NASSAU, Bahamas, CMC – The Central Bank of the Bahamas (CBB) says the local economy recovered beyond its pre-COVID-19 pandemic levels last year, based on available indicators, closely linked to gains in tourism and sustained foreign investment inflows.
Central Bank Governor John Rolle said the CBB expects growth in 2024 and beyond to further The Bahamas’ longer-term potential more closely. However, a future period of acceleration could occur after hotel capacity is replenished in New Providence.
“With credit expansion likely strengthened, the external reserves and bank liquidity levels could moderate, though both remaining very robust. In the meantime, the environment also supports continued reduction in the fiscal deficit and more local currency sourcing of the residual net financing needs.
“While the Central Bank’s monetary policy stance is to continue to accommodate firmer credit growth, there is still room for vigilance given the downside risks to the international economy, most notably in the form of the wars in Eastern Europe and the Middle East, which could impede tourism, and lead to a protracted fight against inflation,” he told reporters.
Rolle said that although the economy has a positive outlook for 2024, enabling more employment creation and continued reduction in the fiscal deficit, downside risks continue to be posed from potential headwinds to tourism if international central banks’ efforts become more drawn out in their fight against inflation.
He also said that travel demand and import inflation remain vulnerable to the harmful effects of the wars in Europe and the Middle East.
Rolle told reporters that in 2023, the economy is estimated to grow in the four percent range, which is a leveling off from the significant post-pandemic recovery of around 14 percent the previous year.
“This captured a robust boost in the cruise sector’s contribution, completion of the occupancy recovery in the stopover sector, and healthy appreciation in the average pricing for stopover accommodations among hotels and vacation rental properties.
“In 2024, the growth is expected to be within the low two percent range, still moderately above the estimate of the economy’s medium-term potential. In this regard, along with sustained marketing efforts, the momentum in the hotel sector, where room availability is still temporarily reduced, remains contingent on how occupancy rates and pricing strengthen.”
Rolle said the vacation rental segment has more growth headroom from occupancy and pricing gains, and cruise market prospects remain robust.
He said an essential boost to construction activity and foreign investment flows also supported positive economic momentum in 2023, targeting significant tourism projects and residential real estate development.
“However, stimulus to the domestic housing market and building activity through mortgage lending remain subdued.”
Rolle said that with the Central Bank’s December 2023 relaxation of mortgage lending conditions, some added positive impacts are expected over the medium term. However, more significant expansion is likely to be linked to downstream benefits of future employment and income growth that increase the pool of eligible homeowners.
Regarding the foreign exchange markets, the Central Bank Governor said the data showed that the economic recovery has reached a more mature state.
He said total foreign currency inflows through the banking sector rose very mildly by only half a percentage point to an estimated US$7.2 billion in 2023.
Rolle said the recovery pace of such inflows in 2022 was 34 percent, noting that although these measured flows can understate the actual volume of activities due to leakages and potential diversion of some private revenues that never reach the local economy, the recorded transactions still significantly reveal the domestic impact through expenses, including wages taxes other costs that sustain the regional presence of business enterprises.
On the outflows side, foreign currency demand also strengthened, at a sharply moderated pace of about 1.5 percent, to an estimated level close to US $7.1 billion in 2023.
Rolle, speaking of the private sector transactions and their impact on reserves, said the commercial banks’ net purchase of foreign exchange from the public was significantly reduced in 2023, and consequently, commercial banks’ net sale of foreign exchange to the Central Bank was almost unchanged from 2022.
“The Central Bank’s external reserves, however, decreased by almost US$250 million in 2023 because of a strong reversal in net transactions with the public sector to the net sale of US$360 million, as opposed to a net purchase of US$206 million in 2022.
“The reason for this difference was that the Government was able to reduce its net reliance on foreign currency borrowing, which had contributed to the net foreign exchange sales to the Central Bank in 2022.”
Rolle said that through the end of January this year, the external balances showed a modest rebound from the end-of-year close to about US$2.75 billion.
“This was mainly due to timing in the government’s US dollar refinancing operations since December, which paid off some overdraft balances with domestic lenders and helped roll over significant US debt. Nevertheless, the seasonal pattern of reserve build-up is projected to occur over the coming peak tourism season.”
The Central Bank Governor said that commercial banks’ lending to the private sector recovered further in 2023, “This is a sign that conditions for lending have become more favorable, with more strengthening expected in 2024.
“That said, the increase in 2023 was for only consumer loans and business lending, with a reduction still seen for residential mortgages. The credit delinquency rates also continued to fall. In particular, the proportion of total private sector loans three months or longer past due with payments (NPLs) decreased to 6.6 percent by December 2023 from 7.7 percent at the end of 2022. This pattern of reduction is expected to continue in 2024.”
Rolle said that given the very healthy outlook for foreign exchange flows, the Central Bank’s posture is to continue to support faster growth in domestic credit over the medium term, particularly in the private sector.
He said the domestic environment will also support increased net financing of the government’s deficit in local currency.
“As a result, it is projected that the increased spending stimulated by credit could lead to additional reduction in the external reserves, although not to any levels that would endanger the reserves needed to support the currency peg.
“In this context, the Central Bank is also taking a very cautious and measured approach to further liberalization of exchange control measures. After the forthcoming consultation with the government, we anticipate a further shift in delegated responsibility for investment currency market transactions to commercial banks and some increased delegation for commercial banks to approve other foreign exchange transactions.”
According to the Bahamas National Statistical Institute (BNSI), there was a declining trend in inflation in the latest available through October 2023. This included moderation in fuel costs in the transportation index and reduced price pressures for imported food and other goods.
However, the delayed pass-through of the higher fuel surcharge for electricity still elevated the increases in the housing component of the retail price index through October. With this episode passed, the outlook is for inflation to moderate in 2024, Rolle added.
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