Remarks by Governor Rolle on the Monthly Economic and Financial Developments Report (MEFD), March 2024

Remarks by Governor Rolle on the Monthly Economic and Financial Developments Report (MEFD), March 2024

Published: Monday April 29th, 2024

Remarks by the Governor

​​​29April2024

Indications are that the Bahamian economy expanded at a more moderated pace in the first quarter of 2024, when compared tothe same period in2023. This signalled completion of the recoveries from both COVID19 and Hurricane Dorian. The performance follows the pattern of moderated but still healthy gainsin tourism; and sustained foreign investment inflows in supportofconstruction activity. These trendsare supporting continued employment gainsand revenue-driven reduction in the government's deficit. The economy is also experiencing more slowedinflation; and gradually improving domestic credit conditions. Growth isisprojectedto continue in the medium-term,butmore in line with potentialthat is slightly under 2 percent per annum, although downside risks remain, from a combination of external factors that could impede tourism, leavethe cost of public debt elevated and keep the funding cost of private foreign investments more extended.

Turning to tourism, the indications are that earnings growth temperedduring the first quarter. This was as expected, as visitor arrivalshad regained and surpassed pre-pandemic levels. Although with hotel room capacitywasmore constrainingin the stopoversector, healthy average pricingincreases was wasstill evident for accommodations, helping to supportthe inflowboost. Over the quarterthe projected vacation rentalsreturns alsoexpanded, due to improved pricing and increased sales volumesthat was almost instep withincreased roomslistings.Meanwhile, capacity limits have had less hinderanceon cruise visitor growth, although the pace of gains was, as expected, also more tempered. In the medium-term outlook, capacity boost is expected benefit both cruise and stopover visitor volumes.

In the foreign exchange markets, the evidence of moderation was also evident. Over the first quarter of the year, commercial banks' total foreign currency purchases from the private sector roseby 5.4% year-over-year, slowing fromthe 9.2% pace of expansion estimated during the first quarter of 2023. In the meantime, private sector foreign currency demand contracted slightly, mainly due to a lower volume of portfolio investments and decreased payments for goods imports. On net basis, there was consequently a larger seasonal boost to the external reserves through the private sector than in 2023.

The public sector's debt operations were also a seasonal net contributor to the external reserves in first quarter of 2024, as compared to net drawdown on the external balances in 2023. This was because some foreign currency borrowing over the first quarter, help reduce short-term domestic debt that was accumulated in the first half of thefiscalyear.

Over the first quarter of 2024,the external reserves accumulated at a significantly stronger pace, of just over $0.5 billion, compared to less than $100 million in the same period in 2023. Through the end of April, this seasonal buildupwas further extended, leaving balances near $2.9 billion. The Central Bank, stillexpects that the reserves will contract over the remainder of the year, to be less than they were at the end of 2023. This would absorbaccelerated growthin private sector credit, whichthe Central Bank is encouraging, while stillleavingthe external balancesatcomfortable levelsto support the Bahamian dollar fixed exchange rate.

It is the restored, heathy state of foreign exchange flows, and comfortable outlook for the external reserves that continuesto frame very gradual exchange control liberalisation policies. In April, this included this included a further delegation of authority to commercial banks to approveawider rangeof transactions involving foreigncurrency purchasesby the public, without needingthe prior approval of the Central Bank.One of the importantcategoriesis investment currency to fundportfolio transactionsoutside The Bahamas. Commercial banks will begin approving these transactions in June, once the reporting framework is establishedto track usage. This means that once Bahamians have established investment accounts abroad, either throughlocal or international financial institutions, they will be able to fund these accounts up to $100,000 annually, without having to obtain direct approvalsfrom the Central Bank. In those instances, where the individual demand exceeds this limit, the applications willhave to be madedirectly to the Central Bank. Suchapprovals could be subject to phased access to investment currency.

Turning to credit, conditions are improving incrementally, with the Central Bank expecting more strengthening this year. The latest lending conditions survey for the second half of 2023, documents that banks were both receiving and approving a greater volume of credit applications. Howeverthe gains were only noticed for consumer credit and commercial loans, with a comparative falloff in mortgage applications comparedtothe same period in 2023. So farin 2024, the private sector lending expansion was largely concentrated in commercial credit. However, bothconsumer loans and mortgages were leaning slightly towards growth overall, as opposed to both being in a contracted state at this point last year. In the meantime, the average delinquency rate on loansthat were 3 months or more in arrears continued to decline, to 6.3% in March-more than a percentage point lower than one year ago.

The Central Bank believes that it is important for the delinquency rate to continue to fall, and for the credit bureau to be relied uponto help improve the quality of future lending. Our near-term objective is see all important non-bank providers of credit join the credit bureau, both reporting data and making use of the information aggregated by the bureau. This would include all of the public utilities providers; and lenderslicensed by other Bahamian regulators.

In the meantime, the government will soon bring finalised draft legislation for the Collateral Assets Registry to Parliament for enactment. This will clear the way to implement the registry, under the ambit of the Registrar GeneralDepartment, alongside other complementary reformsbeing actively targetedfor the Registrar.

Turning to the outlook, the economy is expectedto continue to expand in 2024,but more eased, in line with its true potential as the post-pandemic stage of recovery is over. Nevertheless, it also speaks to robust, fully recovered foreign exchange markets, and therefore continued healthy evolution of the external reserves.The outlook will also generate continued employment creation, especially in tourism and in construction related foreign investments; and further fiscal consolidation from uplift to G\government revenues.The Bank's monetary policy posture will continue to be accommodative of faster credit expansion, but with caution remaining to the downside economicrisks.

As to the lingering risks to the outlook, the most concentrated are around the ongoing conflicts in the Middle East and Ukraine, which if they constrain international trade and escalate the cost of oil could, in turn, stalltourism demand. Tourism performance could also be hamperedifcentral bankinterest rates are forced to be kept high, longer than expected to bring inflation further under control. The higher interest rate environment,would also continue to impose more cost on the public sector's external debt and add to the cost of financing for private foreign investments.

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