Strong action needed to address soaring debt - IMF

Lavern Clarke, Business Editor

Barbados:

The International Monetary Fund (IMF) is recommending more aggressive action on the part of regional governments to address high debt levels that range as high as 156 per cent of gross domestic product (GDP), and to be decisive about tackling weaknesses in the financial sector.

The latter concern is skewed more towards developments inside the Eastern Caribbean, where at least one bank was rescued by the government in July, and where the fallout from the CL Financial/ CLICO collapse is still to be resolved.

"Financial sector fragilities in the region have become more troubling," said the newly released IMF Regional Economic Outlook, encapsulating data up to October 2011.

Referring to deterioration inside the Eastern Caribbean Currency Union (ECCU), the report stressed that "the authorities need to diagnose the health of the financial system quickly and develop options for strengthening balance sheets and avoid further compromising public finances".

IMF deputy director for the Western Hemisphere Department, David Vegara, said later at a press conference Thursday that there is no widespread concern about the regional banking system, which at this point, he says, requires only close monitoring of capital adequacy and asset quality.

Earlier, however, at the seminar launching the REO, he raised the issue of loan quality and the expanding cache of non-performing loans (NPLs) building up in the system.

"On the financial front, NPLs are high and growing while the level of provisioning is low," said Vegara.

That problem is more pronounced inside the ECCU, where NPLs are almost at 12 per cent; Barbados' NPLs appear to have levelled off at 10-11 per cent; and Jamaica's is close to eight per cent, according to IMF's analysis.

Earlier at a seminar at the Central Bank of Barbados, Michael Mansoor said the balance sheets of regional banks were generally healthy, though their business continued to be impacted by faltering domestic demand and low investments.

Mansoor, who is chairman of regional banking group CIBC FirstCaribbean, suggested that the region continue to hunt down capital in Asia and other booming markets for infrastructure and other investments in markets. He urged private-sector colleagues to be more selective about where to invest by going after areas where growth can occur. These action have to be creative, targeted and sustained, he suggested, while noting that it will take the region some time to overcome its current economic reality.

The European Union in July had also pronounced Eurozone banks sound before acknowledging two months later, in September, that some needed to be rescued or recapitalised with private equity because of over-exposure to sovereign debt sitting on their balance sheets.

Inside the region, Jamaican banks, for example, were only 20 per cent exposed to government debt in 2010, but the investment houses - some of largest of which own or are owned by banks - had about 70 per cent exposure.

Luis Breuer, the IMF Caribbean II Division chief and mission chief to Jamaica, said the IMF's monitoring programmes are as focused on macro-prudentials and monetary policy as it is on the fiscal.

"We are not especially worried about that," he said of the banking system's health.

The IMF is concerned, however, that three years into the global financial crisis, the Caribbean can only deliver moderate growth at an expected four per cent this year, and that country balance sheets are not sufficiently strong to deal with new problems on the horizon: a weakened US economy stalled by political gridlock, potentially leading to a double-dip recession, and the unresolved debt and banking crises in Europe.

Jamaica and the Caribbean depend on those two blocs for the majority of export trade. But the US and EU are even more important as markets for remittances and tourism.

The IMF has cut growth forecasts for tourism-dependent countries amid high unemployment in its feeder markets.

"Tourism intensive economies are projected to expand by an average of 1.25 per cent during 2011-12, almost one per cent lower than anticipated six months ago," said the Regional Economic Outlook.

Tourism arrivals have been trending back up, but the IMF data also points to a steep drop in the more important metric, 'average tourism spend', from US$120 per visitor in 2007 to less than US$100 per visitor in 2009 and 2010.

Remittances, which are dependent on a vibrant jobs market in advanced economies, is yet to recover to pre-recession levels.

The most heavily indebted Caribbean countries are St Kitts-Nevis whose debt ratio is projected to fall from 156 per cent to 149 per cent this year; Jamaica which the REO report as at October projects at 143 per cent this year; Barbados at 117 per cent; and Grenada, 102 per cent.

All four are either on IMF surveillance programmes or in the process of being approved.

As a group, the eight-member ECCU's debt ratio stands at 84 per cent.

The IMF said debt levels across the region have climbed by nine per cent of GDP since the crisis.

lavern.clarke@gleanerjm.com