A Working Group report authored by the Inter-American Development Bank (IDB) and the Centre for Global Development (CGD) has revealed that the COVID-19 pandemic has given rise to challenges in the financial systems of countries in Latin America and Caribbean countries.
In the report titled “Sound Banks for Healthy Economies: Challenges for Policymakers in Latin America and the Caribbean in Times of coronavirus,” the organisations posited, “The deep recession and the serious income losses for families and firms may provoke significant challenges for financial systems.”
The IDB and CGD acknowledged that the COVID-19 crisis has already taken a large toll on Latin America and the Caribbean in terms of confirmed cases and deaths as well as sharp declines in economic activity.
The organisations also expressed that “it is far from over,” noting that they are still unclear how long the health crisis will persist and how soon and how fast economies will recover.
According to the IDB and CGD: “Unlike recent financial or balance of payments’ crises, this may be more of a slow-moving event in which credit risks take centre stage.”
This why the organisations have advised that good policies will be critical to navigate the coming months. The IDB and CGD indicated that most financial systems remain dominated by banks and will undoubtedly see non-performing loans rise and suffer losses on other assets as well.
Moreover, the IDB and CGD contended that countries in the region have limited fiscal resources and debt positions had already risen significantly before the COVID-19 crisis hit.
However, they disclosed that monetary frameworks have improved considerably. In most countries, the IDB and CDG revealed that inflation and inflation expectations remain well anchored and more countries have gained exchange rate flexibility by introducing inflation targeting regimes.
The report added that Financial systems were also in relatively good shape before the crisis hit and banks had high capital and liquidity buffers. However, the organisations indicated that the crisis and the immediate response present a set of subtle but extremely important “dilemmas for policymakers dealing with financial sector issues.”
According to the IDB and CGD, the region will face challenging months ahead and concerns regarding financial stability are very likely to surface. The report highlighted, “A lesson of previous financial crises is that confronting these concerns head-on is better than trying to hide them if they emerge.”
The IDB and CGD asserted that good policies appropriate to the nature of the problem at hand will boost confidence, help overcome the problems, and “ensure that banks play a constructive role as suppliers of liquidity and credit” in order for economies in the region to recover as swiftly as possible.