The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A $265 million decline in year-over-year net foreign investment (FDI) into the Bahamas is not as bad as it seems, the Central Bank’s governor yesterday saying that stripping out the BTC privatisation proceeds produced a more “modest” 7.6 per cent fall.

Comparing foreign investment inflows into the Bahamas for the first nine months of 2012 to the same period in the prior year, Wendy Craigg said that at first sight it appeared as if there had been a 28.3 per cent decline, from $937.4 million in 2011 to $672.3 million last year.

However, removing the $210 million purchase price paid by Cable & Wireless Communications for its 51 per cent Bahamas Telecommunications Company (BTC) stake produced just a $55 million year-over-year decline for the January-September 2012 period.

“Over the January to September period, net foreign investment, which includes both FDI or equity-based inflows and loan-based financing, totalled an estimated $672.3 million, compared to $937.4 million in the same period of 2011,” Mrs Craigg told Tribune Business.

“In analysing these numbers, it is important to note that the figures for 2011 include the receipt of approximately $210 million from Government’s divestment of its controlling interest in BTC. Hence, when this one-off transaction is extracted, the results for 2012 so far are just modestly lower than in 2011.”

Elsewhere, the Central Bank governor said that while the Bahamas’ external reserve levels currently stood at $796 million, within the target range of 90-100 per cent of base money, net purchases of foreign currency from Bahamian commercial banks had been “moderate”.

This, Mrs Craigg explained, was a good indication of the level of foreign currency inflows to the Bahamas presently.

The importance of the Central Bank making “adequate” net foreign currency purchases from the banks lies in the need to constantly top-up its external reserve stock, particularly given the demand for oil imports which are subject to major price volatility.

Mrs Craigg said the Bahamas’ total oil import bill, all of which has to be paid for in foreign currency, can hit $1 billion annually, 40 per cent of which is accounted for by the Bahamas Electricity Corporation (BEC).

“The country’s external reserves remain at a healthy level, currently standing at some $796 million, which is within the Bank’s target range of 90 per cent to 100 per cent of base money,” the Governor said.

She added that various factors build-up and deplete the external reserves, one being the impact tourism and FDI related-construction activity have on the activity.

When these sectors perform well, the Central Bank gains “residual receipts” from the banking system, which help boost the external reserves. And, if foreign currency inflows match or exceed the Bahamian public’s demand, there is less drawdown on the existing stock of external reserves.

“The Central Bank’s net purchases from the commercial banks provide us with a good indication of the inflows of foreign currency into the country and, in recent periods, these have been moderate,” Mrs Craigg revealed.

“One, then, has to consider these net purchases against any direct demands on the external reserve pool, dominant among which are oil payments. All of our energy needs are filled through imports, which can amount to almost $1 billion, with nearly 40 per cent of this being accounted for by the public electricity company.

“Therefore, we need to have adequate net purchases of foreign currency from the banks to alleviate demands on the pool.” The “moderate” bank purchases, though, have been offset by anaemic private sector demand - businesses and consumers - for credit.

Mrs Craigg added that there was “a relatively good probability” that the Bahamas will meet, even exceed, a 2 per cent GDP growth target for 2013.

She disclosed, though, that due to room rate discounting by Bahamian hotels, the industry’s earnings did “not keep pace” with visitor arrivals in 2012.

“There is a relatively good probability that we will meet, and perhaps even exceed, the 2 per cent target this year,” the Central Bank governor said of economic growth.

“It is important to note that the economy has been recovering steadily since the 2008-2009 recession, and real GDP expanded at a slightly faster rate in 2011 than in 2010, which bodes well for 2012, a year where we saw relatively stable gains in tourism arrivals, led by the ongoing recovery in the high value-added air segment of the market.

“However, as was noted in the [December] report, because of the level of discounting, the growth in hotel earnings did not appear to keep pace with the expansion in visitor arrivals.

“These trends are expected to continue this year, provided of course that our major source markets - particularly the US - continue to recover.

“We also had a few significant large-scale projects which continued in 2012, the largest, of course, being the Baha Mar development, which focused on the “core phase” of the project last year and is expected to move into high gear this year.”

But, to truly reduce the still-high 14 per cent unemployment rate, Mrs Craigg said Bahamian economic recovery needed to become broad-based, expanding beyond tourism and FDI-related activity.

“What is important is that the economy needs to continue to grow, and the expansion also needs to broaden to include more sectors rather than just the main tourism and foreign investment sectors,” the Governor added.

“Once this happens, we can expect to see a sustained reduction in the unemployment rate over time, and, given the dependence of Government on international trade taxes for almost half of its revenue, this should translate into increased tax revenues, as consumers begin to spend more in the economy.”