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External Reserves 'Run-Off' In 2012 No Major Concern

By NEIL HARTNELL

Tribune Business Editor

WHILE the Central Bank of the Bahamas is expecting "some run-off" in the nation's external reserves, its governor yesterday told Tribune Business any drop would not be significant due to continuing "very mild" demand for credit.

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Wendy Craigg

Wendy Craigg said the foreign currency reserve levels were in the process of "normalising" after peaking at a $1.122 billion historic high in April 2011, due to a number of extraordinary one-off capital inflows that occurred last year.

Moving to forestall any concerns that the external reserve position had "deteriorated", given that the end-February 2012 position of $903.61 million was already more than $200 million below the peak achieved 10 months ago, Mrs Craigg said it was "certainly expected" to remain above the benchmarks set by the likes of the International Monetary Fund (IMF).

Unable to give a figure for how much the external reserves were expected to decline by in 2012, Mrs Craigg reiterated the assessment made by the Central Bank of the Bahamas in its monthly economic developments report for February, saying: "There will be some run-off in the absence of extraordinary inflows."

The Bahamas' external reserves peaked in April 2011 due to the $206 million, plus $7 million in Stamp Duty, that the Government received from Cable & Wireless Communications (CWC) for the 51 per cent majority stake in the Bahamas Telecommunications Company (BTC).

Apart from that, the Central Bank governor noted that "government had a number of transactions that paid in some very high Stamp Duties". Those deals would have been the BORCO sale to Buckeye Partners and Baha Mar, with the former generating around $80 million and the two, together, raising some $120 million.

Since the April 2011 peak, the external reserves had declined by 19.5 per cent to end-February's level. The $903.61 million in foreign currency held then is also down some 7.3 per cent year-over-year against end-February 2011's $974.82 million.

The Central Bank's data, though, showed that the external reserves actually increased during February 2012, albeit by a moderated $16.05 million compared to the $25.55 million rise seen in the same month last year. Year-to-date, they have grown by $11.62 million, although this is dwarfed by the $113.77 million growth enjoyed during the first two months of 2011.

Acknowledging that some might harbour concerns over the external reserves decline, Mrs Craigg moved to reassure. "When persons see that we were at $1 billion, and they see a significant run-off, there is perhaps the view that the situation has deteriorated, but we certainly expect to be above the international thresholds that have been set. It's normalising."

The IMF, for instance, has set the benchmark that nations should have enough foreign currency reserves to purchase three months' worth of imports.

In the Bahamas' case, foreign reserve levels are a sign of the economy's health/performance, and its ability to attract capital inflows and foreign investment. And, with its fixed exchange regime and propensity to import pretty much all it consumes, maintaining healthy foreign currency reserves is vital, and a key component of the one:one peg with the US dollar.

"We would always like to be in reserve building mode," Mrs Craigg conceded, "and when we see growth in reserves we know the economy is performing. Particularly when it comes from real sector activities."

And, while forecasting a "run-off" in external reserves levels in 2012, the Central Bank governor said this would be moderated, even countered, by low levels of import and credit demand among the private sector and Bahamian consumers.

Noting the continued anemic state of the Bahamian economy, Mrs Craigg said: "That will certainly soften the demand for reserves, or the burden on reserves.

"Any expansion in domestic credit is driven primarily by the need for imports, and that requires reserves. With credit [demand] very mild, we don't anticipate any significant claims on the external reserves position."

In its February assessment, the Central Bank noted: "Monetary sector trends are expected to feature a continuation of robust liquidity levels in the near term, amid the weakness in private sector demand. These outcomes should support the external reserves position."

When it came to the overall health of the Bahamian economy, the Central Bank said it expected the pace of recovery to be "sustained" in 2012, especially as US indicators now looked more favourable.

The tourism sector, it added, was set to benefit from this and improvement in the group segment, with the construction sector set to benefit from continuing foreign direct investment projects, such as Baha Mar and Albany, and public sector infrastructure programmes.

On the flip side, the Central Bank warned: "The ongoing volatility in fuel prices is likely to have some upside effects on domestic inflation, and the existing slack in employment conditions is anticipated to persist until the recovery broadens."

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