IT'S STILL NOT BETTER IN THE BAHAMAS: ECONOMIC

C O N F I D E N T I A L NASSAU 000634 SIPDIS PASS TO WHA/CAR JOSLYN MACK-WILSON E.O. 12958: DECL: 10/13/2019 TAGS: ECON EFIN ETRD SUBJECT: IT'S STILL NOT BETTER IN THE BAHAMAS: ECONOMIC OUTLOOK BLEAK REF: A. NASSAU 504 ¶B. NASSAU 560 Classified By: Charge d'Affaires a.i. Tim Zuniga-Brown for reasons (b) and (d) ¶1. (U) SUMMARY: Economic indicators for The Bahamas remained strongly negative. Central Bank reports point to loan defaults of almost USD 1 billion, decreased private sector lending, a government debt-to-revenue ratio of almost 50 percent of GDP and a slumping tourist sector. In an effort to boost confidence, The International Monetary Fund (IMF) has given The Bahamas USD 178.7 million in Special Drawing Rights (SDRs) to supplement its foreign exchange reserves. The GCOB, meanwhile, has launched a series of temporary training and jobs programs aimed at decreasing the 14.2 percent unemployment rate. Despite this, the GCOB faces increasing criticism from business leaders. END SUMMARY -------------- -------------- "Subdued" Economy Faces Loan Defaults, Slow Recovery -------------- -------------- ¶2. (U) In a series of reports issued over the past three months, the Central Bank of The Bahamas notes that "prospects for the Bahamian economy will remain subdued for the balance of 2009 and into the first half of 2010, constrained by the very soft pace of recovery in they key U.S. market and continuing weakness in the consumer segment." The report claims that the country's three key sectors - construction, tourism, and Foreign Direct Investment (FDI) are predicted to "remain moribund" during this time period. ¶3. (C) The economic downturn continues because of a drop in consumer demand for credit and as high default rate among businesses and households. Central Bank and media reports indicate that loan defaults exceeded USD 963 million and delinquent loans comprise 16 percent of outstanding private loans. Despite the difficult credit climate, Bahamas Financial Services Board CEO Wendy Warren told EconOff that Bahamian banks are sufficiently capitalized to withstand the default rates. Central Bank officials also told EconOff that the average consumer debt in The Bahamas is low - nearly $5,000. Most growth in delinquencies was in mortgages. Annual private sector lending decreased by 36.8 percent causing a slow down in the creation new small-to-medium (SME) businesses. Meanwhile, loan financing from foreign lenders, which accounted for the majority of FDI in The Bahamas, is down 67 percent from June 2008 and now accounts for only 25 percent of total FDI inflows for 1st half of ¶2009. Other FDI inflows such as property purchases fell by 40 percent from 2008. -------------- An "IOU" from the IMF -------------- ¶4. (C) The International Monetary Fund (IMF) gave The Bahamas USD 178.7 million in Special Drawing Rights (SDRs) to enhance The Bahamas' foreign currency reserves. This will ameliorate the effects of the global financial crisis on developing nations. SDRs, interest-bearing reserves, can be sold to another IMF country in exchange for foreign currency. A country's computation of foreign currency reserves can include SDR figures. Central Bank senior economist Alwyn Jordan told EconOff that the SDRs are essentially a promissory note from the IMF to provide a certain amount of foreign currency reserves to a developing economy upon request. Although the SRDs essentially "make (The Bahamas') economic indicators look better, they don't have an immediate impact upon the economy." They are designed to boost domestic and international consumer confidence through the appearance of stronger external reserves. -------------- Meanwhile, the Government Keeps On Borrowing( -------------- ¶5. (U) Prime Minister Ingraham announced that the Government borrowed USD 150 million since July 2009 and secured parliamentary approval to borrow approximately USD 310 million. The loans are being used to finance existing debt and to pay for capital-intensive infrastructure projects, including the New Providence Road Improvement Program, the Nassau Harbor dredging and the international airport redevelopment. The overall deficit expended by USD 139.2 million to USD 219 million in 2009. However, revenue collections are down by 6.1 percent due to a steep contraction in tax receipts. The current debt-to-revenue ratio is 42 percent of GDP, and Ingraham told the media that he expects that ratio to climb over 50 percent in the next year. -------------- And the Hotel Rooms Remain Empty( -------------- ¶6. (U) The global recession has hit the land-based stopover tourist industry especially hard in 2009. Despite exposure from the Miss Universe Pageant (a venture that cost The Bahamas USD 5.8 million),overall tourist arrivals are down 13 percent. Atlantis President George Markantonis said room occupancy levels have been as low as 30 percent, staff is on one or two-day weeks; and management has enforced mandatory unpaid vacation. As of July 2009, the average Revenue Per Available Room (RevPAR),a key indicator of industry performance, was down 18.9 percent in The Bahamas. Family Island hotel operators have reported 10-to-20 percent occupancy. On the other hand, sea-based arrivals (cruises) have seen a dramatic 19.9 percent increase, due to a perception among American travelers that Cruises offer more value for the dollar. The Bahamas Hotel Association President Frank Comito told EconOff that while the average cruise passenger spends less money in the country than a stopover tourist, cruises serve as way for tourists to sample land-based vacations. The GCOB is anticipating increased cruise traffic over the next two years and will break ground for a new cruise port in Freeport in 2010 while dredging the Nassau Harbor to accommodate mega cruise ships. -------------- While the Unemployment Lines Grow Longer -------------- ¶7. (C) The decline in stopovers has led to additional layoffs in the hotel sector, with a multiplier effect throughout The Bahamas. As of May 2009, 14.2 percent of the population went unemployed, particularly in Grand Bahama, where nearly a quarter of the population did not hold a job. Mark Turnquest, head of The Bahamas Small Business Association, told EconOff that unemployment is likely between 21 and 24 percent in The Bahamas. Turnquest speculated that the rising crime rates were directly correlated with the current spate of layoffs in the hotel and financial services industry. To date, approximately 12,000 Bahamians have received or are receiving unemployment benefits. ¶8. (C) To address this unemployment, the GCOB created the National Training Program to provide 10-15 weeks training at local colleges on computing, accounting, carpentry, welding and plumbing to the unemployed. The goal is to better prepare Bahamians once the recession has eased. The program has enrolled 800 Bahamians in Grand Bahama and New Providence Islands so far. PM Ingraham also launched a temporary jobs program for as many as 2,000 Bahamians for specific projects, including digitalizing government records and serving as teachers' aides. Finally, Finance Minister Zhivargo Laing has actively promoted the government's "self-starters initiative" that provides $5,000 in start-up capital to small business entrepreneurs. However, Turnquest said that applicants to this program have been told that no actual funds are available. Turnquest notes that the institutional support for small businesses in The Bahamas remains extremely limited and there is a subsequent high failure rate for most Bahamian start-ups. ¶9. (C) Private sector leaders have complained to EconOff that Ingraham has not done enough to bolster confidence in GCOB's management of the economic crisis nor among potential investors in The Bahamas. Academics and public sector officials, on the other hand, blame the current state of affairs on a lack of diversification in the country's U.S-dependent economy. ¶10. (C) COMMENT: The government's current response to the economic crisis is to launch a series of expensive infrastructure projects such as the Arawak Cay port relocation (Ref A),Baha Mar mega resort (Ref B) and New Providence Road Improvement project to generate jobs and put The Bahamas in a strong position when the recession eases. Ingraham has stated publically that the Bahamian economy will only turn around when and after the U.S. economy rebounds and hopes that these projects will keep Bahamians employed in the meantime. These projects, however, will continue to supply The Bahamas with a steady flow of semi-professional and menial labor but it remains to be seen if they will enhance or develop the country's human capital and prevent further "brain drain" of the nation's best and brightest. ZUNIGA-BROWN