market sector are also elements of the wider financial system. Currently, the life insurance sector and mutual funds activity (exclusive of those linked to commercial banks) account for approximately 15.9 per cent and 8.5 per cent, respectively, of total financial assets.

Altogether, the financial services sector inclusive of real estate and business services contribute around 11 per cent of gross domestic product. As regards the local stock market, given the weak degree of integration between the local and foreign stock markets, the direct effect of the crisis on the domestic stock market has been limited. This is not to say, however, that the negative developments in the external environment have not impacted investor sentiments in the local market.

Indeed, local investors have been a bit more cautious about investments on the local exchange. The Securities and Exchange Commission in a press release on its website has also indicated that out of 21 respondents in its poll of securities firms, only three has any exposure to Bear Stearns, Goldman Sachs and Fannie Mae - to a value of less than US$10 million (or less than one per cent of the value of net funds under management.)

A similar picture exists for the insurance and private pension funds, where, so far, information obtained from the industry has indicated that the degree of exposure of the sector constitutes less than ten per cent of the value of total assets of the sector. One factor that has perhaps helped to minimise the impact is the current quantitative restriction in the Insurance Act 1990 which limits investments by private pension funds outside of the domestic market to a maximum of 20 per cent of the assets of these funds.

(iii) Impact on the Real Economy -
(a) Falling Oil Prices and Earnings from the Energy Sector
Oil prices declined by 61.9 per cent from a high of US$147 in July 2008 to just around US$56 per barrel in mid-November 2008. Given the dominance of the energy sector in economic activity in Trinidad and Tobago, a continued decline in energy prices, especially against the backdrop of falling local oil production, maturing oil fields and limited new gas and oil discoveries, is likely to have direct implications for government earnings from the energy sector.

In addition, the declining demand for energy in global markets seems to have begun to impact on the operations of service companies in the energy sector which have already begun to report falling demand for their services.
While the 2009 budget is predicted on an oil price of US$70 per barrel and a gas price of US$4 per barrel, the steady decline in oil prices since October suggests that foe the first quarter of the fiscal year 2008/2009 (i.e. October to December 2008), there is a strong likelihood that oil prices can remain below the budgeted price of US$70. Such a sharp fall would also limit the accumulation of long-term savings in the Heritage and Stabilisation Fund. The Government has already begun to assess the impact of these developments on its fiscal operations.

(b) Lower exports to the regional economy -
Another potential impact of the current financial meltdown is that falling level of disposable incomes in the developed economies could lower discretionary incomes for travel-related activities, negatively impacting tourism receipts especially in those Caribbean member states that are highly dependent on the sector. Already, the Barbadian, Bahamian and Jamaican economies are anticipating slower economic growth for 2008 and 2009. A slowdown in growth in the Caricom economies could hurt Trinidad and Tobago's non-energy sector exports to Caricom. A poll of ten of the top exporters of manufacturing products to the region suggests that the sector could experience some decline in 2009 especially if income levels fall in the Caribbean region.

Conclusion -
If the global recession deepens, Trinidad and Tobago is likely to face a serious challenge in the execution of its long-term strategic development plan. The early establishment of a contingency plan can go a long way in helping the country to limit the negative effects of the crisis. Some Caribbean countries such as Barbados have already taken the lead to put such plans in place."


Source:
Trinidad Express
Business Magazine
Wednesday November 19, 2008
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161402956