BANKING AT THE CROSSROADS – Keynote Address Delivered By H.E. Dr. EVERSON W. HULL on November 12, 2015
The 42nd Annual Conference of the Caribbean Association of Banks (CAB)
BANKING AT THE CROSSROADS
Keynote Address Delivered By
H.E. Dr. EVERSON W. HULL
Marriott Hotel and Resort
Basseterre, St. Kitts.
November 12, 2015
- Chairperson of CAB, Ms. Joanna Charles
- Chairman of CAB LOC, Mr. Donald Thompson
- Members of the Local Organizing Committee
- Distinguished Banking Executives
- Ladies and Gentlemen
I am deeply honored by the opportunity afforded me to address this very distinguished body.
Although I received much of my early schooling at the Charlestown Secondary School in Nevis, taught at the BA, MA and Ph.D. levels in the U.S. and held several positions from restaurant bus boy, through taxi driver through U.S. Presidential Appointment as Deputy Assistant Secretary for Policy and Research, I have always remained deeply committed to the land of my birth and the land of St.Kitts and Nevis that I love.
Whether writing articles for the local press or presenting a few thoughts on contemporary economic and financial developments, I treasure each new opportunity that is afforded me. It is in that spirit and with the wonderful opportunity that is afforded me for working collaboratively with my CARICOM colleagues as the St.Kitts Nevis Ambassador and Permanent Representative to the OAS that I readily embrace the offer extended to me by your Chairman of this Conference, Mr. Donald Thompson.
Thanks Mr. Chairman for your leadership and for the very hard work of all who have played a role in making this very important conference possible. Financial services are indeed at a crossroads and I expect that the presentations and discussions throughout this conference will generate viable ideas for forging ahead.
In my discussion today, I will focus on:
- The fragile pillars that undergird our economic system;
- The effects of these key determinants of our economic system on the performance of our commercial banks;
- The specific threats that we face from harmful “Tax Haven” legislation; and will close with an appraisal of:
- Potential new opportunities to be explored in Mexico, Central and South America that may help to mitigate the damaging effects of a few of the obstacles that are being strewn in our path.
Permit me to state at the outset that the views that I offer for consideration are those of my own. They are not to be construed as representing those of the Government of St.Kitts and Nevis or the Organization of the American States, of which I am an integral part.
Trained in the area of econometrics, my natural impulse is to validate claims by appealing to the data. This has been a challenge in a few areas, given the paucity of data available for cross country comparisons. However, the World Bank produces the World Development Indicators database from which I’ve extracted much of the data presented. And I’ve also used a few secondary sources of international statistics that shed considerable light on many of the difficulties that we face across the region.
The Fragile Pillars of Economic Growth
At the outset, permit me to digress from “banking” and draw attention to the very fragile pillars on which our system stands. I believe this would be helpful in demonstrating the interconnectedness that exists between the performance of the economies of the region and the performance our banking system.
Before the 2008 global financial crisis, our CARICOM region economies were expanding across the board at a fairly healthy clip. There is clear evidence of the sharp decline in 2009 of each of the dominant pillars that undergird our economic systems.
In the aftermath of the crisis, economic growth rates slowed throughout most of the region. What was a fairly robust growth rate in the eight years leading up to the crisis in 2008, of 3.3 percent per annum, has slowed to a near recession level of 0.2 percent after 2008. [CHART 4]
The chart displayed on the screen shows the fundamental pillars on which our system stands.
Buttressing the recovery is fairly strong growth in household consumer expenditures [in green] as well as the level of exports in blue. [CHART 3]
Households’ consumer spending which is everywhere the dominant driver in all of our economic systems has held its own propping up the economy at roughly the same pace of growth as the weaker economy of which it is a part. Our exports also continue to move at the same pace of growth of the economy, albeit at a weaker level.
Not shown on CHARTS 3 and 4 is a surprising and encouraging reversal in the runaway growth of Government. Our chronic dependence on Government has actually declined from its relative share of 18.1 percent which was recorded prior to the 2008 crisis to 16.7 percent of the economy since 2008. This is encouraging. I hasten to add that this finding does not include the three CARICOM states of The Bahamas, Trinidad and Tobago and Suriname. The World Bank data for these countries are not available. Notwithstanding, any progress realized by the eight states that report this data in curbing the size and scope of our governments across the region is, for me, a cause for celebration.
This is important for several reasons. By weaning ourselves away from our chronic dependence on government, and by returning government to its basic essentials — doing those things that only government can and must do offers us our best hope for reining in our penchant for large budget deficits. Any reduction in our current account deficits comes with an attendant reduction in the size of our very punishing high debt loads across the region. Reducing our excessive debt burden and the high cost of servicing the public debt means an increase in the available pool of funds for meeting several basic human needs that only the government can provide.
Capital Investment Spending Flat
While we celebrate the contributions made by the households and the growth and expansion of our fledgling export sectors and the reduced size of our governments relative to the size of their respective economies, there are two very troubling areas of concern.
Firstly, the level of business capital investment expenditures coming out of the recession has been flat at a rate of about $9.4 to 9.6 billion per year across the CARICOM region, down from a level of almost $14 billion in the four years prior to the collapse. [CHART 3 AGAIN]
Given the storm clouds forming on the horizon, this does not augur well for our region, and especially for several of the OECS member states. The [BROWN] line shows that in the aftermath of the financial crisis gross capital investment has been flat.
Secondly: The post-crisis years have produced continuing concerns about the exodus of funds leaving the country from our near record high level of imports. There are no easy answers to curbing our appetite for imported products. Yes! Our food import bill is high. But so too are our imports of pharmaceutical products, electronic data processing products, automobiles and transportation equipment, as well as iron and steel products used in our infrastructure development; and of course our imports of petroleum products.
Notwithstanding, our fuel import bill represents a large share of our imports. And this, we can do something about. We must continue to move aggressively to rapidly bringing on stream all alternative energy forms, wind, solar and geothermal production.
Our imports represent a leakage from our economic system. As funds leave our states, the perverse effect is that these leakages stunt our overall levels of real economic growth – holding our growth and expansion well below our full productive potential. A near-record high CARICOM region import bill of U.S. $32 billion in 2013 imposes a deadweight loss that drags our economies down.
Implications for Banks
On the banking side, I am pleased to report that banks have performed well during the post-crisis recovery. They have generally been responsive to the “needs of trade and commercial activity” by increasing the relative share of the volume of credit to the private sector. This very strong performance in a very different U.S.A. setting would earn the banks a very high Community Re-Investment Act rating of “OUTSTANDING” for meeting the credit needs of the communities from which they draw their deposits.
Notwithstanding, given the magnitude and scope of the decline in economic activity across the region, I am obliged to ask the question, Have the Central Banks across the region done enough in providing the badly needed monetary stimulus at a time when many countries are still under-going significant fiscal stress, with reduced rates of growth of consumer and business spending. Our regional Central banks have many of the same policy tools as those of the U.S. each of which may be used for increasing the liquidity of the banking system, especially during periods when the system is undergoing severe stress.
During a severe economic contraction, they are vested with discretionary power to reduce the discount rate on loans made to their member banks freeing them up to pass on these lower rates to households and businesses, breathing new life into their operations and providing a boost to the communities that they serve.
The published data is fuzzy. But, I am somewhat troubled that our Central banks have not seen fit to impose deeper cuts in the discount rate during the period of economic slowdown when many small businesses were crying out for relief. I don’t claim to have the answer. But, I am troubled, FOR EXAMPLE, as to why one of our Central Banks would elect to increase its discount rate from 12 percent, already the highest rate in the entire CARICOM region to 18 percent in 2010, a mere two years after the crisis, when economic growth rates in that country were falling from 5.4 percent prior to the crisis to 0.7 percent in 2009; followed by what can only be described as a modest recovery in 2010.
Based on the limited published data, [available only for two years of the financial crisis – 2009and 2010] the only two Central Banks that took deliberate steps to reduce the discount rate charged to member-banks that would allow them to reduce their own lending rates to the ordinary man on the street who is trying to keep his head above water are the Central Bank of Guyana which reduced its discount rate from 6.75 percent to 4.25 percent in December of 2010 and the Central Bank of Trinidad and Tobago which reduced its discount rate from 7.25 percent to 4.25 percent in the same year.
By contrast, I note that the Central Bank of the U.S. has reduced its discount rate 5 times since year-end 2007 when it stood at 4.83 percent just before the recession to 0.5 percent by the end of the first year of the crisis. It remained at 0.5 percent for the next 14 months and was increased to 0.75 percent in February 2010. The Federal Reserve discount rate in the U.S. has remained unchanged at 0.75 percent level for the last five and one half years.
DC “Tax Havens” List and Foreign Account Tax Compliance Act
I now turn my attention to the Washington DC’s proposed “tax havens” list. In its 2016 budget that is required by law to be approved by the Appropriations Committees of the United States Congress; the DC City Council decided, without much public debate, to slip in a provision that lists 39 countries as tax havens. This August 11 list includes all CARICOM member states, with the exception of Guyana, Haiti, Jamaica, Suriname and Trinidad and Tobago. This list which has the potential for severely disrupting the flow of investment capital to the region comes on the heels of an equally pejorative list published by the European Commission in June of this year that listed 30 countries which it deemed to be “non-cooperative tax jurisdictions”.
With the kind permission of my OAS Ambassadorial colleague Sir Ronald Sanders of my neighboring state of Antigua and Barbuda and also candidate for the Office of Secretary General of the Commonwealth, permit me to draw attention to a most important observation. In last Friday’s online version of Caribbean News Now; his Excellency stated the following:
“…..The ostensible purpose of identifying tax havens ….is to go after monies they believe are kept in foreign jurisdictions by their national companies or individuals. However, they gain nothing by the ‘tax haven’ branding that they do not already have. Every CARICOM country has tax information exchange agreements with the US and major EU countries. Therefore tax information is available – and is provided – on demand through the appropriate and designated agencies of their governments….”
This, of course, helps to explain why the OECD has launched an all-out assault against what it disparagingly refers to as “tax havens.” That is exactly what FATCA does. It turns us into their off-shore tax collection agency, and pays us nothing, for enduring the financial hardships that we must endure to do that which they have failed to do for themselves.
My own review of Worldwide Tax Summaries published by Price Waterhouse Coopers shows that the U.S Federal corporate tax rate at 35 percent is the highest in the entire world. [CHART 18]
For most other countries corporate taxes are within a range of 12.5 percent to 25 percent. Money is a highly-valued asset that seeks refuge in places where it is accorded a measure of respect.
To illustrate, California is a high tax state. It did not make the top ten list of highest corporate tax states in 2013. It is actually ranked 11th.with a State corporate tax rate of 8.84 percent. The combined federal and state corporate tax rates for companies doing business in California is 43.8 percent. By contrast, Texas is a low tax state; it has a zero percent tax rate. Despite the plethora of high tech companies that are located in California, companies are fleeing the state and heading for Texas where tax rates are lower. The Governor of Texas often states that it costs more to ship an empty U-Haul truck from Austin-Texas back to San Francisco-California than it costs to ship a fully loaded U-haul from California to Texas. Why? It is hard to find drivers who are interested in going to San Francisco which is losing jobs to Texas.
We cannot stand idly by and allow the DC Government and others to effectively “strong arm” low-tax Nations such as ours into being their tax collectors. The OAS CARICOM caucus has been vigorous in denouncing the wrongful actions of the DC Government. A few member states, including St.Kitts and Nevis, have drafted strong letters to the DC City Council and to key Members of Congress who serve on the House and Senate Appropriations Committees. In addition, a strong joint CARICOM letter expressing dissent has been dispatched to the oversight bodies on Capitol Hill that draws attention to the several steps that CARICOM members States have taken in sharing tax-related information with the U.S.
We have received a briefing from Executives of the Council on State Taxation (COST) which represents corporate taxpayers and will be working closely with them at the State level to point out the harmful effects of the actions of the States on some of their very own friendly trading partners. And, we are also considering bringing together experts for a Forum at the OAS which may help motivate the cause for the issuance of an OAS Resolution by the Permanent Council denouncing the practice of the State Governments.
We believe that our very aggressive and strong response has begun to bear fruit. Two weeks ago, we received word that the DC government has withdrawn its support for its proposed “tax haven” legislation and will engage in further review of the proposal.
The Appeal of the Latin American Frontier
Having worked closely with my Latin American peers, I have developed a real appreciation for the mutual benefits to be derived from enhanced trading and commercial activity with our peers in Mexico Central and South America. There appears to be as much interest today in these countries searching for new opportunities for expanding their reach into member states of the CARICOM region as there is in our own region’s interest in enhancing our presence in Latin America.
Our expressions of interest in an enhanced presence in Latin America coincide with a commitment of the OAS and the members of the Permanent Council for strengthening the role of local OAS country offices in each CARICOM member state to foster greater private sector investment; It is important that your Board of Directors takes time out to meet with these officers in each of your home states and become aware of the possible collaborative relationships that exist and that could be established.
I see the same willingness to engage as partners in representatives of a number of Latin American countries. A few weeks ago I paid a visit to the Embassy of Columbia and received a briefing from the Director of International Affairs of the Foreign Office of Columbia to discuss bilateral cooperation initiatives for Columbia’s 2016 budget.
So far, deliberate steps have been taken by several of the larger CARICOM member countries which have established diplomatic representations in Brazil, Mexico, Panama and Venezuela. Among those countries that have led the way are Guyana, Jamaica, Suriname, and Trinidad and Tobago. Each begins with a comparative advantage over their CARICOM peers because each has a stronger raw materials resource base than others in the region.
But, all is not lost for small countries. Small countries can also benefit: Despite the absence of an expansive resource-rich raw materials base that is available for export, St.Kitts and Nevis has demonstrated a capacity for developing a fairly vibrant export sector. This demonstrated record of achievements makes it well-suited for expanding its reach into global markets. When adjusted for population size, per capita exports for St.Kitts and Nevis, valued at $5,429 in 2013 ranks, fourth highest among the 26 OAS member states which reported this performance metric. [CHART 21]
The Preferred Mexico Alternative
When viewed from the perspective of income and wealth, fiscal soundness, vibrancy of economic activity and proximity to trading markets; there is no one Latin American country that meets all of the criteria. Each has its strengths and weaknesses.
The preponderance of the evidence suggests that Mexico holds a comparative advantage over its peers. Like Canada to the North, Mexico benefits from its proximity to the region’s most important trading partner – the United States of America. Its sheer size and potential importance as a viable trading partner is reflected in the number of international tourism arrivals and departures in 2013. No other Latin American country comes close.
The global-financial crisis which contracted economic activity in the U.S. has not noticeably slowed the growth and expansion of the tourism sector in Mexico. In 2013, the country recorded its highest ever level of tourism arrivals (24,151,000). [CHART 22]
This was more than four times the number of tourism arrivals in Brazil (5,813,000), which is ranked second. The level of tourism expenditures for Mexico is equally impressive reaching $11.97 billion in 2013, exceeding comparable tourism expenditures for Columbia, Chile, Peru, Uruguay, Ecuador and Honduras, combined. [CHART 23]
Also buttressing its income base is a disproportionately large share of personal remittances. Mexico stands at the head of the class of all OAS-member countries. During 2013, personal remittances received amounted to $23 billion. [CHART 24]
Its relative share accounted for 37.8 percent of personal remittances that flowed to all OAS member states in 2013. These remittances play a key role in enhancing the purchasing power of Mexican households, providing the surplus income and wealth that many households rely on for funding leisure travel.
Mexico offers a large and diversified market that benefits from its proximity to our leading trading partner – the United States of America. With vast manufacturing and tourism sectors, it has outperformed its peers in the region and is more accessible to our CARICOM member states than other Latin American countries.
Despite the challenges and the uncertainties that lie ahead, the outlook for our region is good. We do not have the galloping inflation that plays utter havoc with the aspirations of many countries. Our crime difficulties are a matter of serious concern and every effort must be directed to rid ourselves of this difficulty. It is an area that must be assigned our highest priority.
Among the bright spots is the improving performance of our export sector. We are therefore well positioned for leveraging this solid record of achievements in the pursuit of new markets in Latin America.
This will involve intense and painstaking study of products that Latin American companies are importing and evaluating whether the member states of our region have a comparative advantage in bringing these products to their markets. It is an aspect of supply chain management that is practiced by IBM and a number of very large U.S. companies.
It is important that attention be given to identifying and monitoring the performance of companies in Latin America that are richly endowed. Many of these companies trade their financial instruments on global financial markets. As a consequence, information about their financial performance, their success and failures, is readily accessible and in the public domain.
Finally, the issue of productivity was referenced several times by Charles Wilkin CMG, QC who delivered the “Feature” address at last evening’s Official Opening of the Conference at Government House. It is my view that our commercial banks are well-positioned to lead the way.
Those institutions that have established an incentive based compensation scheme and which value commensurate rewards as a tool for motivating optimal performance to achieve mission objectives have a duty to share these innovative approaches with our local governments. We are to be reminded that an increasing number of public sector entities are adopting these incentive based compensation schemes in the civil service.
The U.S. Office of Personnel Management has promulgated regulatory guidelines for the establishment across the entire sprawling U.S. Federal Government. The OECD has issued guidelines for governments. The Federal Government of Canada has established a pay-for performance scheme. We will not enhance productivity across our governance structures until clearly defined performance scorecards are put in place that measure and reward outstanding work effort.
Conclusion: In conclusion, I wish you — the governors and high officials of Caribbean central banks and supporting staff — well in carrying out your critical and difficult responsibilities, and I look forward to discussing with you the policy issues that you confront. I hope that the remaining two days of this conference will consist of robust discussions that generate ideas for a successful path forward.