Republic Bank Limited chairman Ronald Harford recently delivered a speech that has been generating discussion in banking and business circles.
Addressing the 41st Caribbean Association of Bankers Conference at the Radisson Grenada Beach Resort last month, the veteran banker said Barbados and its neighbours were now paying for their long-standing adoption of a “broken” economic model.
This week, BARBADOS BUSINESS AUTHORITY brings Part 2 of that address.
Of even greater concern, are losses incurred when governments default on debt payments or require banks to take “haircuts” on outstanding debt because of insolvency.
This jeopardises the long-term and short-term savings of the population. It is one thing to have a defaulting sovereign but it is a catastrophic event when this is coupled with financial institutions default. Grenada is trying to convince private sector creditors to forego repayment of a portion of debt already issued to the government.
Be mindful that government debt usually funds civil service activities and other non-revenue generating endeavours. Anaemic economic conditions and high exposure to public sector debt, has undermined the financial sector’s profitability and depleted its capital base in the Organisation of Eastern Caribbean States (OECS). It is estimated that the banking sector needs to be re-capitalised with US$600 million.
For some time now the region has had to make do without grants and aid. We should put the days of deficit financing behind us. Going forward, rigid budget controls will cause the money supply to contract. The consequence for the OECS then, is a severely overbanked region.
Scotiabank announced plans to close 35 of its Caribbean branches and retrench 1 500 employees. This follows some restructuring activities by the Royal Bank of Canada earlier this year. The 1970s saw the exodus of the American banks from the region, while British banks were out by the early 2000s. HSBC sold its last branch network in Cayman this year. Now that the American Banks (Citibank) are exiting Central America, it is appropriate to ask “Is it now the turn of the Canadians?”
The stronger regulatory environment and the more onerous reporting requirements that exist today have made it difficult, I am told, to manage branches from the metropolitan centres, making them unattractive and reduced their competitiveness, resulting in poor performances. All things have cycles and our wave has long crested.
It is clear that the mass market tourism model is unsustainable in the Caribbean given our small scale and high operating costs. To enhance the viability of the sector, operators should focus more on niche markets and the high-end segment. In the current environment, great occupancy levels are being reported primarily by the high-end operators such as Sandals Resort and Spice Island while the mass market operators continue to struggle.
With high labour costs and expensive energy supplies, the regional tourism sector – which is energy intensive – is finding it difficult to remain competitive. Most destinations in the region rely primarily on oil for energy generation purposes, rather than the much cheaper gas-fuelled power generation grids found in Trinidad and Dominican Republic. In a situation where tourism destinations around the world derive electricity from cheaper and more efficient fuel sources or have scale, the Caribbean, using the current model is likely to remain relatively uncompetitive.
According to the Caribbean Centre for Money and Finance, the Caribbean market share, compared to the rest of the Americas has been in decline. On the other hand, Central and South America have seen their market share grow between 1990 and 2011. When we look at CARICOM countries, in the context of the entire Caribbean the trend is the same. In 1990, CARICOM nations received 34 per cent of all international visitors to the Caribbean. By 2000, this figure fell to 28 per cent, before slumping further to 22 percent in 2011. Conversely, Cuba and the Dominican Republic experienced significant market share growth during the period.
Weighed down by surging energy costs, several Caribbean nations sought refuge in PetroCaribe, an energy-assistance programme for the Caribbean and Central America launched by the late Venezuelan President, Hugo Chávez, in 2005. The programme allows Caribbean states to take fuel from Venezuela, but only pay a portion of the cost up front, with the remainder being converted to long term loans. This consistently adds to the region’s stock of debt, which is already at unsustainable levels.
The Economist magazine revealed that Jamaica, Guyana and Haiti deferred payments to Venezuela that were equivalent to four per cent of GDP and greater than 10 per cent of government revenue, annually between 2011 and 2013. During the period, Antigua and Barbuda deferred payment equivalent to two per cent of GDP, while Grenada and Dominica added just below two per cent annually to their respective debt figures under the programme. Since PetroCaribe permit these regional states to consume a level of fuel they ordinarily could not afford, policymakers have not felt a significant sense of urgency to address the woes of the energy sector.
With Venezuela now finding it difficult to supply basic goods to its citizens and with the country facing severe and deteriorating fiscal deficits, the PetroCaribe programme has been called into question. One suspects that President Nicolás Maduro will face mounting pressure to wind up the programme until the situation in Venezuela drastically improves. From a Caribbean perspective, many regional states now find that their economic prospects are dependent on what is essentially a failed or failing state. I think we can all agree that this is a less than ideal situation, which is deeply disturbing, to say the least. In light of the recent fall in the price of oil to US$77 per barrel, after averaging over US$100 for an extended period, the International Monetary Fund has advised Caribbean countries to put contingencies in place to cater for possible interruptions or a complete halt of PetroCaribe.