The Tribune

By NEIL HARTNELL

Tribune Business Editor

FOREIGN direct investment (FDI) inflows into the Bahamas increased by "about one-third" in 2011 to hit $1.533 billion, a performance that the Central Bank of the Bahamas' governor yesterday said "significantly exceeds" that of the Caribbean and some larger Latin American economies.

Responding to Tribune Business's questions, Wendy Craigg acknowledged that the year-over-year increase in FDI inflows was largely attributable to Baha Mar's $2.6 billion Cable Beach redevelopment, while adding that the Bahamian economy's efforts to grow its way out of recession remained "sluggish".

A report issued last week by the United Nations' (UN) Economic Commission for Latin America and the Caribbean (ECLAC) revealed that FDI inflows into the Bahamas had increased by 45 per cent year-over-year for the first nine months of 2011, and Mrs Craigg confirmed that this data was provided by the Central Bank.

And she told Tribune Business: "For 2011, total foreign investments amounted to an estimated $1.533 billion, which is about one-third higher than in 2010, and predominantly attributed to the Baha Mar project.

"While we do not have comparable annual data for the countries included in ECLAC's survey, the Bahamas' partial data significantly exceeds that of other Caribbean economies and even a few much larger South and Central American countries."

She added that "apart from equity investments and property purchases, the two mainstream components of foreign direct investments, the data also includes loan financing, which is a major component of foreign project inflows for the Bahamas".

Elsewhere, Mrs Craigg said it was unlikely that there would be a significant reduction in the Bahamian commercial banking industry's $1.192 billion loan arrears, accounting for 19 per cent of total credit outstanding, within the next 18-24 months despite the situation having "stabilised".

Despite the $15.7 million or 1.3 per cent reduction in total loan arrears during the 2012 first quarter, the Central Bank governor said banks' credit quality indicators traditionally improved during the first part of the year in line with the peak tourism season, and several consistent monthly declines were needed before a sustained trend of improvement could be confirmed.

"I think it is reasonable to expect that there will not be any appreciable scaling back of loan arrears in the near term - perhaps over the next 18-24 months," Mrs Craigg told Tribune Business.

"Progress in dealing with this situation will not materialise until the financial situation of the borrowers improves - which, for many of them who have lost their jobs, means having new job opportunities. When the economic recovery underway broadens to provide these opportunities, then the outcome will be more favourable."

And she added: "Banks' asset quality indicators typically follow a seasonal trend, improving during the first half of the year, in line with the period of relatively more buoyant activity in the tourism sector, and then weakening in the latter part of the year as the rate of economic activity tends to subside.

"Consequently, we will need to observe several more months of declines in these indicators before we can definitively say that a sustained improvement is underway. The data, however, does positively suggest that loan arrears have stabilised, compared with the surge experienced in 2008-2009."

Responding to the net $96.7 million sale of foreign currency to the public sector during the 2012 first quarter, a development driven by fuel payments, Mrs Craigg said that oil-related imports spiked at just 24 per cent of foreign currency outflows in 2008 when prices reached $142 per barrel.

"Payments for fuel imports accounted for a relatively stable 17 per cent of current outflows over the last three years, and the extent to which there are increases in oil prices means that these payments would rise and would claim a higher proportion of external reserves," Mrs Craigg told Tribune Business.

"We observed that outcome in 2008, when global oil prices spiked at some $142 per barrel and caused oil imports to absorb a higher 24 per cent of current payments. However, imported volumes also fell, as there was some behaviour adjustment by consumers and businesses, and the economy entered into a contraction phase."

Despite the inflationary threat posed by volatile global oil prices, the Central Bank governor said she did not anticipate any "heightening" of this risk in 2012.

"Global oil prices, because of their volatility, are always a wildcard in the economic outlook," she acknowledged.

"In recent days, we have seen global oil prices decline, on balance, amid the weakness in economic activity in Europe and elsewhere. Should this continue, it would assist in containing the rate of increase in the domestic price level.

"While inflation has firmed in the Bahamas over the past year, this is coming from a very low base, and, on balance, we do not anticipate any heightening in the inflationary risk to economic activity during this year."

Credit demand, from Bahamian businesses and consumers, remains anemic, though, with private sector credit contracting by $3.2 million in March and $12.9 million for the full 2012 first quarter.

"Private sector consumption is typically the largest component of a country's GDP, and the ongoing weakness in domestic private sector credit means that the growth momentum, although improving, remains sluggish," Mrs Craigg told Tribune Business.

"Again, spending is constrained by the challenging employment conditions and high consumer indebtedness. We do not anticipate seeing a significant change in this picture until economic growth broadens and unemployment comes down. Both of these outcomes would help to bring about a further improvement in the private sector debt profile, and a strengthening in the sector's contribution to output."

And she added: "Although we continue to observe weakness in consumer borrowing, the data suggests some bottoming out of the situation. In fact, the contraction is not as severe as it was a year ago."