SI Economy to Contract by 3.9 Percent Due to COVID-19

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2020 CBSI Financial Stability Report.

BY ALEX DADAMU

THE Central Bank of Solomon Islands (CBSI) has released its Financial Stability Report for the first half of this year to June 2020. This first half-yearly review of the Financial Stability Report assessed how the domestic financial system has fared in this pandemic in the first half of the year.

According to the Financial Stability Report, the Solomon Islands economy is estimated to contract by 3.9 percent in 2020 due to the impact of COVID-19. The report stated that according to the September 2020 CBSI Monetary Policy Statement, the first six months to June 2020 saw domestic economic activities declining drastically with broad falls in production, tourism, and construction, resulting in rising unemployment.

However, the report noted that domestic financial conditions across the first half of the year were resilient despite the disruptions in the financial markets that occurred at the beginning of the year.

“Key financial system performance indicators such as capital adequacy, profitability, liquidity, and asset quality remain adequate, albeit at much lower levels than the pre-pandemic levels.

“Stress test results suggest that banks can absorb losses associated with a hypothetical downturn however, any prolonged downturn could put the banks’ resilience to test,” the 2020 CBSI Financial Stability Report stated.

Nevertheless, the report pointed out that the pandemic induced vulnerabilities exist in the financial system amidst heightened uncertainty of COVID-19. Moreover, concentration risk, credit risk, liquidity risk, and high non-performing loans remained risks to financial stability.

“During the first six months of 2020, the banking sector recorded a sharp decline in overall net surplus to $35.4 million. The banks’ total assets took another drop to $6,057 million. In the insurance sector, a smaller net profit after tax of $2.7 million was recorded whilst total assets rose 10 percent to $166.9 million. Total assets in the credit union sector rose marginally by 2 percent to $81.5 million. In contrast, the superannuation sector’s total assets dropped negligibly to $3.7 billion,” the report stated.

According to the Financial Stability Report, Solomon Islands’ financial sector remained vulnerable to the impact of pre and post COVID-19. It further stated that the effects of the pandemic have been felt and it is likely that the financial system could witness a compounding effect towards the end of 2020.

With regards to Risks and Policy Responses, the CBSI Report noted that even though the financial system remained stable at end of June 2020, it continued to face headwinds coming from mounting pressures from the impacts of COVID-19 and the changing business environment both domestically and internationally.

“Fortunately, these risks had not been unnoticed but with diligent work from the Board and management teams of the Financial Institutions and the supervisory role performed by the Central Bank combined to principally contain these risks within bay,” the 2020 CBSI Financial Stability Report stated.