BRIDGETOWN, Barbados, CMC—The Central Bank of Barbados (CBB) and its sister regulator, the Financial Services Commission (FSC), launched the 2023 Financial Stability Report on Wednesday. The report notes that a primary concern for the domestic financial stability outlook emanates from the potential slowdown in the global economy and its cascading effects on the tourism sector and the broader macroeconomy.
The report’s launch coincided with a panel discussion that included CBB Deputy Governor Alwyn Jordan, FSC Chief Executive Officer Warrick Ward, and officials from the island’s commercial banks, credit unions, and insurance companies.
According to the report, the robust health of the domestic financial sector was reflected in the domestic economic expansion observed last year, and outstanding credit balances experienced moderate growth. In contrast, credit quality improved due to greater business activity. It said that the increased profitability in the banking sector led to an enhancement in the sector’s capital adequacy ratios, while the profits of finance companies and capital adequacy were on par with the previous year.
Credit to the non-financial private sector (NFPS) increased in 2023, building on the post-COVID expansion in 2022. According to the report, credit demand primarily originated from the private sector through project financing in the manufacturing, real estate, transport, storage, and communication sectors.
However, it noted that a primary concern for the domestic financial stability outlook is the potential slowdown in the global economy and its cascading effects on the tourism sector and the broader macroeconomy.
“Firstly, there is the risk of a decrease in tourist arrivals and capital inflows from key markets, which could dampen domestic economic activity. Such a decline in tourist arrivals might adversely affect businesses’ revenue in critical economic sectors, potentially worsening their debt burden and impairing their ability to repay debts.”
The report stated that if economic activity wanes and businesses weaken, households’ financial positions are likely to suffer due to employment losses, leading to an increase in the unemployment rate.
“This concern encompasses two aspects: direct risks, with the possibility of individuals defaulting on loans, especially in the face of rising interest rates or declining incomes, while indirect risks arise from cuts in household spending dampening overall economic activity and, in turn, amplifying credit risk.”
The report said that despite Barbados’ household debt to deposit-taking institutions (DTIs) as a percentage of gross domestic product (GDP) being 48.2 percent in 2023, higher than other Caribbean and emerging economies, the downward trend in this variable post-pandemic abates household credit risk concerns.
“The macroeconomic slowdown is likely to challenge the occupational pension sector. As many occupational pension plans exhibit significant exposure to foreign markets through mutual fund investments, the potential slowdown will likely present much volatility to investment portfolios.
“Many defined-benefit pension plans face significant funding shortfalls, which heightened equity risks can exacerbate, thus threatening the stability of many pension plans in the sector.”
The report said that a further escalation in geopolitical tensions could have adverse consequences for the supply of energy and food commodities.
“Increases in energy and food prices resulting from geopolitical shocks may contribute to higher imported inflation and widened domestic current account deficits, which would negatively impact the most vulnerable segments of the population.”
It warned that persistent inflation could present a challenge for the insurance sector, noting that if inflation remains elevated in many global economies, the insurance sector, particularly the non-life industry, will face higher repair and replacement costs when settling claims. “Insurers may encounter greater pressure to manage risks and adjust pricing strategies effectively. Consequently, policyholders could see a further rise in premium rates for insurance coverage.”
The 2023 Financial Stability Report said changes in global interest rates and borrowing conditions could affect the cost of servicing Barbados’ external debt, impacting the government’s fiscal position and potentially straining financial stability.
It said despite a decrease in inflation rates across many jurisdictions in 2023, the key policy rates continue to exceed the targets established by most global central banks. “Market players anticipate a relaxation of monetary policy in the latter half of 2024 as the cumulative interest rate hikes of the last two years created restrictive monetary conditions to steer inflation back towards central banks’ targets.
“Nonetheless, the persistence of global inflation levels above these targets could disrupt this expectation. Consequently, financing costs in the region could remain elevated,” the report said, noting that fluctuations in global interest rates are unlikely to affect domestic financial institutions significantly.
It said the anticipated monetary policy easing in many global economies is projected to have a limited effect on the balance sheets of financial institutions due to their significant local investment holdings.
“This is particularly relevant for insurance companies, where many investments are retained domestically. As a result, changes in global interest rates are less likely to impact discount rate assumptions used for actuarial valuations of insurance liabilities.”
The report noted that the domestic financial system remains vulnerable to climate change. Physical climate risks, such as rising sea levels, extreme weather events like hurricanes, droughts, flooding, and changing precipitation patterns, threaten the island’s capital stock and macroeconomy.
It said the potential adverse impact on tourism and other sectors of the Barbadian economy could pressure the financial industry, specifically in the case of a severe climatic event. “While the insurance sector plays a critical role in minimizing much of the financial impact of catastrophic losses, the country’s protection gap remains a concern due to uninsurance and underinsurance, which needs further investigation.”
Deposit-taking institutions continue to integrate climate risk assessments within their frameworks.
Based on a 2024 survey, commercial banks, and finance companies have prioritized Environmental, Social, and Governance (ESG) considerations in their corporate strategies. These institutions have been including climate risk assessments within their credit granting and borrower default frameworks. Also, these institutions have minimized their carbon footprint by going paperless and using more energy-efficient equipment during their daily operations.
The report said developing strategies to mitigate and adapt to climate risk is imperative for safeguarding the nation’s economic and long-term financial stability.
It said that as the threat of cyber-attacks continues to evolve worldwide, it poses a potential risk to the stability of Barbados’ financial sector.
“Cyber-attacks can target financial institutions, disrupting their operations, compromising sensitive data, and undermining the overall trust in the economic system. In Barbados, like in many other countries, financial institutions increasingly rely on technology for various operations, including online banking, electronic transactions, and data storage.
“While these technological advancements bring efficiency, they also create vulnerabilities that malicious persons and institutions may exploit. Cyber-attacks, such as phishing, ransomware, and data breaches, can severely affect the integrity and resilience of the domestic financial system.”
This year, the CBB conducted a cyber risk survey involving financial institutions, including commercial banks and finance companies. The results indicated that these institutions consider cyber risk a top priority.
The report found that the real estate market displayed stability in reported prices, posing no immediate threat to the soundness of the financial sector.
“While the overall market activity slightly lagged behind the previous year based on the number of new mortgages, DTIs indicate that property prices have either grown or remained on par.”
Results from a real estate survey issued by the CBB reveal that DTIs have eased borrower-based lending standards on mortgages, such as the loan-to-value (LTV), debt-to-income, and debt service ratios (DSR), to spur buyer demand.
Respondents also indicated a downward trending house-price-to-income ratio, suggesting improvements in mortgage affordability. However, constrained supply in the tourism residential market is one area of concern.
The report found that the rise in competition within the DTI sector has led to a redistribution of deposits among its subsectors.
“The maximum interest rate offered on time deposits has increased. Consequently, finance companies, whose funding is primarily composed of non-transferable deposits, have encountered increased funding pressures despite the overall system maintaining a high level of liquidity. Commercial banks faced less pressure as transferable deposits represent most of their deposit liabilities.”
Barbados’ payment system and infrastructure remain robust and resilient. The report notes that the country’s payment systems play a crucial role in maintaining financial stability by facilitating the smooth and efficient functioning of the overall economic infrastructure.
It said the payments system contributes to liquidity management, risk mitigation, building consumer and investor confidence, and facilitates the smooth functioning of financial markets and institutions.
“The real-time gross settlement (RTGS) system witnessed increased activity as domestic economic activity expanded, and there was more significant participation in the securities market. The launch of the real-time processing (RTP) system by the Barbados Automated Clearing House Services (BACHSI) in February 2023 brought about a noticeable transition from traditional direct electronic payments to the real-time processing of payments.
The report noted that regulatory oversight and ongoing innovation are imperative to adapting payment systems to the dynamic and changing nature of the financial environment, thereby safeguarding their continual role in bolstering financial stability.
and then  and its sister regulator, the Financial Services Commission){kind=link}