An­drea Perez-Sobers

Se­nior Re­porter

an­drea.perez-sobers

@guardian.co.tt

The Cen­tral Bank’s 2024 Fi­nan­cial Sta­bil­i­ty Re­port of­fers a cau­tion­ary as­sess­ment of the lo­cal fi­nan­cial sec­tor, warn­ing that the sys­tem re­mains in­creas­ing­ly ex­posed to sov­er­eign risk.  

High sov­er­eign con­cen­tra­tion in the bank­ing and in­sur­ance sec­tors was one of four po­ten­tial risks to do­mes­tic fi­nan­cial sta­bil­i­ty. The oth­er were in­creas­ing cy­ber in­ci­dents, height­ened liq­uid­i­ty risk and ris­ing house­hold in­debt­ed­ness.

While the fi­nan­cial sys­tem con­tin­ues to demon­strate re­silience, the re­port makes clear that the deep­en­ing en­tan­gle­ment be­tween the State and key fi­nan­cial in­sti­tu­tions, par­tic­u­lar­ly com­mer­cial banks and in­sur­ance com­pa­nies, rep­re­sents a grow­ing vul­ner­a­bil­i­ty.

At the heart of this con­cern is what the Cen­tral Bank re­port refers to as “sov­er­eign con­cen­tra­tion” in the fi­nan­cial sec­tor. This refers to the ex­tent to which com­mer­cial banks and in­sur­ers hold Gov­ern­ment-is­sued se­cu­ri­ties such as Trea­sury bills and bonds as part of their in­vest­ment port­fo­lios. When a sub­stan­tial por­tion of a fi­nan­cial in­sti­tu­tion’s as­sets is tied up in gov­ern­ment debt, the in­sti­tu­tion be­comes more ex­posed to the fis­cal health of the State it­self. If the Gov­ern­ment’s fi­nan­cial po­si­tion weak­ens, the val­ue of those as­sets may fall, or worse, they may be­come un­re­cov­er­able.

This re­la­tion­ship is par­tic­u­lar­ly rel­e­vant in the con­text of 2024, when the Gov­ern­ment’s fis­cal deficit widened more than ex­pect­ed.  

Ac­cord­ing to the Cen­tral Bank, gen­er­al gov­ern­ment debt ex­pand­ed by ap­prox­i­mate­ly 3 per cent or $4 bil­lion, reach­ing $140.6 bil­lion by the end of the fis­cal year on Sep­tem­ber 30, 2024.

“As 52.6 per cent of this is at­trib­uted to do­mes­tic sources, com­mer­cial banks and in­sur­ers have el­e­vat­ed ex­po­sures to the Gov­ern­ment of the Re­pub­lic of Trinidad and To­ba­go,” ac­cord­ing to the Cen­tral Bank re­port.

Much of this new bor­row­ing was used to sup­port the bud­get and to re­fi­nance ex­ist­ing fa­cil­i­ties.  

The re­port said that while the last gov­ern­ment did is­sue a US$750 mil­lion bond on in­ter­na­tion­al cap­i­tal mar­kets, do­mes­tic fi­nanc­ing re­mained the pri­ma­ry source of funds. Most of this came from lo­cal com­mer­cial banks and in­sur­ers, fur­ther re­in­forc­ing the sov­er­eign con­cen­tra­tion in these in­sti­tu­tions’ bal­ance sheets.

Al­though the last gov­ern­ment’s de­ci­sion to tap the Her­itage and Sta­bil­i­sa­tion Fund (HSF) for US$369.9 mil­lion (ap­prox­i­mate­ly TT$2.5 bil­lion) helped ease some im­me­di­ate fis­cal pres­sures, the re­port un­der­scores that buffers like the HSF and of­fi­cial re­serves are not un­lim­it­ed. Con­tin­ued re­liance on them with­out cor­re­spond­ing fis­cal con­sol­i­da­tion could raise red flags among in­vestors and rat­ings agen­cies alike.

Debt rollover risk is an­oth­er key area flagged by the Cen­tral Bank. Near­ly one-fifth of the last Gov­ern­ment’s bor­row­ing in fis­cal 2024 was ded­i­cat­ed to re­fi­nanc­ing ma­tur­ing debt.  

At the same time, in­ter­est pay­ments on ex­ter­nal debt con­tin­ued their up­ward trend, lim­it­ing the gov­ern­ment’s flex­i­bil­i­ty. By the end of the fis­cal year, da­ta showed that 8.7 per cent of to­tal debt would be due with­in the next 12 months, most of it on the do­mes­tic side.

“This could pose dif­fi­cul­ties for fu­ture debt re­fi­nanc­ing ini­tia­tives,” the re­port states.

The Cen­tral Bank said lo­cal inan­cial in­sti­tu­tions are vul­ner­a­ble to in­ter­est rate risk as most of the sov­er­eign do­mes­tic debt held car­ry fixed in­ter­est rates.

“Due to the in­verse re­la­tion­ship be­tween in­ter­est rates and the val­ue of gov­ern­ment bonds, an in­crease in the yield curve de­creas­es the bond’s val­ue in the fi­nan­cial in­sti­tu­tions’ port­fo­lio, which may af­fect re­turns.”

Speak­ing at a news con­fer­ence last week, Cen­tral Bank Gov­er­nor, Lar­ry Howai, said the in­sti­tu­tion is con­sid­er­ing in­creas­ing in­ter­est rates in or­der to at­tract for­eign ex­change back in­to the sys­tem.

The struc­ture of T&T’s yield curve in 2024 added fur­ther com­plex­i­ty. With a steep up­ward slope, the yield curve in­di­cat­ed that in­vestors were de­mand­ing high­er re­turns to hold longer-term gov­ern­ment debt. This is usu­al­ly in­ter­pret­ed as a sign that mar­kets per­ceive high­er risk over time.

The Cen­tral Bank al­so ex­am­ined the po­ten­tial fall­out of these dy­nam­ics for fi­nan­cial in­sti­tu­tions, us­ing a range of stress tests. While the bank­ing sec­tor’s ex­po­sure to Gov­ern­ment debt as a share of to­tal as­sets de­clined slight­ly by the end of 2024, the in­sur­ance sec­tor in­creased its hold­ings, mak­ing it more sus­cep­ti­ble to any de­te­ri­o­ra­tion in pub­lic fi­nances.