Recovery Next Year

Economy

Economic News

22 Jul 2010
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The economy of the Bahamas is expected to face another lean year before embarking on a modest recovery and moderate but steady growth, though many of the problems are not of the country's own making.

 

Most estimates put the contraction of the economy in 2009 at around 4%. While the rate is expected to ease this year, the IMF has forecast that the economy will contract by a further 0.5% in 2010, before staging a modest recovery in 2011, with GDP tipped to expand by 2%.

To some degree at least, this recovery is dependent on the return to robust health of the US economy, which is still struggling to bounce back from two years of difficulties. With tourism being one of the economic mainstays of the Bahamas – the sector representing some 50% of GDP – and with its main market being the US, a slow recovery by its near neighbour means that it could be some time before visitor numbers and thus earnings start to pick up.

The news from one of the Bahamas' other leading markets, Europe, is even worse, with the debt crisis currently engulfing Greece and threatening to wash up on the shores of Portugal and Spain. With the eurozone countries pledged to bail out Greece, while at the same time looking nervously at the Iberian Peninsula, economies that have just come out of recession could well be pushed back towards the brink. With less money flowing into their own economies, Europeans may be wary of jetting off for a vacation in the Bahamas, preferring to stay closer to home.

The situation is much the same for the country's financial sector, the other foundation stone of the economy. Though structurally sound in itself, the general slowing of offshore financial activity and a growing unease in global markets could delay any major uptick in the sector's accounts in the short term.

According to the former finance minister, Sir William Allen, it could be more than a year until the domestic economy is able to shrug off the worst of the global crisis and move towards positive territory.

"I think we have bottomed out," Allen said in an interview with local press on May 3. "There have been some positive signs in tourism, some signs that investors are beginning to look back, but the rebound will be a slower process."

While the downward trend may have levelled off, there are only limited measures beyond those already taken by the government, which has strained its resources in priming the economic pump over the past year by ramping up capital works programmes and maintaining social services.

As of the beginning of the year, the Bahamas national debt-to-GDP ratio was 53.6%, with the Central Bank saying this figure could increase in 2010 before falling back to more manageable levels as the recovery kicks in.

A recent report by ratings agency Standard & Poor's (S&P) warned that the state deficit will expand above initial estimates to more than 5% of GDP, mainly as a result of ongoing pressures on revenue, a situation that will continue into 2012 and beyond, though to a lessening degree.

"Given the weakening of the economy that began in 2008, deficit and debt levels have risen, and we project they will remain at higher levels through 2012. We project the general government deficit will remain higher at an average of 4% of GDP during 2009-12, with net general government debt rising to 38% of GDP in 2012," the report said.

Simon Townend, head of corporate finance activities in the Caribbean for financial services firm KPMG, believes that while the Bahamas has a worrying debt-to-GDP ratio at the moment, it is far from being the matter of concern it is for countries such as Greece. The situation should improve as the US economy gradually works its way out of the doldrums, he said in an interview with local press on May 5, though the pace of any recovery will not be speedy.

"It hasn't been to date, and is not likely to be, so businesses should continue to be cautious and keep an eye on what's happening. In the past, we've seen a delay between recovery in the major feeder market and the Bahamas," Townend said.

At the end of May, the government of Prime Minister Hubert Ingraham will table its 2010/11 budget, though few expect any massive new expenditure programmes to be unveiled. With limited resources and operating in an uncertain international environment, the government will be doing well to maintain a steady course through still-choppy waters.

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