NASSAU, Bahamas, CMC – Governor of the Central Bank of the Bahamas (CBB), John Rolle, says the local economy is projected to experience continued growth in 2023, although more moderated.
“By 2024, the activity could settle closer to the economy’s medium-term growth potential. This evolution is expected to sustain continued high banking liquidity and comfortably adequate external reserves,” Rolle said as the CBB released the Monthly Economic and Financial Developments for September.
He told reporters that from a policy perspective, it continues to leave the Central Bank open to accommodating more growth in lending to the private sector and the domestic markets sustainably to finance an expanded share of the fiscal deficit in local currency.
“ In any event, the outlook is also expected to encompass continued fiscal consolidation that should reduce the government’s total borrowing requirements,” Rolle said, adding, “Nevertheless, there are downside risks that justify caution. Imported inflation could impede the economy’s ability to retain foreign exchange, while escalated energy costs could make the tourism product more expensive and less attractive.
He said, in addition, the rising interest rates, which push back against inflation, could impose higher costs on the government’s foreign currency debt and could slow the pace of foreign investments that rely on debt financing.
“Weaved throughout these trends are geopolitical tensions from the war in Ukraine and now the Middle East. In these respects, the Central Bank’s monetary policy posture is cautiously balanced and measured,” he added.
Rolle said that the available data through the third quarter of 2023 show a healthy recovery and transition of the Bahamian economy, away from setbacks of the coronavirus (COVID-19) pandemic.
He said tourism underpins the recovery, with aggressive marketing efforts taking advantage of the relaxed global travel conditions.
“Indications are that support from foreign direct investments is also being maintained at healthy levels. As a result, the outlook for employment remains positive. Meanwhile, the inflation expectations for The Bahamas have moderated, even though transitional firming remained evident due to the delayed pass-through from higher electricity costs.”.
Rolle said in the financial sector, trends are characterized by steadily reducing credit delinquency rates while the outlook for lending to the private sector is gradually improving. “Nevertheless, there is a more discernible reduction in the speed of economic growth. With private sector demand more caught up to the rest of the economy and the government more reliant on local currency borrowing, some consequent net reduction in the Central Bank’s foreign reserves continues to be expected over the remainder of this year.”
The Central Bank Governor said the near-term risks to the economy remain concentrated around imported inflation, escalating geopolitical tensions, and the multiple adverse impacts that rising international interest rates could have on the financing costs for the public and private sectors.
He said that based on trends in tourism and the observed level of foreign currency inflows through the private sector, the economy is still expected to grow at an above-average pace in 2023, in the three to four percent range.
“This compares to most of the COVID-19 rebound that grew the economy by about 14. per cent in 2022. In the first half of 2023, there continued to be some residual recovery in stopover tourism compared to the pre-pandemic highs.
“ Alongside increased average prices for hotel rooms and vacation rentals, this helped to expand the sector’s total economic contribution. However, over the first eight months of the year, neither air nor sea arrivals numbers experienced significant, additional seasonal headcount growth compared to the pre-pandemic estimates.”
Rolle said that compared to seasonal performance in the same months of the preCOVID-19 period, sea arrivals leveled off favorably, about 42 percent above the pre-pan
He said the varied, anticipated boost in hotel and cruise capacity in 2024 could create the headroom to improve these seasonal indicators.
Regarding the foreign exchange situation, Rolle said that the foreign exchange markets provide a good indicator of the collective impacts of tourism, investments, and other inflow activities on the economy.
“They are also a reliable early gauge of the annual variations in the activity level in most parts of the economy. In this regard, during the first nine months of 2023, total foreign inflows through the banking sector rose just 2.5 percent compared to 2022. The recovery-driven improvement in receipts in the same period in 2022 was 40 percent.
“In the meantime, the demand for foreign exchange increased by 7.1 percent in 2023, compared to approximately 30.1 percent in 2022. While these trends underscore healthy conditions overall, the relatively stronger growth in foreign exchange sales led to a smaller net retention. It therefore decreased net sale of foreign exchange from commercial banks to the Central Bank.”
Role said that given net foreign exchange trends, the external reserves of the Central Bank remained on course to contract this year.
In particular, the Central Bank’s net foreign exchange purchase from commercial banks decreased by almost one-third from January through September 2023. Moreover, there was an approximate US$700 million reversal in transactions with the government sector, from a net purchase or boost to reserves over the same months in 2022 to a net sale of foreign exchange in the first three quarters of the current year.
“ As a result, the external reserves fell incrementally over the nine months to September 2023, compared to a net accumulation of nearly US$750 million in the same period last year. As regards the leading influence of the government’s debt management operations, some of the drawdown in reserves already experienced could be reversed over the remainder of the year, given some planned foreign currency borrowing. However, the cumulative impact in 2023 is still expected to be a reduction.”
Rolle said as of the end of October, the external reserve balances were at US$2.5 billion, about five percent below the closing levels for 2022.
He said these balances continue to be healthy and more than adequate to support the value of the Bahamian dollar fixed exchange rate. The outlook for the reserves also continues to be supportive of increased expansion in private sector credit and an increased share of financing of the fiscal deficit in local currency.
The Central Bank Governor said in the banking sector, there are steadily improving indicators of credit quality, with the outlook for lending shifting more positively.
As of September, just 6.8 percent of estimated private sector loan balances had fallen behind in repayments by 90 days or more, compared to 8.1 percent of all credit balances at the same point in 2022, and an average setback during the height of the pandemic of to almost 10 percent of loan balances, Rolle said.
“In addition, a gradual, though still very mild pattern of growth, was established in total lending to the private sector over the first nine months of 2023. It included a bottoming out of multiple years of reduction in consumer lending and additional gains in business loans. However, the residential mortgage segment was further contracted overall.”
Rolle said that in line with these trends, based on the latest lending conditions survey for the first half of 2023, commercial banks also reported a further uptick in credit applications, concentrated in consumer and business loans.
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