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The Central Bank’s 2019 Financial Stability Report has warned that the COVID-19 pandemic has the potential to impact the financial sector through channels and at transmission speeds not previously contemplated.

It pointed to growing household indebtedness which it said has persisted since the 2017 report and is reflective of household debt that continues to rise at a steady pace alongside a proclivity by the banking sector for consumer-oriented lending.

“The situation has become more evident as the COVID-19 pandemic unfolds. Factors include depressed economic activity and resultant strains on household income which could negatively affect the quality of commercial banks’ loan portfolios,” the report said.

It noted that over time, this could spill over into an eventual credit crunch as banks become wary of extending loans to customers due to concerns about creditworthiness.

The report added that the domestic sovereign remains the largest exposure for the financial sector, representing just under a quarter of banks’, insurers’ and pension plans’ combined assets.

A weakening of the fiscal position represents a risk in this area, the report said.

The resilience of the regulated financial sector continued to strengthen in 2019, the report said.

The report noted however, that conventional indicators of financial soundness for the banking sector and insurance companies generally pointed to a healthy financial sector from the standpoint of capital adequacy, asset quality, liquidity levels and profitability.

According to the report the Caribbean faces a perfect storm with tourism dependent and commodity-exporting economies both severely affected by the fallout from COVID-19.

In 2019, Caribbean economies were already facing challenges on the economic and financial fronts.

For example, a few Caribbean territories continued to be blacklisted by the European Union as non-co-operative jurisdictions for tax purposes and for anti-money laundering/combating the financing of terrorism (AML/CFT) deficiencies, the report said.

It noted the Caribbean’s susceptibility to weather-related disasters from climate change was on full display as Hurricane Dorian ravaged the Bahamas, resulting in economic and insurance losses which were only partially mitigated by reinsurance inflows.

Amidst these difficulties, a number of bright spots appeared to indicate the early phases of a turnaround, which is now being threatened by COVID-19, the report said.

It said the domestic financial system as a whole is healthy, but uncertainties related to the pandemic have heightened risks.

Payment systems indicators also pointed to the increasing adoption of electronic payments, but the use of cheques remained substantial, the report said. Despite tentative signs of a pick-up in the fourth quarter, domestic economic activity was subdued in 2019.

According to the Central Bank’s Quarterly Index of Economic Activity, estimated economic activity declined in 2019 driven mainly by lower crude oil production which weighed on the energy sector.

The report said inflation levels continued to be low at 0.4 per cent on a year-on-year basis to December 2019 compared to 1.0 per cent one year earlier.

Furthermore, with no official labour market statistics available for 2019, supplemental data from the Ministry of Labour and Small Enterprise Development revealed a 17 per cent decrease in retrenchments in 2019 compared to the previous year, the report added.

Nevertheless, it said labour market conditions remained generally weak as the demand for labour (proxied by the number of job advertisements in the daily newspapers) continued to fall during the period.