Guard against financial manipulation

Published: Wednesday October 8, 2008

The credit crunch is upon us and interest rates are increasing.

Mortgage payments are becoming increasingly hard to meet, small businesses find it hard to get loans and Trinidad and Tobago, despite good economic indicators (which the Government brags about) is not insulated from the pending US recession or the global credit crunch.

These findings, which have been voiced by several financial experts before were reiterated during the University of the West Indies economic forum on "A looming Financial Crisis in the Caribbean?"

While all the presenters agreed that it is not yet time to run for the hills or declare the financial ruin, they all agreed that the region can and will take a beating as a result of global economic forces.

The word from the Chairman of the Banker's Association, Catherine Kumar is while these economic forces do impact us, we can still survive, if we take heed now.

In fact, all the presenters of the day agreed that while economic forces can cause disastrous financial outcomes, unlike natural disasters they are man made and therefore can be controlled, if the stakeholders in the industry work together.

The Greed

While everyone remembers Gordon Gekko's famous lines from the movie Wall Street, "Greed is good, greed is right, greed works," the present situation at the real Wall Street also shows greed has an expiration date.

And to date many economists have blamed the greed of investment bankers, coupled with over-compensation at financial firms and a lack of formal regulations in the US investment market place for the now 'topsy turvy' US investment climate.

During the economic conference last week, Kumar warned locals about this greed.

She said financial institution board members need to guard themselves from the greed which could take this country's financial sector down the same disastrous road as the now turbulent Wall Street financial market.

Kumar urged those involved in the dealings of the local money market not to involve themselves in "financial manipulation" which will eventually lead to their "greedy ends."

She said, "We in board rooms have to ensure that we do not get too greedy and only look at the bonuses and the bottom lines and the shareholders' returns, but that we think of the financial system and the economy as a whole and that we make wise decisions in the board rooms."

Economic Stability

Speaking after Kumar, Carl Hiralal, Inspector of Financial Institutions at the Central Bank of Trinidad and Tobago said that while the impact of the shake up in the US will not directly hit citizens, he said tourist arrivals and the amount of remittances, otherwise known as "money sent back home" from relatives abroad will shrink considerably as lay offs and cut backs in the US increase.

Several studies have said stability of several Caribbean economies such as The Bahamas where tourism accounts for at least 17 per cent of GDP will be disrupted.

The United Nations economic survey of the Caribbean 2007-2008, which was released locally at the Normandie Hotel last week supports Hiralal's statements.

The report stated, "The slower job market and a housing-led recession will have a significant impact on remittances as loss of jobs and negative wealth effects on immigrant home owners (in the US) will translate into less or no money to remit.

According to Kumar, "the net worth of individuals, pension plans and corporations in the US and Europe will be severely affected by the meltdown in the stock market and currency fluctuations."

She said the effect of decreasing disposable wealth, compounded by the loss of income for those who will be losing their jobs will adversely affect consumption expenditure, which means that Americans and Europeans will spend less, especially on "discretionary items like vacations," thereby negatively impacting tourism-dependant regional trading partners and by extension our non-energy exports.

She believes in the medium-term, some debt burdened governments throughout the region will be challenged to service even larger debt portfolios.

Kumar said, "It also means that, in a prolonged recession in the US, members of the Caribbean diaspora will be affected by layoffs, falling net worth and lower real incomes and therefore remittances, critically important to economies like Jamaica, will decline."

The top banker also said that due to the credit crunch and the increasing amounts of financial capital which will be directed to financial institutions abroad, less will be available elsewhere in the global economy.

This will raise the price of capital (real interest rates) as capital lenders will seek superior returns in less risky ventures and this will mean less available capital and more expensive capital for developing countries and companies from developing countries, such as those in Latin America and the Caribbean.

Regulations

Hiralal, who has been in the field of regulation for some time, said the failure of proper governance at the board level, the failure of the regulatory model and a lack of regulatory oversight in the US all contributed significantly to the on-going meltdown.

He added that the "perverse incentives" given to reward investment risks that paid off encouraged a financial culture where chances were taken on 'risky business' and 'uber' sophisticated derivatives and, therefore, set the stage for the present turmoil.

The Central Bank representative said if this country and the region on a whole is to avoid the same outcome:

- Capital market and banking regulators need to work together.

- Boards should improve their knowledge of risk management and secure more outside audits and financial reports, while improving their level of accountability.

- And regional governments need to 'hurry up' and pass the revamped financial legislation which has been in the pipeline and on discussion boards for some time.

Hiralal believes all this is necessary at present. "There is no escaping the effects of a slowdown and we (the region) need to prepare for it," he said.


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161384862