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Budget Speech: Minister of Finance hails stabilization of banking sector

Posted: Monday, March 13, 2023. 12:57 pm CST.

By Aaron Humes: Prime Minister and Minister of Finance John Briceño reported during the presentation of the Budget on Friday that monetary and financial conditions have stabilized, as banks are starting to lend again to the private sector; however, there are a higher number of non-performing loans and excess liquidity in the system.

Money supply expanded by 4.7 percent, with the Central Bank of Belize’s Gross Official Reserves at 960 million dollars at the close of 2022, and import cover comfortably exceeding the recommended three-month cover. The International Monetary Fund (IMF) projects this level to be maintained through to 2028.

During the year, the net foreign assets and net domestic credit of the banking system – the two largest components of money supply – grew by 5.2 percent and 5.7 percent, respectively. Domestic banks’ net foreign assets decreased by 7.3 percent on account of the higher outlays for imported goods and services due to inflation, alongside the full-scale resumption of profit repatriation and dividend payments to international firms. Notwithstanding these outflows from banks’ foreign holdings, increased foreign revenues flowed into the banking system from tourism, BPOs, commercial free zone activity, and exports of agricultural products.

Private sector borrowing climbed by 104 million dollars or 4.5 percent, nearly double last year’s outturn, and the largest annual increase since 2019.

Bank liquidity inched up by 4.6 million dollars in 2022, following increases of 219.5 million dollars and 278.1 million dollars in 2020 and 2021, respectively. The slowdown in liquidity growth was on account of the pickup in lending and the decline in domestic banks’ foreign asset holdings. Excess liquidity amounted to 702.9 million dollars, 91.9 percent above requirements, a situation which the regulator is actively reviewing. Excess cash reserves summed to 499.3 million dollars, 211 percent above the required level.

Weighted average lending rates decreased by two basis points to 8.62 percent during the year, while weighted average deposit rates slipped by 15 basis points to 1.90 percent. As a result, the weighted average interest rate spread widened by 13 basis points.

Non-performing Loans (NPLs) have crept higher to 7 percent of gross loans, a shade higher than the prudential ceiling of 5 percent, primarily due to pandemic-induced business contractions and, in some cases, excessive risk-taking. As explained by Governor of the Central Bank Kareem Michael, this increase was expected “…given the sharp contraction that the country experienced in the midst of COVID…. While we have done quite a bit to contain that level of fallout with a well-crafted exit strategy, there still was some damage, if you will, because businesses did disappear and some businesses were not able to recover from the pandemic. That’s unfortunate, but nothing that should suggest that the Central Bank does not have the capacity to deal with any increase in risk which may result from this increase in nonperforming loans. So it is one which we are on top of and one which we continue to monitor closely.”

The IMF concurs, saying that “the Central Bank’s process for strengthening the banks’ balance sheets and resolving problem loans after the pandemic has been well executed. The CBB has sufficient tools should it need to intervene.”

 

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