The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government and Central Bank are “sceptical” that further interest rate cuts will boost commercial bank lending, with private consumption by Bahamians having “declined for the fifth consecutive year”.

The International Monetary Fund (IMF), in its Article IV report on the Bahamas, again showed just how negative an impact the proposed 15 per cent Value-Added Tax (VAT) could have on the Bahamian economy.

Though it not draw the link, the IMF report said 70 per cent of Bahamian economic activity was driven by private consumption. And with VAT to be paid by the end consumer, the new tax may well spark a further retrenchment by a Bahamian consumer already deleveraging.

“Private consumption growth is expected to be close to zero through 2014, as the ongoing fiscal consolidation and private deleveraging take a toll,” the IMF warned.

“Private sector credit has stalled since 2009 as banks tightened lending standards and debtors deleveraged. In the face of declining profit margins, banks have increased their interest rate spreads, largely through cutting deposit rates.”

The IMF added that growth in mortgage lending was “likely to be limited” moving forward, with “residential investment” down by one-third in nominal terms over the period 2008-2012.

Anticipating that Bahamian consumers will continue to reduce their debt levels and ratios, rather than take on any new borrowings, the Fund added: “Given sizable excess liquidity already held by banks, the authorities were sceptical that a further [discount rate] cut would increase lending activity.”

And, while the proposed Bahamas Credit Bureau was seen as improving transparency when it comes to lending and borrower creditworthiness, commercial banks were “worried that knowledge of the true scope of domestic indebtedness may weaken incentives to make credit more readily available and frustrate its growth”.

While banks were more willing to ‘write-off’ unsecured consumer debt, the IMF said they were having to be “flexible” when dealing with non-performing mortgages, which account for 58 per cent of all non-performing loans due to “continuing softness in the real estate market”.

“Non-performing loans remain elevated (14 per cent of total bank lending), although they appear to have peaked and are provisioned at over 50 per cent,” the IMF said.

“While banks have aggressively written off nonperforming consumer borrowing, in light of weak real estate and labour markets, many saw little benefit from aggressively addressing non- performing mortgages - which now account for the bulk of non-performing loans.

“Most viewed their case-by-case approach to handling restructuring as sufficient, acknowledging that this would lengthen the process, but seeing benefit in not flooding the market with foreclosures. The authorities [Government and Central Bank] viewed the legal framework for a case-by-case approach (including the incentives) as adequate, and thus supported the case-by-case handling of the litigious mortgages.

“However, they agreed with staff [IMF] that it would be desirable to develop more reliable house price indices to promote a more liquid and transparent real estate market, and thus help refine collateral assessments and provisioning.”

Elsewhere, the IMF identified many of the usual suspects, when it came to structural issues holding back Bahamian economic growth.

“The Bahamas faces many challenges in boosting its growth potential,” the Fund added. “First and foremost, the country must attract sufficient tourist demand to fill the large impending increase in supply.

“Second, labour market rigidities constrain the potential supply of labour in the medium-term. Persistently high unemployment rates suggest the presence of wage rigidities, while business surveys cite a lack of skilled labour as an important constraint to growth.

“Third, significant impediments to the growth of small and medium enterprises (SMEs) include limited access to bank loans; training and business development services; a complex system of land administration that raises business transaction costs; and weak trade-logistics mechanisms and Customs procedures that constrain SME access to external markets.”

Summing up the consequences of all this, the IMF said: “As a result, SMEs are concentrated in low-productivity services in less technology and knowledge-intensive areas.” This is critical in the Bahamian context, given that 90 per cent of all registered businesses employ less than 20 persons.

The IMF added, too, that foreign exchange reserve adequacy was pressured by increasing current account deficits.

“The deficit reached 17.5 per cent of GDP in 2012, up from 13.5 per cent in 2011, largely driven by an increase of goods and services imports related to Baha Mar,” the Fund added.

“From a saving/investment perspective, an increase in the investment/GDP ratio by five percentage points to 33 per cent of GDP in 2012 outpaced a small increase in the saving ratio.”