The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank's governor yesterday said restrictions imposed on capital outflows have boosted the external reserves by $200m to-date, as he pledged: "Losing control of the peg is not an option."

John Rolle, unveiling the regulator's economic assessment for the 2020 second quarter, argued that the conservation measures implemented during the early stages of the COVID-19 pandemic had already paid off as The Bahamas' foreign currency reserves closed June at around $2bn.

Confirming that a near-$1bn drawdown on those reserves, which provide the critical support to the fixed one:one exchange rate peg with the US dollar, is still anticipated over the 2020 second half, Mr Rolle said the Central Bank's four immediate policy measures had borne fruit.

He disclosed that the National Insurance Board's (NIB) liquidation of its overseas investment holdings, and their repatriation, had brought "in excess of $100m" in foreign currency back to The Bahamas. And the bar on dividend/profit repatriation by the Canadian-owned banks, coupled with the block on foreign portfolio investments by Bahamians, was likely to conserve up to a further $180m.

Mr Rolle added that Bahamas-based commercial banks have also been given "at least $100m of excess space" to obtain foreign currency from alternative sources to the Central Bank, reducing reliance on its foreign currency reserves and its recycling of US dollar government debt issues.

But, despite these initial successes, he warned that the focus of Bahamian monetary and fiscal policy will remain protecting The Bahamas' fixed exchange regime well into 2021 given the absence of replenishing foreign currency inflows from the still-shuttered tourism industry.

Underscoring the threat this poses to Bahamian living standards and economic disruption, Mr Rolle admitted there was "an ongoing urgency to expand other foreign currency earning activity, with foreign direct investments being at the top of this list" in tourism's absence.

Still, satisfied that the Central Bank's action has sufficiently preserved the foreign reserves to-date, the governor said: "What we did was we gave the commercial banks at least $100m extra space in terms of their ability to source foreign exchange through other sources [apart from the Central Bank].

"We would anticipate having felt the full effect of that benefit. Once they have exhausted that, they will return to making purchases from the Central Bank. We placed a hold on portfolio investments abroad by residents, and we would have imposed a pause on commercial banks making repatriations of profits abroad. That is a measure where the benefits are spread over the remainder of the calendar year."

Mr Rolle added that "the full amount" of proceeds created by NIB's liquidation of overseas investment holdings was received during the 2020 second quarter. "I think they would have repatriated the full amount of what we anticipated," he said. "I know the figure was in excess of $100m.

"I would say on the portfolio investment [overseas investments by Bahamians in securities and real estate], on an annual basis were were beginning to approach a level in excess of $60m, so the savings are in the range of $60m-$80m potentially given current levels as the potential impact for the year. In the banking sector we have potentially seen in excess of $100m generally in dividend outflows in any year."

The Central Bank governor revealed in May that the regulator had "put the potential savings from these measures at at least $300m" on a collective basis, and yesterday suggested that some two-thirds of this had already been obtained.

"When one looks at what happened from April to the present, we have to assume that if these outflows occurred.... they could have used up $200m-plus more in foreign reserves during this period," he said.

The Central Bank yesterday confirmed that the external reserves grew by $269.9m during the 2020 first half, aided by these restrictions and reduced private sector foreign currency demand amid the COVID-19 lockdown, to close end-June at around $2bn.

This was lower than the $363.9m growth enjoyed over the same period in 2019, by the total remained equivalent to 7.3 months of The Bahamas' total merchandise imports. Yet while that position appears relatively healthy, the Central Bank has not altered its view that the external reserves will come under increased pressure during the 2020 second half in the absence of offsetting tourism inflows.

"Our projections have not been amended materially," Mr Rolle added. "We still believe the reserves could be drawn down to a level close to $1bn" by year-end 2020 due to the traditional pre-Christmas demand for foreign currency by the private sector.

Maintaining the fixed exchange rate parity with the US dollar will arguably be the Government and Central Bank's overriding economic priority amid the COVID-19 pandemic, given that its loss would further undermine Bahamian purchasing power and living standards and fuel significant inflation.

These concerns were underlined by Mr Rolle, who said: "Monetary and fiscal policies must stay protective of the Bahamian dollar currency peg, ensuring that the external reserves are stabilised or incrementally improved during 2021. There is therefore an ongoing urgency to expand other foreign currency earning activity, with foreign direct investments being at the top of this list."

Asked how long the external reserves could withstand the tourism shutdown before coming under sustained pressure, the Central Bank governor said it was critical to "maintain and improve access to international capital markets" and US dollar financing if increased borrowing became necessary to support spending within the Bahamian economy.

"That allows us to maintain the economy at a certain level," he added. "If not, there will be natural belt tightening measures that economies like The Bahamas must make. Losing control of the peg is not an option for The Bahamas. Adjustments will be made where ever else they need to be made so that we maintain that equilibrium."

Elsewhere, Mr Rolle said: "On a quarterly basis, foreign exchange inflows through the banking system fell by over 50 percent during April through June in comparison to 2019, and were lower by almost 25 percent for the first half of the year.

"On the other hand, private sector purchases of foreign exchange from commercial banks - which signalled domestic demand adjustment - decreased less proportionately by 22 percent during the second quarter, and by about 7 percent for the year to-date.

"This differential meant that, over the last three months of the quarter, the Central Bank switched to being a net supplier of foreign exchange to the banking system, channelling net inflows from the Government's debt operations," Mr Rolle continued.

"Ordinarily, the Central Bank would not supply net foreign exchange to the system until the second half of each year. Nevertheless, with ongoing replenishment, the foreign reserves balances remained relatively stable, fluctuating near the $2 billion level from March through the end of July."