The Tribune

By LARRY GIBSON HAPPY New Year, Bahamas! I wish to open my first column of the year by wishing my readers good health, and a safe and successful 2012. I thought it would be appropriate to commence with a review of 2011 from a global perspective. Throughout the year, I will examine economic events directly affecting us here at home. MAJOR EVENTS Last year proved to be a tale of contradictions in many respects. For the most part, the global geo-political landscape was shaped by three principle events, namely natural disasters, financial crises and the Arab Spring. On the natural disaster front, the first major event was the devastating earthquake that hit New Zealand. This was quickly followed by an earthquake and tsunami in Japan, which affected international trade and brought about a 'rethink' on the widespread use of nuclear power in densely populated urban areas. We later had massive flooding in Australia and Thailand and, finally, closer to home, in the US there was a multitude of unusual weather occurrences, such as floods, tornados, hurricanes and unexpected severe October snowstorms. The global financial crisis, which is totally man-made and has its genesis in basic human greed, continues to play out with the European Sovereign Debt Crisis (ESDC) continuing to weigh down the world's financial system. The ESDC is still far from resolved, but the European Union (EU) governments reached some agreement last year, which helped stabilise world financial markets...at least in the short term. Let us hope that all EU parties live up to their commitments, otherwise the economies of Greece, Portugal, Spain, Italy and others remain at risk. The most intriguing event of 2011, for me, was the unfolding of the 'Arab Spring', where a massive peoples movement evolved throughout the Arab world. Everyday citizens took to the streets to demand the removal of corrupt leaders, who ruled by suppressing democracy and the development of democratic institutions. These protests have led to change so far in Tunisia, Egypt and Libya, and an ongoing and fluid situation in Syria. There have been protests in other countries which, for now, have been stifled either by brute force or promises of reform. In those places, citizens risked their lives for basic freedoms that Bahamians routinely take for granted, such as the right to vote in free and fair elections. MARKET BEHAVIOUR These events all happened against a background where global economies were struggling with anemic growth, high levels of unemployment (coupled with slow to non-existent job growth) and unsustainable debt levels. Needless to say, this all led to great uncertainty and instability in global capital markets. Market volatility was unprecedented, and many times during the year, markets would seemingly tank on one set of news...only to rally strongly the next week on what appeared to be essentially the same news expressed a little differently. Most major global equity markets posted double digit losses in 2011...the notable exception being the US. The US performed relatively better than the rest of the world because it has historically been the beneficiary of 'flight-to-safety' concerns. Whenever there is global uncertainty, investors seek the safety of the US dollar. It is by far the most liquid currency in the world. So as concerns about the ESDC, fears of inflation in emerging market economies and unrest in the Arab world (translation, potential oil disruptions) all persisted, global investors concluded it was best to park their money in US dollar assets for the time being. During 2011, core inflation (excluding food and energy) was not a proble, and currencies were relatively stable year-over-year. Against the US dollar, the euro lost 3.2 per cent, while the UK pound was flat and the Japanese yen and Chinese yuan both gained about 5 per cent. US ECONOMIC OUTLOOK 2012 At the December 2011 meeting of the Federal Reserve's Federal Open Market Committee (FOMC), the minutes reported: "The pace of US economic activity should pick up gradually in 2012 and 2013, while the unemployment rate will continue to hover at a high level". The US economy will gain momentum this year and next, boosted by the "accommodative monetary policy, further increases in credit availability, and improvements in consumer and business sentiment". The minutes further showed that: * The Fed predicted inflation would be subdued in 2012 and 2013. * Employment opportunities at state and local government level declined further during 2011, and both long-term unemployment and the share of workers employed part-time for economic reasons remained high. * Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties, and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. It should be noted that 2012 is an election year in the US, and given the performance of the US Congress last year, massive political gridlock would be a reasonable expectation. ELECTIONS 2012 As with the US and more than 50 other countries around the world, 2012 is also an election year for the Bahamas. On Saturday past, CNN reported that its most recent poll showed 57 per cent of Americans felt the economy was the most important issue, followed by 32 per cent who felt the large deficits were the most important issue. The economy, deficits and crime will probably be the top three issues in the Bahamas. Within the next few weeks, the Bahamas will be in full election mode, and the machinery of the major political parties will be engaged in earnest. Once that happens, a lot of short-term spending and activity will occur to give the impression that the economy is perhaps not as bad as it really is, or as bad as some say it is. This false period will take us through the general election, which most now see as occurring immediately after Easter. However, come the June Budget, we will get a good dose of reality, and the ability to get a true assessment of where we really stand. Yes, while it is true that government borrowing over the past five years, in response to the global economic meltdown, has gone 'through the roof' and remains at unsustainable levels, there is tangible evidence of substantial public infrastructure investment such as: the almost-completed road project, new stadium (and attendant publicly-funded roadworks), new government buildings, new port facilities, new facilities at the College of the Bahamas and the new (and still evolving) airport. However the litmus test, in light of the added debt burden, will be an assessment of the economic impact of such investment. What were the implications for job creation and the economy as a whole, now and into the future? At the end of the day, it is all about reviving the Bahamian economy for long-term, sustainable growth. So, until then, brace yourself for much rhetoric, misinformation and rank distortion of facts. Some of the rhetoric will have merit, but there will be much that is baseless. However, this should come as no surprise...as such is the nature of politics. Until next week... * NB: Larry R. Gibson, a Chartered Financial Analyst, is vice-president - pensions, Colonial Pensions Services (Bahamas), a wholly-owned subsidiary of Colonial Group International, which owns Atlantic Medical Insurance and is a major shareholder of Security & General Insurance Company in the Bahamas. The views expressed are those of the author and do not necessarily represent those of Colonial Group International or any of its subsidiary and/or affiliated companies. Please direct any questions or comments to Larry.Gibson@atlantichouse.com.bs