The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ annual $2 billion current account deficit is “not as fickle” as many outsiders think, a former finance minister yesterday pointing out that this was traditionally balanced by foreign capital inflows.

James Smith, also an ex-Central Bank governor, said the structural nature of the Bahamian economy, and its propensity to import 80 per cent of everything consumed by this nation, meant major current account deficits were a regular feature.

However, he suggested this was not as big a concern as Royal Bank of Canada’s (RBC) chief economist had indicated at RoyalFidelity’s Bahamas Economic Outlook conference on Tuesday.

Marla Dukharan had described the Bahamas’ current account deficit of roughly 20 per cent as “concerning”, revealing it was one of the widest she was aware of.

“That deficit on the current account has been in the past financed by foreign direct investment. If those inflows do not support this, what ends up happening is that you have a balance of payment deficit, and that shows up as a decline in your foreign exchange reserves,” she said.

Mr Smith, though, implied that fears of a major fall-off in foreign direct investment (FDI) inflows - and the foreign currency they bring - were overblown.

“It’s the nature of our economy,” he told Tribune Business of the current account deficit. “We import about 80 per cent of what we consume on the current account.

“We always have this big gap of $2 billion, but it’s always filled by large inflows on the capital account.”

While major resort acquisitions and developments grabbed the headlines, Mr Smith said there was much other Bahamian property and real estate in foreign hands.

These assets were being bought and sold regularly, with foreign owners also injecting foreign currency to help maintain their properties.

“If you are aware of how the economy is structured, it’s not as fickle as you might think,” Mr Smith told Tribune Business. “On the capital account you have huge annual flows which tend to fill that gap.”

He even suggested that, given the way the Bahamian economy is structured, this nation should consider merging its current and capital accounts into one.

Mr Smith, though, agreed that Ms Dukharan was more accurate with her concerns about the effects the Government’s high borrowing and debt levels may have on the current account deficit.

“I’d be more concerned with the growing portion of our national debt that is denominated in foreign currency, because in paying that debt we have to use the reserves,” the former finance minister told Tribune Business.

“You want to keep that figure as low as possible. It’s more difficult to reschedule if you have to.”

Similar concerns were raised by Standard & Poor’s (S&P) in its most recent assessment of the Bahamian economy.

While the Government’s debt structure had remained favourable, S&P said it had started to rely more heavily on external, foreign currency financing.

It added that this was despite “deep, liquid” Bahamian capital markets, and said: “Domestic debt accounted for closer to 90 per cent of central government debt in 2005-2007, then dropped to 80 per cent in 2009-2011 after the Government did a private placement and, subsequently, increased borrowing from multilaterals.

“In 2012 and 2013, it was 76 per cent. The Government, however, has relied on more external financing in 2014, which brought the ratio closer to 71 per cent mid-2014.”