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‘No delusions’ on foreign reserves

Central Bank of the Bahamas.

Central Bank of the Bahamas.

• Govt borrowings never intended ‘to linger’

• Drawdown below pre-COVID $1.5bn likely

• Reserves at record $2.3bn through February

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank has “no delusions” over an external reserves mix that will likely fall below pre-pandemic levels of $1.5bn prior to COVID-19 recovery starting, its governor said yesterday.

John Rolle, speaking as the regulator unveiled its assessment of the Bahamian economy’s 2020 performance, said it knew proceeds from the government’s $825m foreign currency borrowings and over $500m in Hurricane Dorian-related reinsurance inflows were not intended to “linger” in the foreign currency reserves and keep them at record levels.

Revealing that the external reserves, which are critical to maintaining the one:one exchange rate peg with the US dollar, had remained at a record $2.3bn through to the beginning of February 2021, Mr Rolle said the Central Bank had always anticipated this sum would be drawn down to meet the private sector’s needs in the absence of replenishing tourism inflows.

Asked by Tribune Business to respond to concerns that the external reserves have been inflated by the government’s borrowing and reinsurance inflows, and that the increased foreign currency debt servicing requirements may be storing up future trouble, he said: “I think that to say that the reserves have been artificially boosted is a bit of a misplacement of how the reserves are being assessed.

“There is no target growth level for the reserves. There is every intent that the fiscal stimulus over the course of the pandemic is sustainable, meaning foreign exchange demand by the public is identified.” The governor added that it was never intended that the government’s foreign currency borrowings, and Dorian reinsurance monies, “be permanent amounts that sit in the reserves”.

“There is no level of delusion on the part of the Central Bank or anyone who looks at the reserves data than understanding what is there is to meet temporary needs presently,” Mr Rolle said. “Some of that is created by reinsurance inflows.

“There’s half a billion dollars in the reserves before the pandemic relating to insurance claims. They are expected to be spent, and hoped to be spent. That stimulus is expected to be placed into the economy.

“Similarly, what the Government has done is stimulus to replace lost income from tourism. That has not been injected into the economy to be stored up. Those values are not expected to linger in the reserves.”

Mr Rolle argued that “the reference point” for analysing the strength, and movement, of the foreign reserves was not the present $2.3bn record but the $1.5bn level attained pre-Dorian and COVID-19.

“Even at that $1.5bn, it is potentially the case that when we reset [the economy], we will potentially be below that,” he added. “Today, we anticipate some of what we carried before the pandemic will also need to be spent.

“For anyone to believe there’s an artificial boost in the reserves, they need to review the timeframe for analysis. They need to understand there’s no significant intent or permanence to the levels that are there. We know that.”

Mr Rolle had again earlier reassured that The Bahamas’ one:one currency peg with the US dollar remains stable and secure despite projections that the external reserves will suffer some run down as 2021 progresses.

“As to external reserves, the Central Bank’s holdings were estimated at just over $2.3bn at the end of 2020 and were still just over this threshold at the start of February 2021,” he said. “Throughout 2021, the private sector’s foreign exchange needs are expected to exceed inflows.

“This, therefore, maintains the outlook for a net reduction in reserves through the end of the pandemic, but not to levels that would stir up any concerns about the protection for the fixed exchange rate.”

Mr Rolle added that the Central Bank was in constant dialogue with the Government over the financing mix to cover its projected record $1.327bn deficit for 2020-2021, given the implications this can potentially have for the foreign reserves.

Extensive domestic borrowing tends to leak out in demand for foreign currency and imports, and the Government plans to borrow $600m in the Bahamian capital markets according to the International Monetary Fund’s (IMF) recent Article IV report.

“With the Government sector as the source of support running counter to the depressed state of tourism, the Central Bank’s dialogue with Government continues to be around maintaining the right mix of local and foreign currency borrowing, because it is the borrowing in local currency that contributes to a reduction in the reserves when it stimulates spending on imports,” Mr Rolle added.

With tourism’s foreign currency inflows still depressed because of the sector’s slow ramp-up amid widespread COVID-19 infections in its major source markets, the governor said the private sector was likely to only resume its role as “a net contributor to growth in the foreign reserves” come 2022.

“In 2020, the estimated foreign exchange receipts sold to commercial banks decreased by slightly more than one-third to $3.8bn,” Mr Rolle added. “The lessened contribution from tourism explains this reduction, but with foreign investment activities maintaining stable to strengthened support.

“Similarly, with the spending power of domestic residents contracted, demand for foreign exchange, mainly to pay for foreign goods and services, fell by approximately 15 percent. Still, the reason demand for foreign exchange contracted by less than inflows was partly because of the impulse from public expenditure.

“In the near-term, the Central Bank will stay focused on conserving access to foreign exchange for essential international payments, including imports. Later in the year, the bank will reevaluate the suspension of access to foreign exchange for international portfolio investments. While it is important that net flows strengthen, they need not be fully restored for any relaxation of measures to begin,” he added.

“The Central Bank has already signalled that the moratorium on commercial bank dividend repatriation will cease by the end of the first quarter of this year. Other categories of dividend payments on foreign investments in The Bahamas were never paused during the pandemic, hence banks are being restored to equal treatment.

“In addition, given the knowledge about the multi-year timeframe of bank dividend payments, the Central Bank remains in a position to manage the timing and magnitude of such outflows. In fact, the significant share of commercial banks’ profit repatriation will materialise in 2022 and later years.”

Comments

tribanon 1 year, 6 months ago

Mr Rolle argued that “the reference point” for analysing the strength, and movement, of the foreign reserves was not the present $2.3bn record but the $1.5bn level attained pre-Dorian and COVID-19.

“Even at that $1.5bn, it is potentially the case that when we reset [the economy], we will potentially be below that,” he added. “Today, we anticipate some of what we carried before the pandemic will also need to be spent."

Compare what Rolle says above to the following that was stated on page 14 of the Central Bank's September 2020 Quarterly Economic Review Report:

"At end-September, the stock of external reserves was equivalent to an estimated 38.5 weeks of the current year’s merchandise imports (inclusive of oil purchases), compared with 23.9 weeks last year. After adjusting for the 50% statutory requirement on the Central Bank’s Bahamian dollar demand liabilities, “usable” reserves rose by $313.5 million (41.9%) to $1,062.1 million, compared with the same quarter of 2019."

Note how there has always been a reference point for the adequacy of our external reserves expressed in terms of the estimated number of weeks of imports that they could purchase. Also note that there was no disclosure back then of the external reserves being bolstered by half a billion dollars of Hurricane Dorian related insurance claims (involving foreign insurers and reinsurers) in addition to government foreign currency borrowings.

Try as he may, Rolle can't smear enough rosy coloured lip stick on the very ugly pig face of our country's financial crisis.

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