Address to the Nation
The State of the Bahamian Economy
Rt. Hon. Hubert A. Ingraham
November 10, 2008
My fellow Bahamians,
My purpose for speaking to you this evening is to inform on the state of our national economy which, as you know, is being seriously affected by a severe global financial crisis and a marked deterioration in the economic situation worldwide.
More specifically, I wish to communicate to you:
The extent of the critical economic situation facing our nation; and,
My Government’s plan of action in the face of this critical situation.
Global Financial and Economic Prospects
You are, no doubt, aware of the damage that continues to be inflicted on the global economy by the deepening international financial market crisis that stemmed initially from the collapse of the sub-prime mortgage market in the United States of America.
The crisis began with the bursting of the US housing bubble, as introductory sub-prime mortgage rates were reset to higher levels and residential housing prices started to fall.
As loan defaults and foreclosure activity rose significantly, banks and other financial institutions throughout the world were forced to write down the value of mortgage-backed securities on their balance sheets. This led to substantial losses, bankruptcies and the erosion of confidence in the global financial system.
In recent months, the crisis has deepened even further. It is clear that the global economic and financial situation and near-term prospects are changing at a rapid pace and in a deteriorating trend.
This reflects the continuing difficulties in the financial sector and a significant decline in consumer and producer confidence. As a result, an exceptional level of uncertainty exists around the globe.
The unemployment level in the US is at its highest level in 14 years and consumer confidence is very weak.
We have known for some time that the performance of our tourism business from the United States is highly correlated with that country’s Consumer Confidence Index. It stands to reason that people are more inclined to travel when they feel good about future business prospects.
In recent months, that US Consumer Confidence Index has seen its most precipitous decline in history and at last measure in October is at 38.0, its lowest point ever. Under these circumstances, we expect to end the year with a decline of more than 6% in total visitors to The Bahamas with stopover visitors declining more than cruise passengers.
Financial markets have, in the words of the International Monetary Fund (IMF), “…entered a vicious cycle of asset deleveraging, price declines, and investor redemptions”.
As an indication of the level of uncertainty that exists and just how quickly the economic situation is changing, the IMF published, just last week, an emergency update of its Fall World Economic Outlook.
That update downgraded its forecast for global economic growth in 2009 from 3.0% to 2.2%. The outlook now for the industrial countries is for their economies to shrink by about 0.3%. This will be the first such shrinkage since World War II.
More critically for the Bahamian economy, the new forecast for US growth has been revised downward for 2008. The US economy is now expected to contract by 0.7% next year.
The Managing Director of the IMF, in an address to the Board of Governors last month, characterized the current financial situation as the “most dangerous financial crisis since the Great Depression of the 1930s”.
However, he went on to say that “because of the lessons learned, the world now has the economic tools to emerge from this crisis with our economies and our societies intact”.
World leaders recognize the urgency of the situation and the vital need to take further actions. The President of the United States has invited the leaders of the G-20 group of leading industrial and emerging economies to Washington on November 15 for a summit to discuss the crisis and potential policy options.
The overriding objective will be to identify solutions that will both stimulate growth in the near-term and lead to reform of financial systems so that similar crises can be avoided in future.
The Bahamian Economy and Public Finances
As for the Bahamian economy, our current situation must be placed in its proper context.
Tourism, the principal engine of the Bahamian economy, experienced an increase in income up to August of this year due to increases in room rates in New Providence; but hotel occupancy levels then fell precipitously in September and October and continue to do so.
According to a Press Release from the World Tourism Organization today, “the latest edition of the world tourism Barometer confirms the rapid slowdown of international tourism growth since mid 2008…and the current troubled economic scenario is expected to continue into 2009…”
Foreign direct investment inflows at the end of September, in respect of tourism related projects, increased by more than 16% over the corresponding period last year while property purchases by international persons registered a decline.
In the domestic market, mortgage loans from commercial banks and insurance companies for new home construction and repairs also reported a 15% increase during the first half of the year. However, following moderate expansion earlier this year, construction activity is now subsiding.
Inevitably, the national debt has been impacted. Preliminary estimates placed the national debt at $3.2 billion at the end of October, 2008, up 5.6% over the same month last year.
This was a slightly accelerated rise in comparison to an increase of 4.7% in the 12 months ending October, 2007, and was a reflection of elevated financing needs throughout the public sector.
Happily, at October 31, 2008, foreign reserves stood at $626 million, one third higher than at the same period last year, and domestic bank liquidity was about 50% higher.
But evidence of weakness in the economy is reflected in deterioration in the asset quality of the banking system. Non-performing loans, that is, loans on which payments have not been made for at least three months, have increased by nearly 40%.
Another revealing indicator is the ratio of loans in arrears to total claims outstanding which has risen to 10.4% in 2008 compared with 8.6% in 2007 and 7.6% in 2006.
No developed country has escaped the impact of the global financial crisis, and developing countries are caught in its vortex. The Bahamas is no exception.
As we are a small, very open economy that is heavily dependent on the economic performance of the US, it comes as no surprise that we have not, and will not, escape the effects of this world financial crisis.
As we are all aware, tourism affects, directly or indirectly, all aspects of economic life in The Bahamas; and, to put it bluntly, we are facing a most difficult tourism season.
Since August the major hotels and resorts in New Providence and Paradise Island have experienced the lowest occupancy rates in many years while weakening in Grand Bahama’s hotel sector was in evidence many months before.
Advance hotel bookings offer no sign that the situation in our hotel sector will be reversed in the coming months.
Unemployment is now a most serious concern. Many workers in the tourism sector face the prospect of layoffs or unemployment for a considerable period, and at least until the global economy, especially that of the US, is stabilized and returns to forward movement.
Also, our offshore financial services sector is facing new challenges as some major countries are advancing the erroneous premise that, somehow, the offshore centres are related to the current crisis. They will likely use the crisis to advance their anti-offshore financial centre agenda.
Further, the growth of major investment inflows into resort and hotel development which we had anticipated is slowing down and a significant portion may not materialize for quite a while.
The slowdown and even cessation of direct foreign investment is due, not only to the uncertain outlook for tourism in the present environment, but also to the fact that many of the investors find it difficult to raise funds from their banking systems even for high quality investment purposes.
As would be expected, the current difficult domestic economic environment is having a negative effect on government revenues.
Through the end of October, recurrent revenues were running just slightly above the level of the same period last year. More critically, they are roughly 10% below the level projected for this fiscal period.
Given the extreme uncertainty as to when a resolution of the financial crisis and the rebound in global economic activity will occur, it is very difficult at this time to assess how revenues will progress over the balance of this fiscal year and into the next.
However, we can formulate scenarios for their possible evolution and the attendant impact that this may have on the Government’s fiscal position.
Past experience may be instructive in this regard. In the wake of the events of 9/11, government revenues actually fell by 10% between 2001 and 2002.
Therefore, in the circumstances, we must discipline ourselves accordingly, taking the appropriate defensive measures as and when they become necessary.
Those of us who are employed must increase our productivity and do our best to hold on to our jobs. Now is not the time to do otherwise. Indeed, we must now be more committed to quality service than ever before.
We Bahamians have a long history and tradition of overcoming adversity and of finding special reserves of strength and courage when facing misfortune. Nothing less will be required at this time.
The Government’s Action Plan
As I noted when we faced an earlier crisis, it is “far more important for us to be right than quick”.
In that regard, the Bahamian delegation to the annual meetings of the IMF and World Bank in Washington last month, which I led, had intensive discussions with the IMF on the evolving crisis.
The advice of the IMF was for each Government to develop various scenarios and to plan its response to them. In that way, as the crisis develops, appropriate and feasible responses would be at hand and careful consideration could be given to implementation.
Our delegation brought this advice back to The Bahamas and careful planning in anticipation is already well in hand.
It should be obvious that there can be no broad single-stroke response to this global crisis but, rather, measured and incremental response as the crisis develops.
In assessing the way forward, it is important to bear in mind that The Bahamas is somewhat more fortunate than many other countries. Successive Governments can take credit for maintaining this position of economic and fiscal prudence.
These policies are primarily responsible for the high level of monetary stability which prevails in the Bahamian economy today.
We aim to maintain flexibility so that a graduated response can be made at each stage if the crisis worsens. Furthermore, we will be extremely cautious in placing reliance on raising capital from international markets since these markets and the institutions which operate within them are also suffering from the global financial turmoil.
Given the increasing negative pressures on the economy, reserves are expected to trend lower during the fiscal year. The Central Bank will remain vigilant to ensure that domestic credit expansion is not a significant cause for loss of foreign currency reserves.
We have the additional advantage of a low burden of taxation, and a ratio of government debt to gross domestic product that is the lowest in the region.
This status provides us with some scope to implement necessary measures. However, we need to be cautious so as not to do too much too soon; that is, before we can gauge the full extent of the crisis.
What is clear is that we are in uncharted waters. There is no quick answer to this crisis, and not even the most knowledgeable and gifted financial analysts are willing to gamble on its eventual outcomes.
For our part, we look to a return of US consumer confidence, interest rate cuts and cheaper oil and food prices that will make possible the beginning of global economic recovery.
As a nation, we must stand together as we seek to mitigate the impact of this global crisis on our circumstances.
Standing together is what we can do collectively to support a national plan which is carefully formulated to minimize the impact on current living standards of our people, and at the same time ready our economy to move swiftly to take advantage as and when the situation improves.
At this time, it is vitally important for each and every Bahamian to live within his or her means; debts should be minimized and consolidated and new borrowings should be kept within prudent limits. This will be especially important during the upcoming Christmas season.
This is also the time for all of us to place renewed emphasis on our commitment to reduce wastage, to replace incandescent bulbs with energy-saving fluorescent ones, to turn lights and electronic equipment off when not in use, and to make maximum use of locally-produced items, beginning with fruits and vegetables.
However, I must also caution that it would be dangerous to respond impulsively to current events with unrealistic actions. In short, we must be practical and use commonsense in dealing with the issues, avoiding ideological and unrealistic options.
My Fellow Bahamians,
This brings me to the second point of my address – the measured and realistic national strategic plan which my Government has formulated and has already begun to implement.
Our plans have been developed in light of the very high degree of uncertainty as to how the future may unfold, the advice of the IMF, and the potentially very serious fiscal situation that we may face.
The cardinal element of the plan, therefore, is that we must have an initial response to current circumstances and, thereafter, a graduated response to deal with future eventualities.
I am now of the view that it would be inappropriate to cut recurrent Government expenditures at this time in an attempt to mitigate the fiscal impact of revenue weakness.
As suggested by the IMF, government spending can provide an important stimulus to the domestic economy in the face of shrinking economic growth.
That having been said, this is clearly a policy position that we may need to revisit if revenue performance turns out to be particularly weak.
As always, we must exercise vigilance over the level of government debt if we are to secure a vibrant economy and higher living standards over the longer term.
In the meantime, however, and as a direct response to the current crisis, government borrowings will appreciably increase.
My Government has sought to provide enhanced financial support to those families most in need. To that end, we increased the level of assistance available under the various programmes of the Department of Social Services.
That assistance, up to this year, had remained at the same levels for many years. Additional funding has been provided to the Department to cover this enhanced assistance.
A number of clearing banks advise that they have been discussing with their home-mortgage clients ways to protect them from losing their homes.
Some of them have already implemented delinquency management techniques to help their clients. The Royal Bank of Canada and First Caribbean Bank have announced details of these arrangements for their respective institutions. We have been informed that Commonwealth Bank and other banks have put in place similar programmes.
I encourage other banks and insurance companies that have over the years made substantial profits from their Bahamian operations to follow this lead.
The goal should be to assist those families that have continued to make payments but who now risk losing their homes because of unanticipated circumstances.
Bahamians facing difficulties in meeting their monthly mortgage payments should seek the assistance of their banks early.
Under no circumstances should you wait until the bank offers your home for sale or attempts to foreclose on your mortgage before you contact your bank to discuss your circumstances.
Steps are also being taken to provide a government programme to ease difficulties for unemployed persons experiencing problems with meeting mortgage payments on owner-occupied houses.
I advise that we are also reviewing the Government’s capital investment programme to accelerate those projects that would contribute most to dealing with the emerging unemployment problem.
These will include most if not all of the following:
The redevelopment of the Lynden Pindling International Airport;
The resumption of work on the New Providence Road Improvement Project;
The construction of three government office complexes in New Providence, Grand Bahama and Abaco;
The completion of the new school in Oakes Field;
The construction of the new Registrar General’s office complex on Market Street;
The completion of the Magistrate’s Court complex on Meeting Street;
The completion of the Government office building next to the Ministry of Works on JFK Drive;
The restoration of the historic Supreme Court and Colonial Secretary buildings at Bay Street and Bank Lane;
Construction of a new Straw Market on its original site;
The construction of an Authentically Bahamian Craft Market;
Commencement of the Downtown Revitalization Programme; and
Enhanced beautification programmes around New Providence.
Additionally, the government housing scheme has resumed and several hundred houses are slated for construction by the end of next year. A number of other public sector projects, including the development of public recreational spaces, will also be undertaken.
The Bahamas.com website has been redesigned making it both more attractive and interactive. We are significantly increasing the marketing and advertising of our destinations in the television and print media and we are also aggressively promoting our country online.
Much of this initiative is directed to the United States market as the closest, friendly, English-speaking destination which uses the same currency and enjoys US customs and immigration pre-clearance facilities.
The Bahamas has the considerable advantage of proximity to the United States of America; we will exploit that proximity advantage to the fullest.
These efforts are being supplemented by aggressive initiatives to improve airlift from the US to The Bahamas at competitive rates.
Increased promotional television and print marketing initiatives are also underway in the UK and Canada. Public relations initiatives are being pursued in key markets in Asia and Latin America with a view to positioning The Bahamas to benefit as and when the economy begins to improve in those regions.
But even the best pump in the world is of little value if there is no water in the well. We must all await the return of consumer confidence in the global financial system and most especially consumer confidence in the US before we can get our tourism sector back on track completely.
We can be encouraged that the World Tourism Organization’s press release of earlier today also noted that “so far, international tourism has resisted the downturn better than other economic sectors such as construction and real estate or car manufacturing. As in previous crisis situations, traffic to closer destinations . . . is expected to be favoured as compared to long haul travel”.
I have, as well, announced measures:
to enable persons to work out a solution to arrears of bills with BEC and the Grand Bahama Power Company, and,
to subsidize surcharges over 15 cents per unit on residential utility billing to some 80% of consumers that use less than 800 kw of electricity per month.
The price of crude oil, which caused a sizeable hike in the oil import bill for The Bahamas and fueled an increase in the cost of living, stood approximately 25% lower in October compared to the same month last year, and some 52% below the July peak of $140 per barrel, but was still moderately above $60 per barrel in 2006.
Given the deepening weakness in global economic conditions, the outlook is for generally lower oil prices, although with persistent unpredictability.
Having regard to current and expected economic conditions, it is projected that unemployment levels will rise to lower double digits in The Bahamas.
In light of this, my Government will put in place various measures to mitigate the impact of joblessness or reduced income.
Hence, the Government is considering the implementation of a temporary unemployment assistance programme to be administered by the National Insurance Board.
Although unemployment benefits are not presently offered, NIB’s primary objective is to ease the burden.
My Government will, therefore, cause to be allocated some of the excess funds accumulated in the Medical Benefit Branch of the NIB Fund to provide weekly unemployment assistance payments to workers who have recently become unemployed or placed on reduced work-weeks.
Since these payments are being financed from the excess in the former Industrial Benefit Branch, the sustainability of future pensions will not be affected.
To benefit under this programme, a person must have been unemployed for a specific period of time and a contributor to NIB for a minimum number of years. Other rules and stipulations will be formulated prior to the introduction of this plan.
Additional measures will be introduced as necessary, and as the evolving situation dictates.
My Government will continue to monitor closely ongoing developments, ensuring that we are properly positioned to make the appropriate short-term responses without damaging the early return to our medium-term growth path when the danger passes.
In the early 1990s, following upon the first Gulf War when my first administration came to office, we faced a critical economic and social situation. We worked tirelessly to reverse that situation and we succeeded.
We then dealt with the crisis caused by the collapse of the high-tech bubble in 2000 and the crisis caused by the terrorism events of September, 2001.
Our good management of the people’s business during each of these crises facilitated a quick recovery in the years that followed.
I have no doubt that my Government has the experience and the expertise to enable us to recover from yet another crisis not of our making and over which we have no control.
Bahamians can trust in our preparedness and our experience to do what is right. God willing, we will succeed.
As conditions warrant in the weeks and months ahead, I will update you on the evolution of this crisis, its impact upon us and the effectiveness of our actions to meet the challenges thrust upon us at this time.
In the meantime, I trust that each citizen and resident will do his or her part to conserve and to help others who may be less fortunate.
And, I also remind all leaders of a quotation from the late President of the United States, Franklyn Delano Roosevelt:
“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
God bless us all. Thank you.