The Bahamas: The stormy haven

The Bahamas is a collection of 700 islands and 2,400 cays, stretched over an area of almost 14,000 square kilometres. However, 90 per cent of the 400,000 inhabitants are concentrated in three islands, Abaco, Nassau and New Providence.

The Bahamas is one of the wealthiest countries in the Caribbean. With a GDP of US$12 billion and a population of 400,000, it has a per capita GDP of about US$30,000. Its good fortune is based on tourism and offshore banking.

The islands have long been considered one of the world’s notorious tax havens, as well as home for many of the world’s rich and famous. Hollywood movie stars and industry moguls have homes in The Bahamas. It is also the location of top tourist destinations, such as the Atlantis resort and casino and the new US$4.2-billion Baha Mar hotel complex, both of them on the island of New Providence.

Yet, a look at the country’s credit metrics and ratings does not show such a great picture. Its credit rating is Ba2/BB-, and it has been on a steady decline for the last 17 years.

Bahamas’ location may make it a great tropical vacation, but it also makes it an easy target for the growing number of hurricanes that have been ploughing through the Caribbean.

Global warming is a serious risk for The Bahamas, as changing weather patterns and rising sea levels make it precarious for the collection of sandbars that sit only a few metres above the surf.

The onset of COVID-19 has also been devastating, with the economy expected to collapse almost 15 per cent in 2020, after averaging a GDP growth rate of about 1.0 per cent over the past four years. Social distancing and travel restrictions have brought tourism to its knees. This has forced the government to seek help from the IMF, securing a US$250-million disbursement in June.

The Bahamas is a country with a consistently large current account deficit, which is offset by large inflows into the capital account. The current account shortfall is about 5 per cent of GDP. The construction of the Baha Mar complex was an important source of foreign direct investment. Unfortunately, anti-money laundering, or AML, initiatives have made life difficult for the offshore banking sector. This will force the country to redouble its efforts in the tourism sector.

Like many other countries, instead of implementing a structural adjustment in order to rebalance the economy, the government has opted for increasing the level of debt. The external debt-to-GDP ratio doubled during the last five years to 29.2 per cent, and the gross level of GDP will hit 82.6 per cent this year.

The government has signalled its commitment to stabilising the level of indebtedness, but the effects of the pandemic have raised the primary fiscal deficit to 3.6 per cent of GDP and the operational deficit to 6.7 per cent of GDP. This is a complete reversal from the primary surplus of 0.9 per cent of GDP that was posted in 2019 and the operational deficit that was recorded at 1.7 per cent of GDP.

Earlier this year, the government allocated 4 per cent of GDP to meet higher healthcare and unemployment costs. The cancellation of cruise port visits also marked an important hit to the government coffers. Fortunately, the debt amortization schedule is pretty light for the next few years, which does not create any imminent problems for the government. Like the currencies in many other Caribbean countries, the Bahamian dollar is pegged to the US dollar at parity. While this provides the country with a strong anchor for its currency and an effective tool to keep inflation under control, it also eliminates the central bank’s ability to implement monetary policy.

Nevertheless, inflation is low, despite the fact that most goods are imported. Low commodity prices have also helped keep the inflation rate around the 2 per cent mark. International reserves are about US$$1.3 billion, which provides the country with a healthy buffer.

The political picture is pretty stable, with two major parties defining most of the political space. The country has a parliamentary system, where the ruling party names the prime minister.

The two main political parties are the Free National Movement, which is the oldest party in the country. It is centre-left, and currently is the majority. In 2017, they named Hubert Minnis as prime minister after the general elections. The Progressive Liberal Party is centre-right. The next elections will take place before May 2022. There have been rumours of early elections, but they have been dismissed by the government.

Overall, The Bahamas is a solid economy. However, its heavy dependence on tourism has made it vulnerable, given the current pandemic. Nevertheless, it is committed to fighting in order to confront the current headwinds.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.wmolano@bcpsecurities.com