May 2004 Financial News

Excess Liquidity Lingers

May 04, 2004

Source: Nation Barbados
Monday 03, May-2004
Stories by Marva Cossy

“For those who are borrowers of money, there is no better time than now; borrow long and lock the rate in.”

This advice was given to Barbadians in January by investment manager Roger Cave writing in the Business Authority.

Cave, a financial analyst, had noted that the excess liquidity in the local banking system and the growing corporate profits had sent stock prices on the local and regional stock markets soaring.

Those banking conditions started in recent years and are partly associated with Government’s borrowing of $200 million and $300 million in two successive years. That meant Government did not need to borrow from the commercial banks.

This was reinforced last year with capital inflows from divestments and take-overs.

Last May, Central Bank Governor Dr Marion Williams said: “Over 50 per cent of the excess liquidity in the system can be attributed directly to banks buying other banks and other entities.

“This money has come into Barbados and that is largely responsible for much of the excess liquidity.”

Analysts believed then that the excess liquidity would be reduced within the next year or so. This has so far held true.

Last week, in reviewing the economy’s performance for the first three months of this year, Williams said the excess liquidity ratio rose by 1.3 percentage points to 23.1 per cent.

“However, discounting the four percentage-point reduction in minimum securities requirement, which reclassified approximately $200 million as excess liquidity, the effective liquidity ratio decreased marginally.”

The governor added that with the expansion of the deposit base continuing to outstrip credit growth, the loan/deposit growth ratio at the end of March was relatively unchanged at 51.5 per cent compared to 52 per cent at the end of last year.

“The financial system, therefore, remained very liquid, resulting in continued high demand for treasury bills,” she said.

As a result, the treasury bill rate fell by 0.36 of a percentage point, ending the quarter at a record low of 0.28 per cent.

No further slippage of the treasury bill rate is expected by the Central Bank. Economists there believe credit will grow in response to lower interest rates and the treasury bill rate should therefore rise.

Nevertheless, the jump in credit is not expected to mop up a significant amount of the liquidity, consequently the current high level will be a feature throughout 2004.

Cave’s advice is still relevant. Commercial banks are still flooded with idle dollars and there are no long queues of borrowers requesting finance for viable projects.

Why not? Interest rates have fallen.

About seven months ago, Scotiabank’s managing director for the Eastern Caribbean, Stephen Cozier, saw a fall-off in business investment, but said “that naturally comes when you are in a recessionary period, although Barbados is emerging from that period.”

Other commentators have said that activity should have been stirred by now and they see the slow uptake of loans as indicative of a lack of confidence in the economy.

Williams does not believe this.

“I think it is about cost. Our costs of operation in Barbados are high, relative to most partners in the region and, in fact, relative to many countries outside the region,” she told the Press recently.

Stressing that total cost must be cut so excess liquidity could be deployed, the governor said that if the cost could be cut, then there would be a demand for credit and Barbados would be more competitive, thus absorbing the liquidity.

As part of the solution to the liquidity situation, the Central Bank has permitted commercial banks to invest “small amounts” overseas.

But Williams added that excess liquidity was also related to Government’s tight fiscal policy.

She added that the bottom line had to do with viable projects.

“We need a wider range of viable projects in which the [commercial] banks can invest and that really relates to preparing an entire environment which can assist in achieving that kind of demand for new credit,” she said.