First published April 11, 2012
After a couple years of carrying the burden imposed by a seemingly relentless global economic recession, the whole world, and indeed The Bahamas, is optimistically watching for signs that the storm has past and some type of sustainable recovery is on the way.
There is understandably an eagerness to seize any positive information on the economy, anecdotal or otherwise, and hold it up as incontrovertible evidence that the economic downturn is over and recovery is on the way.
Over the past few weeks a number of positive and upbeat reports on the economy have appeared in the local press. A new business venture has been started; some restaurant chain has added another branch; a recently constructed strip mall has reported full occupancy; air-lift capacity to the country has been expanded; a smaller than expected fiscal deficit has been reported; and in the commercial banking sector, the rate of increase in non-performing loans has moderated.
Taken together, those isolated reports would ordinarily be regarded as a source of inspiration -- a reason to rejoice in the expectation of a brighter economic future for the country. But these are not ordinary times.
Challenges remain
We are now living in a time where some fundamental structural changes have occurred in the economy and unless and until those issues related to the changes are appropriately addressed, the outlook for the economy must be looked at through a cautionary prism.
A closer examination of some of the dark clouds on the horizon would tend to support a cautious approach. To begin with, the continuous rise in oil prices remains a stumbling block to any sustained recovery. Increased oil prices affect not only local motorists by reducing the amount of resources that they have to spend on other goods and services, oil price increases also affect the cost of utilities in The Bahamas and the cost of travel to The Bahamas.
Increased travel costs and higher utility bills at our hotels could restrain the growth of our tourist industry and extend the time for laid-off workers to return to the industry. In other words, the current challenges with the unemployment problem, possibly now in the high teens, would persist. An effective plan to significantly reduce the unemployment level is perhaps one of the most urgent requirements for the restoration of economic growth and development.
And, even if we were to magically reduce the level of unemployment in the country and at the same time provide meaningful jobs for all who were willing and able to work, there would still remain formidable barriers to growth and development.
One major obstacle would be the levels of both public and private sector debt. The public sector debt which is approaching $4.5 billion, more than 50 percent of GDP, would in time constrain the government's ability to provide the same level of services (contributions to GDP) because of the resources that would have to be diverted to debt service.
Private sector debt (households and businesses), which stands at approximately $6.6 billion or about 80 percent of GDP, has become a problem for the commercial banking sector in that more than $1 billion of the loans are in arrears.
What this means is that a high percentage of any new income from the magically-created jobs would have to be applied to debt-servicing instead of normal expenditure in the economy to promote economic growth. It follows, therefore, that another major objective of any economic growth policies would have to take account of the debt overhang in both the private and public sectors.
The construction sector
So far we have noted the potential threat to our main economic sector, tourism, as a result of continually rising oil prices. Additionally, we examined the challenges being faced by our domestic financial services sector. The only other significant sector that contributes in a meaningful way to economic growth is the construction industry, which accounts for about 10 percent of our GDP.
Small and medium-sized construction companies, which build the majority of single-family homes, tend to employ a large pool of skilled and unskilled technical labor and accordingly make a valuable contribution to the economic development effort.
Given the historically high level of non-performing mortgage loans (20 percent at the commercial banks and 40 percent at the Bahamas Mortgage Corporation) there is a glut of houses on the market at generally reduced prices and it is unlikely that we will see an appreciable increase in new home construction over the medium-term.
Indeed, there is a need for some special housing market programs aimed at not only increasing construction starts but also in assisting delinquent homeowners to keep their properties.
Since our major economic sectors, tourism, banking and construction are unlikely to experience any significant rebound over the short-term, it would appear that it is too early to take a victory lap and it is not yet the time to proclaim that our mission to restore the economy has been accomplished.
o CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com.
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