Falling oil prices could affect the local banking sector, according to an oil price analysis released by First Citizens Research & Analytics on November 25. Vangie Bhagoo-Ramrattan, head, First Citizens Research & Analytics, said: “If large multinational energy players hold back on investments into the T&T market, then employment in the energy sector may be affected. This may have an impact upon the bank’s exposure to this sector (institutional and individual).”
She said credit exposure by sector shows that “the energy sector only accounts for a small portion of banks’ overall loans, with Republic Bank Ltd, First Citizens and CIBC under 1.0 per cent, and Scotia with the highest exposure of 9.0 per cent as at the end of the respective bank’s financial year 2013.”
She said the country’s largest earner of foreign exchange (FX) is the energy sector, providing 75 per cent of the supply in 2013. “Therefore, if the sector is facing a lower price environment, then there will be lower FX inflows. The FX shortage which is currently a major concern will therefore continue to pose a significant challenge for the banking sector and their ability to meet customers’ demand for foreign exchange.”
Bhagoo-Ramrattan said contagion via the trade channels can negatively impact the financial institutions. If PetroCaribe is modified, then the fallout in economic performance can impact upon the local financial sector, she said. If regional non-energy import demand falls, local exporters may find it difficult to meet financial commitments to local financial institutions, as such under this scenario, commercial banks’ non-performing loans may increase, she said.
“We think that interest rate policy in T&T will be tightened at a gradual rate for the rest of this year, and into next year,” she said. Written since November 19, Bhagoo-Ramrattan accurately predicted that the next Central Bank Monetary Policy committee meeting would increase the repo rate.
“We expect that a 25 basis point increase in the repo rate to 3.25 per cent may be implemented by the end of the year, to rise further to 3.75 per cent by the first quarter (Q1) of 2015 in response to anticipated higher US interest rates.” The Central Bank will likely hold the rate at 3.75 per cent until year end 2015 as it could be that long before public spending restarts, following general elections. The commercial banks’ average prime lending rate will increase, which should increase the banks’ spread income.
However, she added: “We do not think that the current movements in energy prices will result in a deviation of the current monetary policy stance adopted by the Central Bank.” She also said that the US dollar shortage (due to current shortage, lower energy revenues and falling demand for T&T natural gas) may force the T&T dollar to depreciate against the US dollar.
This may encourage imported inflation, where the costs eventually trickle down to consumers, which can stoke headline inflation and force the Central Bank to be more aggressive toward monetary policy (raising rates faster than our baseline). “The implications for commercial banks may be two-fold: operating in a higher interest environment, as well as increased FX expenses associated with a depreciating TT dollar. The latter will be minimal, based on the managed float the CBTT operates.”
