The BAHAMAS-Bahamian economy expanded at a healthy rate during the first six months of 2023

NASSAU, Bahamas, CMC – The Governor of the Bahamas Central Bank (BCB), John Rolle, says indications are that the Bahamian economy expanded at a healthy rate during the first half of 2023.

He said it is expected that growth will be around the three percent range this year and moderate further in 2024 from the projected outcome for 2023, with subsiding inflation, chiefly due to the success in reducing inflation abroad.

” Momentum in tourism was still brisk but slowed compared to 2022 since the industry had less shortfall to recapture relative to the pandemic losses. Foreign investment inflows also propelled growth. These developments supported revenue-driven improvements in the Government’s finances and increased private sector employment,” Rolle said as the CBB released the Monthly Economic and Financial Developments (MEFD) for June.

He told reporters that some evidence of tapering in inflation also emerged, in line with moderating trends in the United States and other trading partners.

Rolle said in the monetary sector. There was less seasonal accumulation in external reserves due to the significant absence of public sector foreign currency borrowing and increased net outflows through the private sector.

He said there was an incremental upturn in private-sector credit while the economy continued to support decreasing delinquency rates on private-sector loans.

Rolle said that the economy’s expansion would also stimulate more employment, the scope for increased labor force participation, and improved conditions for bank lending.

“In this context, downside risks are still those from increased headwinds, if rising interest rates outside The Bahamas slow demand for travel; or if oil price uncertainties, partly related to the war in Ukraine, lead to increased costs for transportation and accommodations.

“With foreign exchange flows recovered, the outlook remains favorable for the external reserves. However, vigilance is always necessary for how credit and Exchange Control policies are set, considering the interplay of forces affecting the relative volume of foreign exchange inflows and outflows.

“In this regard, commercial bank liquidity, which remains buoyant, is also a risk to be monitored, as it could be a pent-up source for outflows over the medium term. This places renewed emphasis on increasing the private sector’s net take-up of government debt that still sits on the Central Bank’s balance sheet,” Rolle told reporters.

Rolle said while the outlook for the economy remains positive, there are still downside risks associated with the adverse effects of the war in Ukraine, rising interest rates abroad, the pushback against inflation, and uncertainties about oil prices.

“Let me preface the discussion on tourism by underscoring that analysis of the recent performance in the industry are essential to assess the overall economic growth prospects, post-recovery trends in net foreign exchange flows, and the Central Bank’s foreign reserves management policies.

“In this regard, the Central Bank still projects some recovery-laced, above-average real GDP (gross domestic product) growth in the three percent range for 2023. However, potential annual growth beyond 2023 is resettling closer to the two percent range,” he said.

Rolle said gains in tourism during the first six months of 2023 were still driven by significant pent-up demand as COVID-19 precautions no longer constrained travel.

In addition, he said, the industry benefited from appreciated stopover pricing, both within hotels and vacation rental properties.

“Based on comparisons against the pre-pandemic highs and the best seasonal performance before hurricane Dorian, sea arrivals, which essentially represent cruise visitors, have exceeded the pre-pandemic highs by an average of 40 percent since December 2022.

“However, the comparative index has not trended upward since February 2023. In addition, since January, the seasonal recovery in air arrivals stabilized, on average, just two percent below the pre-pandemic comparisons.”

Rolle said that over the first half of 2022, air arrivals were still an average of 25 percent below pre-pandemic volumes, while the sea segment still trailed by 22 percent.

“Some of this leveling off in volumes may well reflect increasing limits on hotel room inventory, particularly in New Providence,” he said, noting that given appreciated stopover pricing and the magnitude of cruise volume boost, the industry, however, experienced more than fully-recovered earnings in the first half of the year.

“The growth outlook beyond 2023 would, however, be more ameliorated if better pricing was reinforced, among other factors, by capacity-aided visitor volume gains.”

Rolle said the foreign exchange indicators and external reserve trends showed that over the first six months of this year, total inflows through the banking system, which capture impacts from tourism, foreign investment spending, and other private sector activities, increased by 3.8 percent to US$3.8 billion.

He said this compared to a recovery-related rebound of 50 percent in 2022.

“Inflows, though, were expected to have been stronger, given the extent of strengthening in tourism indicators. This underscores the importance of boosting domestic retention from all subsectors where there is growth.”

But he said, as expected, the growth in spending on imports of goods and services and portfolio investments was stronger than trends on the inflow side, increasing by 11.1 percent in the first half of the year.

“On a net basis, the private sector retained less foreign exchange, contributing to a minor boost in the external reserves. In particular, the net amount of foreign exchange that commercial banks sold to the Central Bank was one-third less than in 2022.

“In addition, the volume of foreign currency-denominated borrowing by the government was sharply reduced compared to 2022, resulting in the public sector, on the net, repaying some foreign currency debt and being a net purchaser of foreign exchange from the Central Bank.”

The Central Bank Governor said as a result, the external reserves grew by just US$117 million in the first half of this year, compared to a US$788 million buildup in 2022.

“As the external balances were approximately US$2.7 billion at the end of July, little changed from the end of June. These balances remain healthy relative to their support for the Bahamian dollar fixed exchange rate.

“Over the remainder of 2023, the Central Bank will continue to plan for and to accommodate a net reduction in the external reserves, which would place the end-of-year balances below the closing levels of 2022.”

Rolle said this remains consistent with an increased capacity, on the net, for the Government to borrow in local currency, more room for growth in private sector credit, and other increased spending by residents from accumulated liquidity.

He said, nevertheless, the Central Bank is reviewing the administrative policies in place for the Investment Currency Market and the access permitted to overseas investment funding through the Bahamas Depository Receipt (BDR) framework.

“In sum, the demand for investment currency, in particular, has accelerated, and the Bank believes that additional refinements are now needed to sustain more retail investor access while moderating potential wholesale outflows within a more defined multi-year framework.

“The Central Bank also continues exploring how BDR activity, which already has a more concentrated retail appeal, could be increased. The Bank expects to consult with the Government on such reforms and other administrative adjustments to the Exchange Control policies before the end of the third quarter of 2023.”

Rolle said there continued to be improvements in credit markets, although most concentrated on declining delinquency rates on outstanding loans. The fraction of private sector loans that were three or more months behind in payments fell to 7.4 percent in June 2023 from nine percent in June last year.

“This further repositioned the delinquency rate below where it was at the pandemic’s start. In the lending space, though, commercial bank credit to the private sector was incrementally expanded during the first half of the year, with lending for commercial purposes boosted. However, there was still no uptrend in consumer loans and mortgages.”

Rolle said that the Central Bank maintains a policy posture toward more growth in private sector credit in a sustainable fashion that does not outpace our comfort level for the external reserves.

He said the financial Bank is therefore exploring how lending institutions can have more flexibility in processing loan applications by varying downpayment requirements, including mortgages, while guided by limits on the debt service ratio and relative real estate valuation compared to the financed amounts.

He said for The Bahamas. These are still the most effective policy levers influencing the amount of credit flowing to the private sector.