In the face of economic sluggishness in 2019, Trinidad and Tobago’s banking sector showed continued consolidation and resilience. As the sector plays an increasingly critical role in the country’s diversification progress, executives are focused on supporting small and medium-sized enterprises (SMEs). In the near term, domestic banks are seeking to hone their competitive edge and enhance their capacity for dealing with digitalisation as personal finance needs evolve.
The year 2019 was characterised by an increase in government deficit spending, which added to excess liquidity levels. Rises in public expenditure can be attributed to the upcoming general election in September 2020, as incumbents are increasingly incentivised to use economic policy instruments for re-election purposes.
In FY 2018/19 external loans amounted to approximately TT$2.5bn ($369.4m), according to data from the Central Bank of T&T. They originated primarily from the Corporación Andina de Fomento, a multilateral financial institution that promotes sustainable development; the Development Bank of Latin America, which invested $220m; and the Bank of Austria, which provided $90.5m towards the Point Fortin Hospital. In response, liquidity management operations at the central bank have managed to balance the public sector’s financing requirements with prevailing credit and inflationary conditions.
Estimates from the Ministry of Finance (MoF) indicate that in FY 2018/19 central government fiscal accounts registered an overall deficit of TT$3.9bn ($576.2m), equivalent to 2.4% of GDP. This compares with a fiscal deficit of TT$5.7bn ($842.1m), or 3.6% of GDP, recorded in FY 2017/18. Of particular note to the country’s economic diversification plan, the increased deficit was primarily due to a decline in non-energy receipts over the same period. According to the central bank, the non-energy fiscal deficit expanded from TT$16.7bn ($2.5bn) to TT$18.7bn ($2.8bn) in FY 2018/19. During that same period, revenue collected by the central government increased by 7.6%, to TT$46.6bn ($6.9bn), supported in part by the successful tax amnesty in the final quarter, which contributed an additional TT$2.4bn ($354.6m) in tax revenue (see Economy chapter).
“If the revenue authority is successful in straightening out tax revenue collection, then the economy as a whole will reap the benefits,” Hadyn Gittens, CEO of the T&T Securities and Exchange Commission, told OBG. “The system required should be incredibly robust, rigorous and systematic in its approach.”
While moves by the government have boosted state revenue, a key challenge going forward will be to wind back spending and catalyse more dynamic growth in the country’s non-energy sectors. Supporting tourism, construction, finance and education will help reduce exposure to fluctuations in oil prices, and improve overall economic and financial health.
The Monetary Policy Committee (MPC), which is tasked with developing and implementing the central bank’s monetary policy framework, maintained the repo rate at 5% throughout 2019. The MPC noted that although inflation remained well contained, activity in key non-energy sectors had not yet reflected substantial spillover effects of increased government capital spending. Additionally, private sector business credit had not recovered markedly since FY 2014/15. The reductions in interest rates by the US Federal Reserve in July and September 2019 contributed to reducing the gap between the domestic and US Treasury rates.
Structure & Oversight
T&T’s banking structure remain unchanged in 2019. There were eight active banks, 16 non-bank financial institutions and four financial holding companies as of December, when ANSA Merchant Bank signed an agreement to purchase the Indian financial institution Bank of Baroda’s operations in T&T. If approved in 2020, ANSA will take on all aspects of the bank’s commercial banking.
Banks in T&T are the only institutions licensed to receive deposits, extend short-term loans of less than one year and offer chequing accounts to customers. Commercial banks remain the single largest group of financial institutions in terms of assets. As of July 2019 there were 254 ATMs in the country, representing an average of one ATM per 5000 people. The Central Bank of T&T is in charge of overseeing market operations, controlling inflation, managing currency stability and various other regulatory responsibilities. There are no restrictions on borrowing by foreign investors. Republic Bank, FirstCaribbean International Bank (FCIB), NCB Financial Group and Scotiabank T&T are the largest financial institutions by asset size in the country, and operate under licences issued in compliance with the 2008 Financial Institutions Act. Domestic banks have the highest capital adequacy ratios (CARs) in the Caribbean, with an average CAR of 23.4% of risk-weighted assets, five percentage points above any other territory in the region.
In April 2019 credit ratings agency Standard and Poor’s (S&P) downgraded the country’s long-term sovereign credit rating from “BBB+” to “BBB”, marking the second consecutive year that S&P lowered T&T’s rating. A higher than expected rise in net general government debt to GDP and the interest burden over the 2017-20 period were the two primary reasons cited for the downgrade. Banking executives told OBG that although the downgrading was unfortunate and in line with S&P metrics, there has been no immediate negative impact on the country’s broader financial system. They argued that the new rating should instead serve as a wake-up call for the broader financial services sector to improve its near-term outlook and better compete on an international level.
According to the latest available data from the Central Statistical Office (CSO), headline inflation fell to 0.3% over the 12 months to November 2019. Core inflation lessened from 1.6% in January 2019 to 1% in September, reflecting slower price increases in the home-ownership, transport and hotels, cafes and restaurants segments. Similarly, price movements at the production level have remained subdued amid stable demand conditions.
In the second quarter of 2019 producer prices, as measured by the CSO’s Producer Price Index, increased by 0.8% year-on-year (y-o-y) compared with a y-o-y increase of 0.2% in the first quarter of 2019. While it is possible for fiscal measures to result in an uptick in inflation, the magnitude of the impact on final prices depends on how households and businesses adjust. Government spending – particularly in the build-up to an election – could translate into higher net domestic fiscal injections, which have historically been a major source of banking system liquidity.
Lending & Deposit Growth
In the first three quarters of 2019, the non-performing loan rate hovered around 3.1%. This marked a decrease on the previous year’s performance and another positive sign of financial sector health. Growth in private sector credit slowed to 4.3% y-o-y as of September 2019, while business credit eased to 5.5%. Consumer credit, driven by debt consolidation and refinancing, grew by 5.9%, while mortgage loan growth accelerated to 10.9%. Real estate executives told OBG that while the real estate market is a buyers’ market, booming oil production in neighbouring Guyana may give rise to more interest in expat real estate ventures in T&T. Mortgage lenders also face the challenges of persistently low interest rates, limited access to personal credit and a lack of available market data.
Business-wise, an injection of liquidity into capital markets to support SMEs would be welcomed. Although over 42% of CEOs surveyed in the OBG T&T CEO Survey in 2019 reported that access to credit in T&T is difficult, the banking sector has maintained a steady increase in its lending to non-energy sectors, up 6% y-o-y as of April 2018, providing access to loans for SMEs and sectors outside of retail. High liquidity is in part a result of higher government deficit spending, but as of June 2018 the figure for surplus liquidity stood at just under TT$2bn ($295.5m), and in July 2018 a financial instrument in the form of a bond took TT$4bn ($591m) out of the local financial system.
In November 2019 commercial banks’ daily excess reserves at the central bank amounted to around TT$5.5bn ($812.6m). The central bank’s liquidity-management operations have balanced the public sector’s financing requirements with prevailing credit and inflationary conditions. As part of the budget announced in 2019, Colm Imbert, the minister of finance, offered TT$3bn ($443.2m) in value-added tax (VAT) bonds over five years, with 1.5% interest, in place of paying out VAT refunds. However, the issuance of the proposed bond in the first quarter of 2020 in lieu of outstanding refunds has been treated with some scepticism among the business community.
In the face of challenging economic conditions and a competitive market, major T&T banks remained profitable in FY 2018/19. FCIB reported net income of $170.5m, up by $69.7m or 69%, while assets stood at $11.6bn, up 5.4% from $11bn the previous fiscal year. As the fourth-largest financial institution by market capitalisation, Scotiabank T&T reported income after tax of TT$668m ($98.7m) for FY 2018/19, an increase of 4%. Regarding loans, Scotiabank registered an increase of 11%, or TT$1.6bn ($236.4m), driven by the corporate and commercial segments. Net interest income was up TT$37m ($5.5m), or 3%, propelled mainly by retail and commercial loans.
As the largest bank by market capitalisation, Republic Bank’s performance is often seen as an overall economic indicator. Despite an increase in net interest income from TT$2.18bn ($322.1m) to TT$2.13bn ($314.7m) in FY 2018/19, Republic posted a 3.1% decrease in profits from TT$878m ($129.7m) to TT$851m ($125.7m). In September 2019 the Eastern Caribbean Central Bank, the central bank for the Organisation of Eastern Caribbean States, approved the sale of Scotiabank’s subsidiaries in Anguilla, Dominica, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines to Republic Financial Holding, the owner of all banks in the Republic Bank Group. The Central Bank of Curaçao and Sint Maarten also approved the sale of Scotiabank’s Sint Maarten operations to Republic Financial Holding.
The acquisition will add 350 team members to Republic Bank’s staff, as well as TT$10.2bn ($1.5bn) to the group’s total assets and $20m to its net profits. However, the sale was blocked in Guyana by the Bank of Guyana, the country’s the central bank, because the deal would have allowed Republic Bank to control more than 50% of the banking sector.
Measures were taken in 2018 to bolster anti-money-laundering (AML) activities, including the adoption of the International Financial Reporting Standard 9 guidelines by local banks. In June 2019 the AML group Caribbean Financial Action Task Force carried out the Third Enhanced Follow-up Report and Technical Compliance Re-rating for T&T and found that the country has made good progress overall in addressing technical compliance deficiencies and was re-rated on 18 recommendations.
In an effort to deepen AML activity, the government proposed a new polymer TT$100 ($15) bank note that became legal tender on January 1, 2020. It is not yet clear whether the demonetisation of the old notes significantly helped in curbing criminal activity, however, the process of changing the bills encountered unexpected challenges. It is likely that a combination of mistrust in traditional banking and cultural practices such as sou-sou (an informal savings group among peers) led to fewer bills being exchanged at banks.
In December 2019 it was announced by the central bank that commercial lenders were permitted to accept old TT$100 notes into 2020, past the original deadline. At 34%, T&T’s financial literacy rate is in line with the global average. The government is working with a handful of financial institutions to raise consumer knowledge. For banks, offering financial aid is a way of tapping into underbanked and unbanked populations, while acting as a key differentiator in a competitive market. World Bank statistics show that while 75% of the T&T population over the age of 15 has a bank account, 58% were unable to save any money in a one-year period and only 8.4% have ever borrowed from a licensed financial institution.
While T&T has traditionally struggled with worker productivity, the first quarter of 2019 saw improvements in this regard. The Index of Productivity, which measures domestic production divided by the index of hours worked, grew by 7% during the quarter. The increases in productivity were mainly centred in a number of key non-energy segments, including drinks, tobacco and food processing. In a panel discussion in November 2019, Alvin Hilaire, the governor of the Central Bank of T&T, highlighted that improved data collection, among other reforms, could help build on strong recent productivity growth in the country. The governor noted that the year 2018 saw a 13.4% increase in productivity in non-energy sectors and a 9.4% increase for the economy as a whole. Data from the International Labour Organisation, meanwhile, shows a 3.4% increase in productivity between October 2018 and October 2019. This outperformed the global average of 2.7% and the Latin American and the Caribbean average of 1.5%.
In light of significant recent downsizing, beginning with the closure of the state-owned Petrotrin Oil Refinery in mid-2018 and the Yara ammonium plant in November 2019, T&T has steered a steady course following an uptick in unemployment. The bulk of the workforce is employed and earning income, and demand for car loans, mortgages and commercial products remains positive. Retail performance, therefore, is steady despite some changes in consumer shopping patterns. According to diversified regional conglomerate MASSY Group, many consumers are now opting for smaller cars over SUVs and larger vehicles, for example. Meanwhile, regional real estate firm Terra Caribbean reported that more apartment units were being sold in T&T than houses. According to data from the CSO, the unemployment rate declined from 4.9% in 2017 to 3.8% during the first half of 2018. While full-year unemployment statistics were unavailable for 2019, that year the labour force contracted by 8500 people and total employment fell by 900 people. The continued decline in the labour force participation rate could be cause for concern since this has implications for future economic prospects. An analysis of well-paid workers at Petrotrin Oil Refinery from 2018 showed that while some workers re-entered the workforce in different roles, many are waiting for the refinery to come back on-line, which is expected to take place in the third quarter of 2020.
According to Nirad Tewarie, the CEO of the American Chamber of Commerce of T&T, the difference between unemployment and the labour participation rate is an important distinction to make. “Over time, the incentive to work in non-energy sectors has diminished, so we now have a falling labour force participation rate and an artificially low unemployment rate,” he told OBG. “The low unemployment rate could be misleading, showing we face a situation of underemployment and there is not a high enough proportion of people who are available and interested in better work, actually seeking work.” In another potential threat to employment growth, T&T’s status as a business process outsourcing (BPO) hub in the Caribbean could be under threat from increased competition from Asia. Several BPO companies manage payroll, simple accounting and revision tasks; however, Asian firms compete at a lower price point and often have higher levels of productivity.
According to the central bank, energy sector purchases made by authorised dealers were higher on a y-o-y basis in the first 10 months of 2019, contributing to the increase in overall market inflows. Nonetheless, foreign exchange (forex) continued to be a critical issue as sales of foreign currency by authorised dealers outstripped total market purchases. According to industry players domestic businesses are sometimes obliged to buy US dollars on the black market. Meanwhile, in January 2020 Republic Bank reduced its maximum US dollar spending limit on credit cards from $15,000 to $12,000, signalling ongoing issues with forex availability.
The exchange rate remained steady, and gross official reserves stood at $7.1bn at the end of October 2019 compared with $7.6bn at the start of the year. Gross official reserves were therefore equivalent to a little over 7.5 months of prospective imports. The 2020 budget statement reports that in 2018 T&T’s liquid external assets were healthy with gross official reserves able to cover more than eight months of imports of goods and services. The country’s sovereign wealth fund, the Heritage and Stabilisation Fund, had almost $6bn in external reserves, while commercial banking institutions held over $400m.
According to the MoF, the decline in external reserves is slowing down. Bi-monthly forex intervention by the central bank has become increasingly effective, reducing delays for import needs. The availability of forex is similarly improving, and with a stable exchange rate, appropriate incentives are provided for producers to consolidate the emerging growth in the non-energy sector. This should help reduce problems caused by forex shortages, and mitigate the prevalence of black market US dollar exchanges. The EXIM Bank established the Foreign Exchange Facility in 2018 to help remedy the situation. Consistent with its mandate to promote non-energy exports, the EXIM Bank is now equipped with a $100m forex account to meet the needs of qualifying domestic non-oil manufacturers. The bank aims to consolidate investor confidence in the economy, while contributing to the expansion of non-energy sectors.
The Ministry of Energy is forecasting a rise in natural gas production, from 3.8bn standard cu feet per day (scfd) in the first half of 2019, to 4.14bn scfd by the end of 2021. This, coupled with the planned resumption of activity at the Petrotrin refinery, which is scheduled for late 2020, should help to rejuvenate downstream refining and strengthen petrochemicals production. At the same time, energy-related companies continue to streamline their operations in the face of increasing global competition.
Private investment combined with action taken by banks is critical in consolidating the rapid recovery of the non-energy economy. Although public spending has received a boost as a result of upcoming elections, the central bank’s examination of bank liquidity and private sector credit growth suggests that there has so far been limited crowding out by the public sector regarding access to credit. If the rate of lending to SMEs continues at 6% or more, T&T should see more private sector growth. Higher wages off the back of the 2019 budget could also result in more spending.
It is unlikely that the Caribbean will see a surge of new competition from international banks or financial technology companies over the medium term, and in such an absence, banks can continue to profit from wide net interest margins and a certain level of comfort. While banks are fortified and well-established, a sharp surge in growth is unlikely in the near term. Overall, releasing the potential of non-energy sectors via structural reforms will pave the way to develop an economy equipped with greater financial clout. Increasing the ease of doing business, reducing administrative and unproductive barriers to investment, and assuming better flexibility in response to rising global competition would also aid the country in fostering durable growth over the longer term.