The 2023 Financial Stability Report

Executive Summary

The robust health of the domestic financial sector was reflected in the domestic economic expansion observed in 2023. Outstanding credit balances experienced moderate growth, while credit quality improved due to greater business activity. The increased profitability in the banking sector led to an enhancement in the sector’s capital adequacy ratios, while the profits of finance companies and capital adequacy were on par with the previous year. Credit to the non-financial private sector (NFPS) increased in 2023, building on the post-COVID expansion in 2022. Credit demand primarily originated from the private sector by way of project financing in the manufacturing, real estate, and transport, storage and communication sectors. 

A primary concern for the domestic financial stability outlook emanates from the potential slowdown in the global economy and its cascading effects on the tourism sector and the broader macroeconomy. Firstly, there is the risk of a decrease in tourist arrivals and capital inflows from key markets, which could dampen domestic economic activity. Such a decline in tourist arrivals might adversely affect the revenue of businesses in critical economic sectors, potentially worsening their debt burden and impairing their ability to repay debts. 

If economic activity wanes and businesses weaken, households’ financial positions are likely to suffer due to employment losses, leading to an increase in the unemployment rate. This concern encompasses two aspects: direct risks, with the possibility of individuals defaulting on loans, especially in the face of rising interest rates or declining incomes, while indirect risks arise from cuts in household spending dampening overall economic activity and in turn, amplifying credit risk. Despite Barbados’ household debt to deposit-taking institutions (DTIs) as a percent of GDP (48.2 percent in 2023) being higher than other Caribbean and emerging economies, the downward trend in this variable post-pandemic, abates household credit risk concerns. 

The macroeconomic slowdown is likely to challenge the occupational pension sector. As many occupational pension plans exhibit significant exposure to foreign markets through their mutual fund investments, the potential slowdown will likely present much volatility to investment portfolios. Many defined-benefit pension plans face significant funding shortfalls, which heightened equity risks can exacerbate, thus threatening the stability of many pension plans in the sector.

In the event of a further escalation in geopolitical tensions, there is a potential for adverse consequences concerning the supply of energy and food commodities. Increases in energy and food prices resulting from geopolitical shocks may contribute to higher imported inflation and widened domestic current account deficits, which would negatively impact the most vulnerable segments of the population.

Persistent inflation can present a challenge for the insurance sector. If inflation remains elevated in many global economies, the insurance sector, particularly the non-life industry, will face higher repair and replacement costs when settling claims. Insurers, therefore, may encounter greater pressure to manage their risks and adjust pricing strategies effectively. Consequently, policyholders could see a further rise in premium rates for insurance coverage. 

Changes in global interest rates and borrowing conditions can affect the cost of servicing Barbados’ external debt, impacting Government’s fiscal position and potentially straining financial stability. Despite a decrease in inflation rates across many jurisdictions in 2023, the key policy rates continue to exceed the targets established by the majority of global central banks. Market players anticipate a relaxation of monetary policy in the latter half of 2024 as the cumulative interest rate hikes of the last two years created restrictive monetary conditions to steer inflation back towards central banks’ targets. Nonetheless, the persistence of global inflation levels above these targets could disrupt this expectation. Consequently, financing costs in the region could remain elevated. 

Fluctuations in global interest rates are unlikely to affect domestic financial institutions significantly. The anticipated monetary policy easing in many global economies is projected to have a limited effect on the balance sheets of financial institutions due to their significant local investment holdings. This is particularly relevant for insurance companies, where a considerable portion of investments are retained domestically. As a result, changes in global interest rates are less likely to impact discount rate assumptions used for actuarial valuations of insurance liabilities.

The domestic financial system remains vulnerable to climate change. Physical climate risks such as rising sea levels, extreme weather events like hurricanes, droughts, flooding, and changing precipitation patterns, threaten the island’s capital stock and macroeconomy. The potential adverse impact on tourism and other sectors of the Barbadian economy could place pressure on the financial sector, specifically in the case of a severe climatic event. While the insurance sector plays a critical role in minimising much of the financial impact of catastrophic losses, the country’s protection gap remains a concern due to uninsurance and underinsurance, which needs further investigation.

Deposit-taking institutions continue to integrate climate risk assessments within their frameworks. Based on a 2024 survey, commercial banks and finance companies have prioritised Environmental, Social, and Governance (ESG) considerations in their corporate strategies. These institutions have been including climate risk assessments within their credit granting and borrower default frameworks. Also, these institutions have been minimising their carbon footprint by going paperless and using more energy-efficient equipment during their day-to-day operations. Developing strategies to mitigate and adapt to climate risk is imperative for safeguarding the nation’s economic and long-term financial stability.

As the threat of cyber-attacks continues to evolve worldwide, it poses a potential risk to the stability of Barbados’ financial sector. Cyber-attacks can target financial institutions, disrupting their operations, compromising sensitive data, and undermining the overall trust in the financial system. In Barbados, like in many other countries, financial institutions are increasingly reliant on technology for various operations, including online banking, electronic transactions, and data storage. While these technological advancements bring efficiency, they also create vulnerabilities that malicious persons and/or institutions may exploit. Cyber-attacks, such as phishing, ransomware, and data breaches, can have severe consequences on the integrity and resilience of the domestic financial system. In 2024, the Bank conducted a cyber risk survey involving financial institutions, including commercial banks and finance companies. The results indicated that these institutions consider cyber risk as a top priority.

The real estate market displayed stability in reported prices, posing no immediate threat to the soundness of the financial sector. While the overall market activity slightly lagged behind the previous year based on the number of new mortgages, DTIs indicate that property prices appear to have either grown or remained on par. Results from a real estate survey issued by the Bank reveal that DTIs have eased borrower-based lending standards on mortgages such as the loan-to-value (LTV), debt-to-income, and debt service ratios (DSR) in an attempt to spur buyer demand. Respondents also indicated a downward trending house-price to income ratio, suggesting improvements in mortgage affordability. One area of concern, however, is constrained supply in the tourism residential market.

The rise in competition within the DTI sector has led to a redistribution of deposits among its subsectors. The maximum interest rate offered on time deposits has increased. As a consequence, finance companies, whose funding is primarily composed of non-transferable deposits, have encountered increased funding pressures, despite the overall system maintaining a high level of liquidity. Commercial banks faced less pressure as transferable deposits represent the majority of their deposit liabilities. 

Barbados’ payments system and infrastructure remain robust and resilient. A country’s payments systems play a crucial role in maintaining financial stability by facilitating the smooth and efficient functioning of the overall financial infrastructure. The payments system contributes to liquidity management, risk mitigation, building consumer and investor confidence, and facilitates the smooth functioning of financial markets and institutions. The real-time gross settlement (RTGS) system witnessed increased activity as domestic economic activity expanded, and there was greater participation in the securities market. The launch of the real-time processing (RTP) system by the Barbados Automated Clearing House Services (BACHSI)[1]in February 2023 brought about a noticeable transition from traditional direct electronic payments to the real-time processing of payments. Regulatory oversight and ongoing innovation are imperative to adapting payments systems to the dynamic and changing nature of the financial environment, thereby safeguarding their continual role in bolstering financial stability.

The implementation of the IFRS 17 Accounting Standard[2] can enhance risk assessments in the insurance sector. The FSC is currently engaged with the insurance industry and regional regulators regarding the conversion to the new IFRS 17 accounting standard. While significant changes to revenue recognition are expected, the standard will also provide more granular insight to the regulator and other stakeholders for more effective risk assessments.

[1] BACHSI facilitates the clearing of cheques, direct payments, and daily bank settlements in real-time.

[2] IFRS 17 is an international financial reporting standard issued by the International Accounting Standards Board (IASB) that establishes principles for the recognition, measurement, presentation, and disclosure of insurance contracts. It aims to provide consistent, transparent, and comparable financial information about insurance contracts to improve financial reporting.