GEISHA KOW­LESSAR-ALON­ZO

The Cen­tral Bank is warn­ing that per­sis­tent­ly high in­ter­na­tion­al in­ter­est rates could mag­ni­fy glob­al fi­nan­cial sta­bil­i­ty con­cerns and im­pact the port­fo­lios of do­mes­tic fi­nan­cial in­sti­tu­tions.

In its Fi­nan­cial Sta­bil­i­ty Re­port 2022, which was re­leased on Thurs­day, the Cen­tral Bank not­ed that glob­al in­fla­tion de­cel­er­at­ed at the end of 2022 be­cause of a sharp re­ver­sal in en­er­gy and food prices; how­ev­er, in­ter­est rate in­creas­es ex­tend­ed in­to the first half of 2023.

The re­port al­so cit­ed that the IMF, in its April 2023 World Eco­nom­ic Out­look (WEO), not­ed that high­er bor­row­ing costs could weak­en eco­nom­ic growth and that the pos­si­bil­i­ty of a re­ces­sion has in­creased, par­tic­u­lar­ly in ad­vanced economies.

This could have knock-on ef­fects on glob­al eco­nom­ic ac­tiv­i­ty, ac­cord­ing to the Cen­tral Bank, which could have neg­a­tive im­pli­ca­tions for the do­mes­tic econ­o­my through trade and fi­nan­cial link­ages.

Tighter glob­al fi­nan­cial con­di­tions and a po­ten­tial slow­down in de­vel­oped coun­tries could ad­verse­ly im­pact do­mes­tic fi­nan­cial in­sti­tu­tions’ port­fo­lios due to as­set reval­u­a­tions on bonds and oth­er fixed-in­come in­stru­ments.

Nev­er­the­less, the re­port said, high­er in­ter­na­tion­al in­ter­est rates could bol­ster net as­set re­turns in the long-term in­sur­ance and oc­cu­pa­tion­al pen­sion plans sec­tors.

“More­over, un­changed do­mes­tic rates in the con­text of tight­en­ing in the US has led to a widen­ing of neg­a­tive short-term in­ter­est rate dif­fer­en­tials –the TT-US dif­fer­en­tial on three-month trea­suries de­clined by 418 ba­sis points over 2022 and reached -392 ba­sis points at the end of the year.

“Though there is lim­it­ed ev­i­dence of sig­nif­i­cant cap­i­tal out­flows due to ad­verse in­ter­est rate dif­fer­en­tials, fur­ther widen­ing may

height­en the risk of port­fo­lio out­flows and in­crease ex­change rate pres­sures,” the re­port ex­plained.

In­creas­es in do­mes­tic rates could im­pact fi­nan­cial in­sti­tu­tions’ bal­ance sheets via sev­er­al chan­nels.

The re­port not­ed that the do­mes­tic re­po rate has held steady since March 2020, de­spite the uptick in in­fla­tion over last year, adding that at the macro­eco­nom­ic lev­el, in­creas­ing in­ter­est rates to re­duce in­fla­tion­ary pres­sures while the busi­ness cy­cle is in an ear­ly phase of an up­turn could threat­en the eco­nom­ic re­cov­ery by rais­ing bor­row­ing costs for house­holds and cor­po­rates, there­by cur­tail­ing cred­it growth.

“Pri­vate sec­tor cred­it grew by 5.5 per cent in 2022, com­pared to 1.3 per cent in 2021, large­ly due to an uptick in busi­ness lend­ing. While in­creas­ing do­mes­tic in­ter­est rates could boost net in­ter­est in­come and sup­port bank prof­itabil­i­ty, weak­er debt ser­vic­ing ca­pac­i­ty could wors­en as­set qual­i­ty in pri­vate sec­tor loan port­fo­lios.

“Mis­matched du­ra­tions on in­ter­est rate-sen­si­tive as­sets and li­a­bil­i­ties could al­so trig­ger fi­nan­cial loss­es on bank bal­ance sheets, af­fect­ing bank sol­ven­cy and liq­uid­i­ty,” the re­port out­lined.

The Cen­tral Bank as­sured that it will con­tin­ue to mon­i­tor risks stem­ming from ris­ing in­ter­na­tion­al in­ter­est rates.

Re­gard­ing oth­er threats, the bank not­ed that cy­ber­crimes are con­tin­u­ous­ly evolv­ing and are an im­mi­nent threat to the fi­nan­cial sec­tor, ne­ces­si­tat­ing ap­pro­pri­ate mit­i­gat­ing ac­tions.

It said sev­er­al in­sti­tu­tions’ an­nu­al re­ports high­light­ed that a key area of pri­or­i­ty in their risk man­age­ment frame­work is man­ag­ing cy­ber-re­lat­ed risk.

Fol­low­ing an IMF Tech­ni­cal As­sis­tance Mis­sion on strength­en­ing cy­ber­se­cu­ri­ty in No­vem­ber 2022, the Cen­tral Bank is de­vel­op­ing a cy­ber­se­cu­ri­ty guide­line, in­clud­ing an in­ci­dent-re­port­ing regime to im­prove its sur­veil­lance on cy­ber­risk of fi­nan­cial in­sti­tu­tions.

While the guide­line will be ap­plic­a­ble to in­sti­tu­tions reg­u­lat­ed by the Cen­tral Bank, oth­er fi­nan­cial in­sti­tu­tions could vol­un­tar­i­ly adopt the guide­line, the re­port added.

Bank­ing sec­tor per­for­mance

Ac­cord­ing to the re­port, bank­ing sec­tor as­sets grew mod­er­ate­ly in 2022, sup­port­ed by an ex­pan­sion in the loan port­fo­lio, not­ing that the gross as­set base in­creased by 2.4 per cent ($4.1 bil­lion) to $176.0 bil­lion as at De­cem­ber 2022, com­pared to growth of 1.5 per cent in 2021.

The re­port al­so not­ed that high­er bor­row­ing from busi­ness­es and con­sumers ac­count­ed for the ma­jor­i­ty of the in­crease, which was fund­ed by an ex­pan­sion in cus­tomer de­posits as well as ma­tu­ri­ties of short-term gov­ern­ment in­vest­ments.

Ac­cord­ing to the Cen­tral Bank, as­sets con­tin­ued to com­prise most­ly loans, in­vest­ments, and liq­uid funds, with ac­cen­tu­a­tion not­ed in the loan port­fo­lio.

Re­gard­ing the con­sumer sec­tor loans, the re­port de­tailed that con­sumer debt grew in 2022 as a com­bi­na­tion of pent-up de­mand, high in­fla­tion, and on­go­ing house­hold debt con­sol­i­da­tion/re­fi­nanc­ing ef­forts drove bor­row­ing ac­tiv­i­ty.

“Con­sumer loans in­creased by 6.1 per cent ($2.3 bil­lion) to $39.5 bil­lion (45.9 per cent of gross loans) at the end of De­cem­ber 2022.

“There was a greater ap­petite for re­al es­tate-re­lat­ed loans, which in­creased by 6.6 per cent ($1,304.9 mil­lion) in 2022. Mo­tor ve­hi­cle lend­ing de­clined year-on-year by 2.9 per cent ($134.9 mil­lion), but showed signs of re­cov­ery over the lat­ter half of 2022 as ship­ping op­er­a­tions and the time­ly de­liv­ery of ve­hi­cles im­proved.”

As it per­tains to busi­ness sec­tor loans, the re­port not­ed that

lend­ing to the busi­ness sec­tor surged by 11.4 per cent ($3.8 bil­lion) in 2022 pri­mar­i­ly dri­ven by in­creased bor­row­ing with­in the fi­nance, in­sur­ance and re­al es­tate sec­tor, while ser­vices sec­tor firms al­so sought ad­di­tion­al fi­nanc­ing to con­tend with high­er op­er­a­tional costs and in­creased com­pe­ti­tion.

It added that fi­nance, in­sur­ance and re­al es­tate lend­ing grew by 24.2 per cent ($2.0 bil­lion) while lend­ing to ser­vices sec­tor busi­ness­es ex­pand­ed by 9.3 per cent ($827.1 mil­lion).

The re­port fur­ther not­ed that with­in the ser­vices sec­tor, lend­ing to the dis­tri­b­u­tion sub-sec­tor (in­clud­ing restau­rants and bars), in­creased by 11.2 per cent ($439.5 mil­lion) in 2022.

The ad­verse ef­fects of the COVID-19 pan­dem­ic, which stymied oc­cu­pan­cy rates at ho­tels and guest­hous­es and the op­er­a­tions of per­son­al ser­vices providers, were al­le­vi­at­ed over the year.

Ac­cord­ing to the re­port, banks ex­tend­ed ad­di­tion­al cred­it to these busi­ness­es, in­creas­ing by 19.3 per cent ($345.4 mil­lion) and 5.1 per cent ($70.7 mil­lion), re­spec­tive­ly.

Cred­it to the man­u­fac­tur­ing sec­tor was buoy­ant, the re­port said, par­tic­u­lar­ly due to strong de­mand from both lo­cal and for­eign con­sumers of prod­ucts from the food and drink sub-sec­tor and com­po­nent parts from the as­sem­bly-type and re­lat­ed in­dus­tries sub-sec­tor. Bor­row­ing in these sec­tors ex­pand­ed by 27 per cent ($312.5 mil­lion) and 61.4 per cent ($164.9 mil­lion) over the pe­ri­od, re­spec­tive­ly.

Ac­cord­ing to the re­port there was al­so no­table ac­cel­er­a­tion in con­struc­tion lend­ing over the first half of 2022, which led to an

over­all in­crease of 18 per cent ($330.4 mil­lion) year-on-year. Mean­while, growth in com­mer­cial mort­gages slowed but re­mained pos­i­tive – re­al es­tate loans in­creased by 1.7 per cent ($150.1 mil­lion) in 2022, com­pared to 5.5 per cent in 2021.