The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Foreign direct investment (FDI) will finance “close to” 50 per cent of the Bahamas’ current account deficit in the near-term, a Wall Street rating agency has projected, down from historical levels.

Standard & Poor’s (S&P), in its full country analysis of the Bahamas, said this nation’s current account deficit (CAD) hit 17 per cent in 2012 and is likely to stay above the historical 10 per cent average for the next three years due to higher import levels associated with Baha Mar and other investment projects.

It is projected to decline slowly, with the trade deficit - a major CAD component - having grown from 27 per cent in 2011 to 29 per cent last year.

“Traditionally, FDI has financed a large part of the CAD,” S&P said. “From 2005-2009, FDI financed about 70 per cent of the CAD.

“In 2011, about 60 per cent of net FDI S$667 million covered the CAD of US$1.09 billion. In 2012, net FDI dropped to only $360 million, covering only 25 per cent.”

The Bahamas has traditionally relied on FDI and the capital account to cover its deficits on the current account (goods) side. However, the global recession reduced the level of FDI inflows available to do this.

Still, S&P added: “Taking into account ‘other’ investments deemed private sector project-finance borrowing, the ratio (CAD coverage) increases to more than 50 per cent.

“In our forecast, FDI will not fully finance the deficit, and given the recent drop, we project it will cover closer to one-half of the deficit.

“FDI projects that appear to have staying power are those that serve high-end customers or a niche group of tourists, as well as those that will provide residential tourism products, besides the development of Baha Mar.”

Elsewhere, S&P said the tourism industry, the largest private sector employer in the Bahamas, had “not fully recovered” from the effects of the 2008-2009 global recession.

“The tourism sector was having difficulties even before the full effects of the international economic crisis took hold,” it added.

“Reconstruction delays at resorts following hurricane damage resulted in the unavailability of rooms from 2005-2007, and the requirement (effective in 2006) for US citizens to have a passport to travel to the Bahamas.

“The global recession hit the sector hard. Despite a rebound in 2010 and further growth in 2011 and 2012, it has still not fully recovered, remains dependent on promotions, and has weakened in 2013.”

Noting the relatively weak tourism performance for the 2013 first half, with stopover arrivals down 6 per cent, and occupancies and hotel room revenues also off, S&P added: “The Bahamas is a relatively high-cost destination subject to competition from cheaper destinations.

“Many hotels, especially small ones, struggle financially. Increased airfares have limited the ability of hotels to raise prices. As it is, air carriers still rely on airfare promotions, and hotels add other promotions. Since the worst of the recession, the mode has been one of maintaining - versus increasing - employment.”

S&P added that the Bahamas had also “underperformed” economies with similar levels of per capita income.

It said: “A still comparatively subdued recovery in the US following the 2008 recession, and a slow decline in unemployment, weigh on tourism.

“Real GDP in the Bahamas grew an average 1.5 per cent during 2010-2012, only 0.3 per cent in per capita terms.

]”We expect GDP to expand about 1.7 per cent in 2013 and pick up more in 2014 and 2015 as the US economy grows more quickly, and as the Baha Mar resort is scheduled to open at the end 2014. We forecast growth of 2.5 per cent in 2015, though a strong opening at Baha Mar could provide a larger boost to growth.”