The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) last night said there were “no immediate threats” to the stability of the Bahamas’ financial services industry, while describing the Government’s fiscal position as “the key policy priority”.

In a statement that will cause little surprise among the Bahamian private sector and Ministry of Finance officials, the Fund also gave this nation - and especially its financial services industry - a little boost by indicating it had fared reasonably well in the recent Financial Sector Stability Assessment.

Noting that “there are no immediate threats to financial stability”, the IMF statement said stress tests had shown Bahamian commercial banks “can withstand severe shocks to solvency and liquidity”.

That counts as a key endorsement for the banking industry, particularly in an environment where $1.25 billion worth of commercial bank loans - or $1 out of every $5 lent - was in arrears at year-end 2012.

Still, the IMF said it had encouraged the Government and Central Bank of the Bahamas to “strengthen the monitoring of credit risk in light of high non-performing loan ratios”.

While acknowledging that “financial system oversight has strengthened”, the IMF urged the Bahamas to publish more information on the offshore financial sector and continue “improvements in the crisis management and financial safety net framework”.

The IMF statement will cause no shocks, given that it largely flagged up issues that were already known, with “fiscal and external imbalances widening”.

While acknowledging the need for the Bahamas to balance economic growth and job creation with fiscal reforms and consolidation, the Washington-based Fund warned the Government not to delay the latter.

“Directors emphasised that the key policy priority is to strengthen public finances,” the IMF said.

“They acknowledged the need to balance fiscal consolidation with efforts to support growth and employment. At the same time, they noted that delayed fiscal consolidation could pose risks to long-term debt and external sustainability.

“Directors, therefore, encouraged the authorities [the Bahamas government] to embark on a credible medium-term strategy to strengthen revenue mobilisation and improve tax administration, rationalise expenditure, and place public enterprises on a sound financial footing.”

A significant improvement is, however, unlikely in the short to medium-term. Following total deficits equivalent to 5.9 per cent of GDP for both 2012 and 2013, the gap is projected to remain elevated - at 5.3 per cent of GDP - in the 2013-2014 Budget year.

In turn, the Government’s primary balance is also projected to remain above traditional norms, dropping slightly to 2.9 per cent of GDP in 2013-2014 following two years when it was at 3.4 per cent and 3.6 per cent.

The Government’s direct debt-to-GDP ratio is set to increase in line with this, striking 53.6 per cent this year and 56.9 per cent in 2014.

The IMF projected a slight increase in economic growth this year, with GDP expansion forecast to increase to 2.7 per cent from 2.5 per cent last year. The Bahamas’ growth rate, though, is projected to slip slightly again in 2014, falling back to 2.5 per cent.

Noting that these figures exceeded the Bahamas’ long-term growth trend rate of 2 per cent, the IMF said new tourism/construction related investments and trade-related liberalisation could drive economic growth higher than projections.

“Inflation is likely to stay low - projected at over 2 per cent (year-on-year) at end-2012 - but reducing the high level of unemployment [currently 14 per cent nationwide] will remain a challenge,” the IMF said.

“Pressures are projected to continue from a large external current account deficit and a rising government fiscal deficit. The risks to the outlook, however, are tilted to the downside, given uncertainty about prospects for the US recovery and global food and fuel prices and, on the domestic front, about the pace of fiscal consolidation and implementation of structural reforms......

“Directors agreed that the main challenge is to strengthen the fiscal and external positions, rebuild macroeconomic buffers, and implement policies to enhance medium-term growth.”

Going forward, the IMF “emphasised the importance of measures to improve the business environment, develop infrastructure, enhance human capital, and promote economic diversification”.

The surprise in the IMF report may be that it suggested the Bahamas enjoyed “strong tourism and construction activity” in 2012, factors they attributed as driving GDP growth.