Analysis and News

Bank of Guyana Half Year Report 2021 – Macroprudential Review

BY GEOCAP's Contributor: Kayshav Tewari

Central Banks regularly conduct macroprudential reviews; analytical tools are deployed to identify and measure systemic risks to the respective economic and financial system. Managing systemic risks involve monitoring the economy for events that may trigger a loss of value or confidence in a substantial portion of the financial system.


In this article, three of these indicators will be discussed and analysed. The information is taken from the Bank of Guyana Half Year Report 2021 and Annual Report 2020. 


Banking Stability Index (BSI) – This index reflects the resilience of the banking sector by looking at asset quality, profitability of banks, liquidity indicators as well as foreign exchange and interest rate risks. A higher BSI reflects greater banking stability.


BSI for June 2021 increased to 0.38 from a value of 0.15 in June 2020. This reflected higher profitability of the banking sector (reflecting improved returns on assets and return on equity), greater asset quality held by the sector, as well as greater liquidity within the system. On the other hand, slight decreases were noted in the interest rate, capital adequacy and foreign exchange risks to the banking sector. 


When compared to the BSI for December 2020, however, the banking system would have lost some resilience as the BSI moved from 0.67 in 2020 to 0.38 in June 2021. This was caused by a reduction in asset quality, a fall in the levels of liquidity, and a fall in profitability. 


While these components in June 2021 remained higher than June 2020 levels, the low BSI of June 2021 relative to December 2020 reflected decreased resilience in the banking sector. 


Absorption Ratio – The Standardised shift in the Absorption Ratio (SAR) measures the degree of linkage or interconnectivity of asset returns across various banks and their banking portfolios (as reflected in their return on assets). 


When compared to June 2020 the SAR has decreased from 0.44 points to 0.22 points which reflects reduced interconnectivity in the asset portfolios of commercial banks; this downward movement in the SAR implies a decreased vulnerability of the commercial banks to a common risk exposure. 


Macro-Financial Early Warning Index (EWI) – This index reflects the influences of the financial sector, real sector, private sector, public sector, and the external sector on the banking system’s soundness. It, therefore, measures overall levels of macroeconomic and financial risk in the system. 


The diagram below gives a graphical illustration of the various risk factors and their relative weights in the EWI. Note that the EWI is based on the performance of a basket of key macroeconomic and financial indicators, each of which is scored by severity levels ranging from 0 points (no or minimal amount of risk) to 5 points (most severe). Therefore, the higher the total score, the higher the overall risk.


Source: BoG Half Year Report 2021

When compared to June 2020 levels, seven indicators pointed to higher risk levels: the 12-month growth in CPI, the 12-month growth in private sector credit, central government balance to GDP, government debt to GDP, volatility in inflation, lending rate minus deposit rate, and the real 3-month Treasury bill rate all signalled amplified risk levels. 


Many of the risks identified by these indicators can be traced back to the current COVID-19 pandemic as well as the recent floods. For example, the 12-month growth in the Consumer Price Index (CPI) of 7.1 percent from June 2020 levels was largely caused by a rise in prices of food and food products – this was due to supply shortfalls following the flooding earlier this year. Another major component of inflation was Transport and communication costs which would have increased due to higher oil prices. Higher freight prices due to backed-up global supply chains are other examples of COVID-induced inflationary pressures. 


Other risk factors such as the growth in private sector credit, greater government debt to GDP and a fall in the real 3-month T-bill rate can all be understood on account of macroeconomic activities aimed at preserving the health of the economy in response to the negative effects of the COVID-19 pandemic.


The EWI currently signals an overall increase in risk level in the economy and will likely continue to signal such for as long as global economic uncertainty and volatility exist. Given Guyana’s unique position of experiencing unprecedented growth and interest while other similar Latin America and Caribbean countries struggle, there remains a strong degree of optimism towards the immediate and long-term future.


Yet still, ongoing surveillance, continual risk management and prudent policies must continue to be a staple to macroeconomic governance in order to prevent the worsening of risk indicators and ensure the aforementioned optimism. COVID-19 regulation and vaccinations are also key to securing Guyana’s best outcomes in the immediate future.


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