By NEIL HARTNELL
Tribune Business Editor
The Bahamas is “riding the bet” that pent-up tourism demand will offset a slowing US and global economy, a financial provider said yesterday, while warning: “That may not last for long.”
Kenwood Kerr, Providence Advisors’ principal, told Tribune Business it was unclear whether current tourism business volumes - elevated by the post-COVID desire to resume travelling - can be sustained against the backdrop of consistent Federal Reserve rate hikes that some fear will tip the US into recession.
Speaking before the US central bank’s rate rise, which he correctly predicted would be between 50 and 75 basis points, he said the Federal Reserve was “damned if you do, damned if you don’t” as it effectively seeks to ‘thread the eye of the needle’ between dampening down 40-year high inflation while avoiding sending the economy into recession.
As for the implications for The Bahamas, Mr Kerr told this newspaper: “The general scenario still persists. You have inflation, you have high oil prices. You have the prospect of increasing interest rates.... Either way the cost of travel, transportation is working its way through to the cost or airline tickets, hotel rooms and energy prices, and people are starting to rebalance their balance sheets in the US.
“Where the majority of our tourists are coming from, they see the trend of having less disposable income and cash, and we are still an expensive destination. The bet is, and what everybody is riding, is the level of pent-up demand - people who were locked down for a long period of time and want to travel - that continues to come through positively in the tourism numbers.”
Tourism industry executives (see other article on Page 1B) yesterday said they have no signs of any slowdown in visitor bookings and spending from previous US rate hikes, and do not anticipate any significant impact from the latest hike which is equivalent to the largest one-off increase since 1994.
However, Mr Kerr warned that The Bahamas cannot rely on pent-up post-COVID travel demand lasting indefinitely given the multiple negative global economic headwinds in play. “That is not going to last too long if you have a slowing US economy and higher interest rates,” he told Tribune Business.
“The argument, the fundamental argument, comes back to how do we grow our tourism sector, deepen and widen it, so that we earn more foreign currency income flows. We are not a hard currency economy; we are a soft currency economy.”
The Bahamas’ fixed one:one exchange rate peg with the US dollar, and the fact its own currency is not convertible, means this nation is reliant on tourism and other services exporters such as financial services to generate the bulk of foreign currency inflows that support the external reserves and prop up the peg. Any drop-off in tourism, as was highlighted by the COVID-19 shutdown, puts The Bahamas in a perilous situation.
“We have to be aware of our high debt levels,” Mr Kerr told this newspaper. “We earn hard currency through tourism, and if it slows down we could be in a problem. We are a soft currency economy and need hard currency to pay our foreign debt in foreign currency. To the extent that tourism is hit by high prices and inflation, we could find ourselves in a bit of difficulty.”
The Bahamas’ post-COVID economic revival is almost entirely dependent on the strength and pace of tourism’s recovery, but there are multiple external global forces that can derail that including still-high oil, energy and gasoline prices; high food prices and shortages; global inflation; supply chain bottlenecks; Russia’s ongoing invasion of Ukraine; and the possibility that the US and other major economies may slip into recession via interest rate hikes.
The US Federal Reserve is attempting the finest of balancing acts - bringing 40-year high inflation under control, and then lowering it to acceptable levels, without plunging the economy into a recession that contracts it. It is aggressively raising rates at levels unseen since the mid-1990s as it struggles to tamp down soaring prices, which rose by an annual rate of 9.1 percent in June, the fastest inflation rate since 1981.
The increase raises the Federal Reserve’s cost of borrowing to between 2.25 percent and 2.5 percent, and is its fourth rate increase in 2022. It comes as central banks worldwide seek to calm price rises with higher rates. Hubert Edwards, principal of Next Level Solutions, a Bahamas-based risk management consultancy, yesterday said The Government’s fiscal woes meant it can only offer limited help to the most vulnerable Bahamians grappling with high oil and gas prices.
“The truth is that I think the Government has the lowest potential at the moment to provide a cushion for the vulnerable population,” he told Tribune Business. “The headroom is so narrow as to be non-existent. We’re basically grappling with 1980’s type challenges. It’s still a bit schizophrenic; we don’t know where we’re going to land. The Federal Reserve’s move today was a big one, taking rates into the 2.25-2.5 percent range.”