A World Bank report has claimed that developing countries in the Caribbean are confronting the COVID-19 crisis from a weaker position compared to the Global Financial Crisis – but the data also shows that T&T was more prepared for the crisis than a lot of its Caribbean counterparts.
In it’s Semi-annual report on Latin America and the Caribbean Region entitled
“The Economy in the Time of COVID-19”, the World Bank assessed country readiness in four major areas – fiscal, monetary, financial and external preparedness. The countries in the region were compared according to Global benchmarks.
Many Caribbean countries recorded multiple weak rankings, while T&T received a weak ranking for only one area – it’s fiscal balance (which has been a concern of many local economists.)
The data shows that while T&T was average in the preparedness of its fiscal balance for the Global Financial Crisis of 2008, it was weak compared to other countries on the onset of COVID-19.
Within the four major areas, countries were assessed on their fiscal balance, Government foreign debt, Government interest payments, international reserves with regard to fiscal preparedness. Assessments were made on inflation, bank credit to central government and bank liquidity for monetary readiness.
The strength of a country’s financial preparedness was analysed through it’s domestic credit to the private sector, non-performing loans to total gross loans and its current account balance.
A country’s short term international investment position and financial account balance was used to assess external readiness.
Trinidad and Tobago also displayed strength in it’s short term international investment position comparable to other countries prior to the pandemic. Guyana for instance was illustrated as weak in its fiscal, monetary and external preparedness for COVID-19’s impact.
Meanwhile, the data revealed that Jamaica was weak in its fiscal readiness and struggling with its external buffers before the outbreak. The same can be said of Barbados that was displayed as underperforming it its Monterey and financial strength.
The World Bank noted, however, that “the fiscal, monetary, external and financial position of countries in Latin America and the Caribbean is generally more challenging now than it was at the time of the Global Financial Crisis.”
It continued: “The only noticeable exception refers to inflation levels.”
The Effect of the Crisis
According to the World Bank report, the hardship from the crisis will be enormous for large segments of the population. It noted that “many households live from hand to mouth and they do not have the resources to cope with the lockdowns and quarantines needed to contain the spread of the epidemic.”
The Bank highlighted that many depend on farming or are self-employed, and informality is common even among wage earners. It noted that protecting the earnings of these workers, and reaching them through transfers, is considerably more challenging than in more formalized economies.
It also indicated that many in the region also depend on remittances – which are collapsing as economic activity shuts down in host countries, with migrant workers among the most affected. In T&T for example, migrant workers were not given unemployment grants.
The bank indicated that support to jobs and firms will have to be based on a dual approach. It posited that a first track should be geared to important employers or exporters, “those with significant backward and forward linkages or those in sectors such as logistics and utilities that enable other economic activities.”
The report highlighted that due consideration should also be given to those firms that employ a larger share of women and socially disadvantaged groups.
The Bank said that support for this first group of firms should be targeted to their circumstances, where instruments may include fiscal measures, such as wage bill subsidies and the deferral of taxes and social security/national insurance contributions.
Access to subsidized loans, partial credit guarantees, and the provision of some form of equity could be effective as well according to the World Bank.
The second track highlighted by the Bank should focus on smaller firms that cannot be efficiently reached through tailored approaches. For firms in this group, the Bank indicated that the gaol should be to ensure the availability of finance in a context of mounting working capital needs, where support would be triaged by commercial banks, microfinance institutions, digital lending platforms, corporate supply chains or other intermediaries.
Although questions have been asked about compliance measures for these beneficiaries, the Bank noted that compliance with such conditions would be more difficult to enforce in developing countries with low capacity. However, it commented that it should be possible in the case of strategically important firms and sectors.
Banks Operate From Strength
The World Bank also observed that the financial sector displayed strength before the current crisis across Latin America and the Caribbean.
It said: “ At the onset of the current crisis, banks in the region were generally solvent and profitable. Most of them enjoyed considerable liquidity, and few were exposed to high foreign exchange risk.”
The Bank continued to articulate, however, that risks are currently amplified, as the Latin America and Caribbean region is facing “a strong short-term capital outflow.”
It noted that this kind of “sudden stop” is not new for the region, but is greater amid COVID-19. It also expressed that this sudden stop raises risks both for the financial sector and for foreign exchange markets.
According to the Bank, domestically, many debtors will be unable to service their obligations because of the crisis, and as a result they may call for renegotiations, or default.
This can also cause lenders to become uncertain about the financial health of their customers. It noted that averting a financial crisis should be a policy priority, given the international and domestic risks.
The World Bank report indicated that in past economic downturns, when the financial sector experienced serious difficulties job losses deepened and the subsequent recovery was critically hampered. It resolved, that in financial crises both market infrastructures and the set of contracts that underpin the conduct of business need to be protected.
Governments Should Bear the Loss
In its report the World Bank highlighted that the longer the crisis lasts, the more likely that liquidity constraints will become a solvency problem, and in many contexts there will be a real loss of economic value.
According to the Bank, a key question is: “Who should bear the losses?” It continued: “From an economic point of view, the answer is simple: the losses should be centralized with the government to the extent possible.”
The first justification by the Bank for this argument was that a shock like the Covid-19 epidemic was uninsurable and it would also affect individual firms and households in different ways.
In this context, it noted that only the government can serve as an insurer of last resort. Secondly, the bank indicated that the process to absorb the shock and distribute its cost “needs to be perceived as socially fair for countries to maintain social cohesion.” It noted: “Ensuring that the socialization of the losses is seen as legitimate require active coordination and communication.”
However, the Bank indicated that some ways to address this challenge can be done quickly but could eventually make things worse. For instance, it gave the example of household being authorized to skip utility payments and to withdraw retirement savings.
The Bank said: “These responses certainly help in the short term, but they risk making infrastructure utilities and pension funds insolvent.”
Another suggestion by the bank to cushion the economic shock, was that governments transfer downside risk and losses, where significant, to public balance sheets.
It noted that socializing the losses may require taking ownership positions in financial sector institutions through recapitalization and the absorption of non-performing portfolios. It also recommended taking stakes in strategically important employers.
However, the supranational institution indicated that there is a risk that “instead of a policy of triage, diagnosis-based resolution, and early asset restructuring, a muddling-through approach prevails.”
According to the Bank these moves may be necessary to prevent a financial crisis, to protect jobs and to revitalize private investment, but they will entail a change in the relationship between the public and the private sector.
This will ultimately lead to a greater role of the state for “possibly quite some time.”