Marion Williams: The current turbulence in the US financial markets and
its implications for Barbados
Comments by Dr Marion Williams, Governor of the Central Bank of Barbados, on the current
turbulence in the US financial markets and the implications for Barbados, Bridgetown,
24 September 2008.
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While the current turbulence in the US financial markets is unlikely to have a significant
impact on Barbados immediately, as the US economy slows or goes into recession as it
copes with these difficulties, the result could be a slowdown in the growth of the Barbados
economy going forward. Recession in the UK and some European economies would also
impact adversely on our tourism prospects and our investment inflows. However, the
Barbados financial system should remain sound although there may be some loss in value
(realised and unrealised) on US dollar fixed income securities held by financial institutions,
including the Central Bank, as securities' prices in the US markets tumble. However, such
losses in value are not expected to be significant in relation to the overall portfolios of these
institutions, particularly over the medium term and especially for those who tend to hold short
to medium term securities to maturity. For non-bank institutions with US equity portfolios,
long-term investors would have some tolerance to the current volatility in the equity market
but may record unrealised losses in the short term.
For some institutions in the international financial business (or offshore) sector who trade
more aggressively in US stocks and in fixed income securities and more especially in
derivative instruments, particularly those who may have been doing active business with
those US financial institutions involved in the US financial melt down, realised losses may be
recorded. This is likely to be mitigated by the actions of the US Government to bail out these
institutions. Details of the bailout are not yet clear, but it is expected that there will be free
access to assets placed with these institutions where funds are held in an agency or
custodial capacity on behalf of overseas investors. Funds held in the capacity of agent by
these US institutions should retain their agency status and should not be affected by the
financial losses of these institutions. Administrative hurdles during the adjustment period may
however hamper immediate access. Any problems of access to funds held in an agency
capacity are expected to be short-lived if the bailout goes through. In any event, the
investment activities of the offshore sector are segregated from the local banking system.
In the interim, investors in overseas markets should be cautious about the external financial
advisers, consultants and custodians they choose. Barbadian investors holding direct
deposits with commercial banks in the US can take comfort from the fact that the Federal
Reserve Bank appears to be taking a protective stance and is unlikely to allow any large US
commercial bank to fail. Certainly, the decision of Morgan Stanley and Goldman Sachs to
convert their status to that of a commercial bank (from that of investment bank) suggests that
this is the market sentiment. There is much discussion about the moral hazard effect of such
support as it reduces the incentive to increase the level of care required of these institutions.
In the US system, ordinary depositors are assured US$100,000 in federal deposit insurance
per depositor per bank. In Barbados, deposit insurance is also in place up to an amount of
BDS$25,000 per depositor per bank. This was put in place in 2007. It applies to Part III
companies, as well (that is, Merchant Banks, Trust and Finance Companies). In the
meanwhile, the business of local financial institutions with their overseas correspondent
banks continues. Such overseas correspondent banks are assured of liquidity support from
the Federal Reserve Bank in the US. The Central Bank of Barbados also provides liquidity
support to domestic banks but there is no reason to expect that this will be called upon as
our banks (except for possible losses in value on their US dollar securities) have not been
directly impacted by the developments in the US market. It is expected that investors may
turn to safe havens. Barbados is generally viewed as a well regulated domicile.
Over the longer term and into 2009, given the size of the bailout by the US government, we
can expect larger US fiscal deficits, possibly a further depreciation in the US dollar and a
likelihood of a longer US recession than was anticipated. The likelihood of a global slowdown
also becomes greater. The international credit markets are likely to be hesitant to lend for a
while until markets settle. However, given the healthy level of Barbados' foreign exchange
reserves, this is unlikely to be significant for Barbados at the level of official borrowing at this
time, but foreign investors into Barbados who were depending on borrowing on the
international markets may be put on pause.
The one positive outcome of all this is that if there is a global slowdown as expected, and
therefore lower demand for oil, oil prices should contract.