2018 Financial Stability Report

instability. The key risk factors that are identified in 2018 were: Further slowdown or recession in major trading partners’ economies . The ECCU countries are small open economies and thus any changes in the external macroeconomic environment is likely to affect financial stability. Additionally, some commercial banks and insurance companies have exposures to advanced economies’ bond and stock markets. The volatility of these markets in 2018, is likely to have impacted these institutions. Natural Disasters - The increasing frequency and intensity of natural disasters are likely to have a negative impact on the financial sector and the real economy. For example, the passage of a hurricane can cause widespread damage to the real economy through the destruction of agriculture and infrastructure. Furthermore, borrower’s financial positions may be affected through job and income losses as well as damage to physical collateral, which can significantly affect the financial sector. These effects can also lead to an increase in the cost of insurance and can place upward pressure on both the cost of construction (i) (ii)

and home ownership. Thus, households may choose to underinsure their property. Further loss of CBRs - Though the loss of CBRs for the region has been stabilised, there is still a risk that further loss of these relations can exacerbate the timely transmission of payments internationally thereby interrupting the smooth and efficient function of the financial system and the economy. Therefore, this risk needs to be assessed continually. Cyclical Risk At the end of 2018, cyclical risk, as measured by the credit to GDP gap was low (negative). This negative gap indicates that excessive levels of debt are not accumulating in the financial sector (Figure 5) . The total credit to GDP gap stood at negative 24.4 per cent as at end December 2018 compared with negative 25.0 per cent recorded at the end of December 2017. Though negative, the credit to GDP gap is closing, indicative of an expansionary phase of the financial cycle. (iii) 1.3

Financial Stability Report 2018

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