Interview: Nigel Baptiste
With government facing a revenue shortage, how can banks help fund infrastructure and housing?
NIGEL BAPTISTE: From a direct financing perspective, there is potential for the private sector to lend directly to the government of Trinidad and Tobago. This is a function of the liquidity in the system, which is estimated to be somewhere between TT$4bn ($616m) and TT$8bn ($1.2bn). This estimate includes secondary reserves and special deposits and is equally available for lending to the government or the private sector. Our last estimate of T&T’s gross public debt was around 40% of GDP. Should this figure be around 60%, however, we would be cautious in providing additional financing to the government. We should avoid government debt exceeding the 65% mark. An enhanced capacity to fund projects, as well as increased attractiveness on the government’s part, may increase the chance of co-financing by banks. Some interesting areas for public-private partnerships are hotel investments, housing developments and toll roads.
How have the increases in repo rates impacted the financial system, and what do you expect the monetary policy direction to be in 2016?
BAPTISTE: In 2015 the repo rate increased while liquidity did not reduce, and deposit and lending rates have remained stable. If the authorities had further increased special deposits or secondary reserves, we would have observed a much greater impact on liquidity, as banks would have pushed their deposit and borrowing rates up. In 2016 the monetary authorities are faced with a difficult situation. In a recessionary period they should loosen monetary policy in order to drive interest rates down, free up liquidity and stimulate economic activity. However, there is another large variable, which is the exchange rate situation. With respect to the rate, we are definitely out of balance given the current limited availability of foreign currency. My view is that if it is not coupled with an aggressive move in interest rates, the exchange rate adjustment will have to be even greater.
Coordination with fiscal measures should also play a role. The government may want to stop running an expansionary budget and increase duties on motor vehicles imports and other high-import items. In terms of spending, five years ago T&T operated with a TT$30bn ($4.6bn) budget. I do not see today’s TT$60bn ($9.2bn) budget as having led to considerable improvements in life conditions.
What kind of initiatives or structural changes should be explored in order to better serve small and medium-sized enterprises (SMEs)?
BAPTISTE: A fundamental approval requirement for funding is the ability to repay. Unfortunately, over the years, SMEs have not, for the most part, been able to instil banks with the necessary confidence in their repayment ability on commercial terms. In the recent past, two main initiatives have been explored in this regard. First, a guarantee fund was established to support credit to SMEs. Second, the Inter-American Development Bank funded CariC RIS, a regional credit rating agency, to rate SMEs’ credit worthiness. The latter was an outstanding success as just the process of undergoing a credit rating prepared SMEs for getting their accounts sorted out and producing a business plan with proper cash flows – the infrastructure they need to have in place before facing a bank lender. These initiatives should be implemented continuously and on a greater scale.
Nevertheless, with no micro-lending financial institutions consistently able to serve the market, SME funding sources are limited. A possible initiative could be to transform the mandate of the Agricultural Development Bank into a micro-development bank with the technical expertise to deal with microfinance projects, rather than purely offering what many of its customers perceive as developmental grants.
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