2018 Financial Stability Report

C hapter 5:

O UTLOOK

The outlook for the ECCU financial sector is largely positive and is expected to remain stable in 2019 . Despite increasing signs of a slowing global economy, the ECCU economies are forecasted to record positive economic growth. The growth outlook is central to all the main risks to financial stability as it can impair the balance sheet of economic agents in the economy. Against the backdrop of positive economic growth, the financial sector is anticipated to record stronger performance in profits, increasing credit growth, and lower default risk for 2019. The non-performing loans (NPL) ratio is predicted to continue to moderate due to a combination of higher loan growth and lower default risk on account of a favourable macroeconomic environment. However, the introduction of IFRS 9 is expected to keep provisioning levels elevated. The resilience of the financial sector (as measured by capitalisation) is likely to remain in place except for major tail risks. Nonetheless, key vulnerabilities such as an overly concentrated loan portfolio are expected to remain. Both commercial

banks and credit unions have portfolios that are heavily concentred on household loans. Any weakening of economic conditions can have an adverse impact on the financial position of households, which can then affect credit intermediaries. Legacy NPLs held by these institutions, continue to affect the financial system due to the high provisioning cost. Mechanisms to reduce these legacy NPLs are important to improving the efficiency of the financial sector. The key risks to the outlook are related to the increasing probability of a slowing global economy in 2019 and hurricanes. Materialisation of downside risks to global economic growth can be transmitted to the ECCU economies and to the financial sector. Persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted households, firms and governments. Natural disasters, particularly hurricanes, remain an ever-looming threat to the stability of the financial sector.

Financial Stability Report 2018

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