The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar faces “a lot of pressure” to drive economic and fiscal recovery, a Moody’s analyst yesterday questioning whether there was enough tourist demand to fill the net 2,100 room increase at Cable Beach.

Edward Al-Hussainy, the analyst who covers the Bahamas and its sovereign rating, said his “biggest concern” was a lack of visitors to fill the extra room inventory Baha Mar is developing - something that could split the high-end tourist market with Atlantis, and depress room rates across the entire resort industry.

Describing the Bahamian tourism/hotel industry’s recovery from the 2009-2010 recession as “very mixed”, Mr Al-Hussainy told Tribune Business there was still “a fair distance to go” before the sector returned to full health.

Noting that economic growth was key to driving recovery in the Government’s fiscal position, the Moody’s analyst said the slow recovery to-date had largely been driven by incoming foreign direct investment (FDI) inflows.

The Bahamas attracted $960 million and $970 million in FDI inflows in 2010 and 2011, respectively, although this tapered off to $595 million in 2012.

Mr Al-Hussainy told Tribune Business such FDI levels should have driven “much higher growth rates”, and suggested this exposed “some real fundamental weaknesses” in the economy’s structure.

He added that domestic demand, which traditionally accounts for two-thirds of Bahamian economic activity, was “very weak”, and would not be helped by impediments to commercial bank lending.

Speaking after the Government laid out its 2013-2014 Budget plans, Mr Al-Hussainy said “a lot depends on the continued growth” of the Bahamian economy when it comes to the Christie administration hitting its debt and deficit reduction targets.

“That’s a big part of the equation, and the recovery in demand, that’s been very weak to date,” he said. “A lot of the growth has been driven by investment coming in, big ticket projects like Baha Mar and construction activity.

“The recovery in the tourism sector has been very mixed. We’ve seen a couple of bright spots - group business has done very well - but overall numbers are still weak relative to where they were before the crisis, so there is a fair distance to go before the tourism sector is back to health.

“That’s the biggest concern. Baha Mar is coming along, you will have all this extra room capacity, but are you going to have the demand to fill the rooms?”

Such concerns have been aired frequently before, particularly by top Atlantis executives, who fear Baha Mar may ‘split’ the high-end market with Paradise Island and leave both resorts worse off.

To counter this, both resort properties and the Government have undertaken numerous initiatives to expand the Bahamas’ visitor source market, and ensure there is extra airlift capacity totalling some 400,000 seats into the destination.

Linking growth in the real economy directly to the Government’s prospects of effecting a fiscal turnaround, Mr Al-Hussainy said: “If you’re not growing it puts pressure on the Budget, and puts pressure on the debt metrics.”

In theory, a recovery in jobs and incomes should manifest itself in improved government revenues, but the Moody’s analyst said the Bahamas - given its relatively strong FDI inflows over the past three years - should have been doing better.

Mr Al-Hussainy said that “given the level of investment, we’d be assuming a much higher growth rate. That just speaks to some real fundamental weaknesses in the domestic economy”.

He added that the high level of distressed banking sector assets was a concern, describing non-performing loans - at more than 14 per cent of total credit - as “extremely high”.

“It’s going to take a really long time for credit to become available again,” Mr Al-Hussainy said. “It’s tough to borrow for a mortgage, and almost impossible to borrow if you are a small and medium-sized business.

“That again is something that’s a bit of a drag on the economy. We’re not concerned about the banks going under; they’re not going to be putting out credit for the foreseeable future, two-years.”

The Government is projecting that capital expenditure will be further reduced in 2013-2014, down at $295 million from a projected $350 million (down again from the 2012-2013 Budget’s initial $400 million forecast).

While this was good from a fiscal perspective, given the cost overruns on projects such as the New Providence Road Improvement Project, Mr Al-Hussainy said “the flip side” was that there would be reduced employment for Bahamians on public sector infrastructure projects.

“That’s going to leave a bit of a hole,” he told Tribune Business. “It puts a lot of pressure on Baha Mar to deliver on growth when it comes on stream next year.

“A lot of pieces have to fall into place for that to be successful. It’s coming together slowly.”