Release Date: 3 February 2012

Monthly Economic and Financial Developments

December 2011

In an effort to provide the public with more frequent information on its economic surveillance

activities, the Central Bank has decided to release monthly reports on economic and financial

sector developments in The Bahamas. The Bank monitors these conditions as part of its monetary

policy mandate, to assess whether money and credit trends are sustainable relative to levels of

external reserves required to protect the value of the Bahamian dollar and, if not, the degree to

which credit policies ought to be adjusted. The main data source for this surveillance is financial

institutions’ daily reports on foreign exchange transactions and weekly balance sheet statements.

Therefore, monthly approximations may not coincide with calendar estimates reported in the

Central Bank’s quarterly reports. The Central Bank will release its “Monthly Economic and

Financial Developments” report on the Monday following its monthly Monetary Policy Committee

Meeting.

Future Release Dates:

2012:

February 27, April 2, April 30, June 4, July 2, July 30, September 3, October 1, October 29,

December 3, December 24.

Page 1

Monthly Economic and Financial Developments

December 2011

1. Domestic Economic Developments

Indications are that the domestic economy maintained a positive, although mild, growth momentum, during

the month of December. More favourable foreign investment activity, alongside ongoing public sector

infrastructure projects, buoyed construction output and the tourism sector benefitted from stronger seasonal

hotel earnings. The central Government’s overall deficit contracted over the first five months of FY2011/12,

occasioned by an increase in revenues and a marginal decline in expenditures. In the monetary sector,

liquidity and external reserves rose modestly, supported by net foreign currency inflows arising partly from

foreign investment and Government’s financing activities.

Preliminary evidence suggests that tourism sector output continued to strengthen in December. The 28.5%

surge in sea passengers, alongside a more moderate 7.7% advance in air arrivals, led to higher growth of

23.8% in overall tourists, relative to 1.7% in 2010. The Family Island market showed the largest increase in

visitors (34.1%), buoyed by gains in the sea (38.3%) and air (4.3%) segments. Visitors to New Providence

firmed by 21.4%, with a greater rise of 27.4% in the sea component; compared with the 7.5% hike in air

visitors. Grand Bahama recorded a more modest 9.8% improvement in arrivals, reflecting gains in air

passengers and sea tourists, of 15.9%, and 8.6%, respectively.

For 2011, growth in total visitor arrivals slackened to 6.3% from a 13.1% hike in 2010, with the 9.1%

expansion in the larger sea segment outweighing the 2.1% reduction in air visitors. In terms of the major

markets, tourists to New Providence—which accounted for the bulk (53.8%) of total arrivals—rose by 2.8%,

due entirely to a 5.0% gain in sea traffic, as air passengers fell by 1.6%. Similar conditions prevailed in

Grand Bahama (14.6% of the market), as the 7.7% expansion in sea arrivals offset a 12.2% falloff in the air

component, for a 4.8% upturn in the total. Visitors to the Family Islands—at 31.6% of overall arrivals—

strengthened by 13.7%, extending the 11.7% increase of the prior year, as sea passengers advanced by

15.5% and air arrivals rose by 1.2%.

Consistent with the gains in stopovers, hotel performance data from a sample of properties in Nassau and

Paradise Island showed room revenues for December advancing by 6.5% over the comparable period a

year earlier. Underpinning this outturn was a 3.3 percentage point gain in the occupancy rate to 58.3%,

accompanied by a $3.55 increase in the average daily room rate to $270.65. Similar gains were reported

for the entire year, with the 3.1% hike in room revenues linked to a 1.3 percentage point advance in

average occupancy rates to 63.9%, and a 1.9% firming in the average daily room rate to $236.26.

However, the growth was not broad-based, as only half of the properties recorded improvements in

earnings, and total room revenues were still 8.9% lower than the comparative 2008 level.

Data on the central Government’s fiscal operations for the first five months of FY2011/12 showed a $38.8

million (20.1%) reduction in the deficit to $154.0 million, relative to the comparable period a year earlier.

Total revenue grew by $18.6 million (4.0%) to $485.0 million, the bulk of which was attributed to tax

revenue. In particular, higher excise tax receipts supported an $8.7 million (3.6%) upturn in taxes on

international trade; business & professional fees firmed by almost two-thirds to $17.6 million, owing to an

increase in “general” business fees; and tax receipts from property sales elevated other “miscellaneous”

taxes, by $2.3 million (1.7%). Non-tax revenue rose marginally by $0.2 million (0.4%) to $58.8 million.

Page 2

Total expenditure contracted by $20.2 million (3.1%) to $693.0 million, as a public corporation’s partial

repayment of outstanding debt lowered the Government’s net lending to public bodies, by $24.8 million in

contrast to a year earlier increase of $19.8 million. Capital spending decreased by $7.2 million (10.6%) to

$60.5 million. Outlays for asset acquisitions, which fell by $8.6 million (56.5%), reverted to trend levels,

following a one-off land-related increase a year earlier. In contrast, current expenditure grew by $31.5

million (5.5%) to $603.3 million, buoyed by a $29.3 million (28.4%) advance in purchases of goods &

services—driven by higher outlays for insurance-related payments—and more modest increases in wages

& salaries, by $3.4 million (1.5%). Transfer payments were lower by $1.2 million (0.5%).

2. International Developments

On the international front, economic conditions were mixed during the review month. In the United States,

the recovery remained relatively subdued, while the euro area continued to be adversely affected by the

ongoing fallout from the region’s sovereign debt crisis, and growth in China showed signs of a modest

slowdown from previous robust levels. Against this backdrop, the IMF, in January 2012, revised

downwards its 2012 forecasts for global growth, by 0.7 of a percentage point to 3.3%. The expectation is

that the euro area would fall into recession, with a 0.5% decline in overall output; while growth in China is

expected to slow by 0.8 of a percentage point to 8.2%. In a positive development, the forecast for the

expansion in United States’ real GDP remained unchanged at 1.8%.

Indications are that output growth in the United States strengthened to an annual rate of 2.8% in the fourth

quarter of 2011, from 1.8% in the prior three-month period, buoyed by an uptick in personal spending and a

build-up in inventories. Manufacturing output firmed by 0.4% in December, compared to a 0.3% falloff in

the prior month. Similarly, retail sales edged up by 0.1%, after a 0.4% expansion in November. Despite

the general improvements, the housing sector remained weak, with housing starts and building permits

falling by 4.1% and 0.1%, respectively, over the prior month. The employment situation improved in

December, as nonfarm payrolls increased by 200,000, resulting in a 0.1 percentage point reduction in the

unemployment rate to 8.5%. Prices were stable for the second consecutive month during December, but

rose by 3.0% on an annualized basis. In a bid to further encouraging economic growth, the Federal

Reserve maintained its accommodative monetary policy stance, with key interest rate kept within the 0-

0.25% range.

In Europe, concerns over the potential spread of the Greece debt crisis to other economies in the euro

zone, along with the continuation of fiscal austerity measures in several nations, led to a broad-based

weakening in European economic activity. In the United Kingdom, decreased output in the mining and

quarrying sector contributed to a 0.6% fall in industrial production in November, following a decline of 1.0%

in the prior month. On the trade side, the external deficit widened to £2.6 billion from £1.9 billion in

October, as the £0.7 billion deterioration in the goods deficit to £8.6 billion outweighed the marginal £0.1

billion gain in the services account surplus to £6.1 billion. However, in December, retail sales rose by 0.6%

in contrast to a 0.4% reduction a month earlier. As a consequence, labour market conditions remained

challenging, with 118,000 jobs being lost during the three months to November, resulting in a 10 basis point

increase in the unemployment rate to 8.4%. With regard to prices, the inflation rate slowed on a monthly

basis, by 0.6 of a percentage point, to 4.2% in November, due mainly to lower costs for petrol, gas and

clothing. In monetary policy developments, the Bank of England decided to maintain the size of its asset

purchase programme at £275 billion, and kept the official bank rate at 0.5%.

Page 3

Industrial production in the euro area fell for the third consecutive month in November, by 0.1%, due to

declines in both durable and non-durable consumer goods’ production. Similarly, retail sales contracted by

0.8%, in contrast to a marginal increase of 0.1% in the previous month. Buoyed by a €7.7 billion

strengthening in exports relative to a €2.1 billion gain in imports, the trade surplus grew by €5.9 billion to

€6.9 billion over the month. With no improvement in the economy, the unemployment rate was unchanged

in November at 10.3%, while the growth in average consumer prices softened to an annualized 2.7% in

December from 3.0% a month earlier. Although inflation remained above the 2.0% target, concerns over

the state of the region’s economy led the European Central Bank to lower the key interest rate by 25 basis

points to 1.0%.

Over the review period, the rate of economic expansion within the major Asian countries slowed, but

remained considerably more robust than other regions. In China, preliminary data showed real GDP

growth easing to 8.9% in the December quarter, from 9.1% in the prior three-month period. The trade

surplus widened, on a monthly basis, by $2.0 billion to $16.5 billion in December, as exports grew

marginally by 0.1% to US$174.7 billion, while imports fell by 1.1% to US$158.2 billion. Retail sales also

increased by 1.4% over the month, following a 1.3% gain in November. Led by higher costs for food,

consumer prices edged up by 0.3% in December, in contrast to a 0.2% falloff a month earlier.

Indications are that economic conditions weakened in Japan over the review period. In particular, industrial

output declined by 2.6% in the penultimate month, reflecting decreased output in machinery production and

steel, after a 2.2% expansion in October. In trade developments, the deficit widened by ¥405.8 million to

¥687.6 billion, occasioned by a 5.6% narrowing in exports to ¥5,196.6 billion and a 1.6% gain in imports to

¥5,884.2 billion. In this environment, the unemployment rate steadied at 4.5% on a monthly basis. The

consumer price index declined by 0.6% from October’s level, due mainly to lower food costs. Given the

underlying weakness in the economy, the Bank of Japan decided to keep the uncollateralized overnight call

rate at the range of 0.0 to 0.1%.

Crude oil prices contracted by 2.5% to $107.62 per barrel in December, as OPEC’s oil production

advanced by an estimated 170,000 barrels per day (bpd), to average 30.8 million bpd. Similarly, the price

for gold narrowed by 10.5% to $1,563.70 per troy ounce over the month; however, silver prices advanced

by 15.1% to $27.84 per troy ounce.

During December, most of the major stock markets rallied, buoyed by signs of continued growth in the

United States’ economy, where the Dow Jones Industrial Average (DJIA) and the S&P 500 index rose by

1.4% and 0.5%, respectively. European bourses also registered gains, with the United Kingdom’s FTSE

100 and France’s CAC 40 growing by 1.2% and 0.2%, while Germany’s DAX fell by 3.1%. In Asia, Japan’s

Nikkei 225 index advanced by 0.3%; however, China’s SE Composite declined by 5.7%.

Amid the heightened uncertainty in Europe, investors increased their holdings of relatively “safe” US Dollar

denominated assets. In particular, the Dollar strengthened against the euro, by 3.8% to €0.7717. It also

firmed vis-à-vis the Swiss Franc, by 2.7% to CHF0.9376, the British pound by 1.0% to £0.6431, and the

Canadian dollar, by 0.4% to CND $1.0212. In contrast, the Dollar depreciated against both the Chinese

Yuan and the Japanese Yen, by 1.2% and 0.9%, to CNY6.3026 and ¥76.90, respectively.

Page 4

3. Domestic Monetary Trends

December 2011 vs. 2010

Money and credit trends for the month of December featured a build-up in liquidity and external reserves,

owing primarily to foreign currency loan receipts and other scheduled inflows, and in an environment of

subdued credit activity. Accretions to excess reserves more than tripled to $44.4 million from $13.8 million

a year ago, while gains in excess liquid assets accelerated by more than two-fold to $25.9 million.

External reserves firmed by $33.1 million to $892.0 million during the review month, a turnaround from a

$10.0 million contraction a year earlier. Underpinning this development, the Bank's net foreign currency

transaction with the public sector was reversed from a $10.6 million net sale in 2010 to a $20.8 million net

purchase during the review period, reflecting the receipt of proceeds from a multilateral loan and external

lease payments. Similarly, the Bank purchased a net of $12.4 million from commercial banks, a turnaround

from a $0.8 million net sale in the prior period. Banks, in turn, purchased a net of $15.0 million from their

customers, partly related to net foreign investment inflows, in contrast to an $8.4 million net sale a year

ago.

Growth in Bahamian dollar credit narrowed to $10.2 million from the previous period’s $41.8 million, as

accretions to credit to the private sector slackened to $6.6 million from $29.8 million in 2010. This outturn,

reflected a $5.9 million reduction in commercial loans, in contrast to a $28.3 million expansion in the prior

year, and a $4.4 million slowdown in consumer credit growth to $5.8 million. In contrast, mortgages firmed

by $6.7 million, a reversal from an $8.7 million reduction a year ago. Net claims on the Government fell

marginally by $0.4 million, relative to 2010’s $8.2 million accumulation; however, accretions to credit to the

rest of the public sector edged up by $0.3 million to $4.0 million.

Banks’ credit quality indicators remained elevated over the review month, although total private sector loan

arrears contracted by $34.4 million (2.8%) to $1,208.1 million, lowering the corresponding ratio of arrears to

total loans by 59 basis points to 19.3%. A disaggregation of delinquencies by age showed most of the

retrenchment in the short-term 31-90 day segment, which declined by $21.3 million (5.1%) to $392.0

million, alongside a 35 basis point softening in the attendant ratio to 6.3%. Similarly, non-performing

loans—those exceeding 90 days and on which banks have ceased accruing interest—fell by $13.2 million

(1.6%) to $816.1 million, with the corresponding ratio narrowing by 23 basis points to 13.0%.

The reduction in aggregate arrears was broad-based, led by mortgage delinquencies which fell by $13.2

million (2.0%) to $650.0 million, and with decreases in both the short-term ($10.7 million or 5.1%) and nonperforming

segments ($2.6 million or 0.6%), respectively. Similarly, commercial arrears moved lower by

$10.9 million (3.7%) to $286.7 million; delinquencies in the 31-90 day component declined by $4.7 million

(5.1%), while non-performing loans decreased by $6.2 million (3.0%). Consumer loan delinquencies fell by

$10.3 million (3.6%) to $271.4 million, with both the short-term segment and the non-accrual component

down by $5.9 million (5.3%) and $4.4 million (2.6%), respectively.

Amid the slight decline in delinquencies, banks lowered their total provisions for loan losses, by $3.5 million

(1.1%) to $299.6 million. As a consequence, the ratio of provisions to total arrears and non-performing

loans grew by 41 and 17 basis points, to 24.8% and 36.7%, respectively. During the month, banks wrote

off an estimated $8.4 million in loans and recovered $1.5 million in outstanding balances.

Page 5

Foreign currency credit expanded by $44.8 million in December, a reversal from a $32.8 million reduction a

year earlier. This outturn reflected a $49.8 million increase in claims on public corporations, mainly related

to a local utility company, a turnaround from the prior year’s $19.3 million contraction. In contrast, the

decline in net credit to the Government and claims on the private sector narrowed, by $0.9 million and $4.1

million, from $1.7 million and $12.4 million, respectively, a year earlier.

Growth in Bahamian dollar deposits accelerated by $17.3 million to $26.3 million, buoyed by a $16.8 million

firming in demand deposits, compared to a $4.8 million accumulation in 2010. Savings balances grew by

$12.5 million, up from $3.3 million in the previous year, while fixed deposits declined by $3.0 million,

following the prior period’s $0.8 million contraction.

In terms of interest rates, banks’ weighted average deposit rate softened by 6 basis points to 2.10%, with

the highest rate of 5.25% offered on balances of over 12 months. In contrast, the weighted average loan

rate firmed by 4 basis points to 10.72%.

January – December 2011

During 2011, both liquidity and external reserves expanded modestly, although intra-year levels attained

new peaks benefitting from several one-off public sector and foreign direct investment related

transactions—including the Government’s divestment of 51.0% of its holdings in BTC. Given the subdued

pace of the domestic recovery and the persistently high rate of unemployment, credit to the private sector

rose modestly, and banks’ loan delinquencies remained at elevated levels. In this context, excess reserves

grew by $45.4 million to $434.9 million, a slowdown from the $127.4 million expansion a year ago.

Similarly, accretions to excess liquid assets moderated by $226.0 million to $83.6 million.

External reserve gains slowed marginally in 2011 by $4.7 million to $30.9 million. The Bank's net purchase

from commercial banks contracted by over 50% to $91.2 million, as they in turn, recorded a fall in net

purchases by $123.6 million to $115.6 million. The Bank’s net sale to the public sector tapered by $125.9

million to $83.5 million, reflecting receipts from divestment activities and other modest one-off inflows.

Growth in Bahamian dollar credit fell sharply by $164.2 million to $222.4 million. This was largely explained

by an almost two-thirds reduction in gains to net claims on the Government, to $118.8 million, as budgetary

requirements were supplemented by extraordinary inflows. Given the modest improvement in economic

conditions, credit to the private sector strengthened by $114.3 million (1.9%), outpacing the 0.4% and 1.1%

increase for 2010 and 2009, respectively—although significantly below 2008’s 6.8% expansion. This

outturn, reflected gains in the commercial and consumer components––which accounted for 34.3% and

16.4% of total loans––by $78.9 million and $9.6 million, respectively, following declines of $3.0 million and

$35.7 million in 2010. In a modest offset, growth in the largest component mortgages—which accounted

for 49.3% of the total––was more than halved to $25.8 million from $64.7 million in 2010. Further, claims

on public corporations declined by $10.5 million, a turnaround from a $32.6 million upturn a year earlier.

Despite the ongoing recovery in the real sector, borrowers’ continued to face challenges in meeting their

debt obligations. As a result, banks’ credit quality indicators remained at relatively high levels over the

year. Total private sector arrears, although staying within the $1.1 billion to $1.2 billion range, rose by

$69.1 million (6.1%) to $1,208.1 million compared to a 4.5% rise in 2010; however, the rate of growth was

much slower than the 42.3% and 44.5% gains for 2009 and 2008, respectively, during the height of the

economic recession. As a percentage of total loans, arrears rose by 71 basis points to 18.3% and were

Page 6

above the 12.7% and 9.5% registered in the prior two years. A breakdown of total arrears showed that the

average age continued to lengthen. The increase in delinquencies was due solely to a $70.2 million (9.4%)

expansion in the non-performing component to $816.1 million, resulting in an 86 basis point uptick in the

corresponding ratio to 13.0%. In contrast, the 31-90 day component fell by $1.1 million (0.3%) to $392.0

million, with the attendant ratio declining by 16 basis points to 6.3%.

The increase in aggregate arrears was mainly attributed to the worsening in the mortgage and commercial

components. Mortgage delinquencies rose by $36.4 million (5.9%) to $650.0 million, as the $21.7 million

(9.8%) reduction in short-term arrears was overshadowed by a $58.1 million (14.8%) rise in non-accrual

loans. In addition, commercial arrears firmed by $34.2 million (13.5%) to $286.7 million, with both 31-90

day delinquencies and non-performing loans expanding by $28.3 million (47.9%) and $5.9 million (3.0%),

respectively. In contrast, consumer loan delinquencies declined by $1.5 million to $271.4 million, as a $7.7

million (6.9%) reduction in the short-term segment outpaced the $6.2 million (3.9%) uptick in arrears in

excess of 90 days.

Given the worsening in credit quality indicators over the year, banks increased their total provisions for loan

losses by $26.9 million (9.9%) to $299.6 million. Resultantly, the ratio of provisions to arrears rose by 86

basis points to 24.8%, while the non-performing loan ratio increased by 15 basis points to 36.7%. For

2011, loan write-offs totalled $176.5 million and recoveries amounted to $33.8 million.

During 2011, total domestic foreign currency credit contracted by $92.0 million, a turnaround from a $39.9

million increase in 2010. This outturn reflected a $68.3 million net reduction in claims on the Government,

a reversal from a similar increase a year earlier, as foreign currency receipts were utilised to repay

outstanding short-term debt. Claims on the private sector contracted by $40.6 million, following a $30.9

million weakening in the previous year. Buoyed by foreign currency borrowings by a local utility in the latter

half of the year, credit to the rest of the public sector grew by $17.0 million, following a $2.4 million rise in

the prior period.

Accretions to Bahamian dollar deposits advanced by $19.7 million to $144.3 million, bolstered by a $95.6

million build-up in demand balances, almost double the $49.3 million firming recorded in 2010. Similarly,

savings balances grew by $49.9 million, following a $21.3 million expansion a year ago. In contrast, fixed

deposits decreased by $1.3 million, after a $54.0 million gain in the prior year.

4. Outlook and Policy Implications

The pace of the domestic recovery in 2012 will depend heavily on global economic developments, in

particular the sustainability of the rebound in the United States economy, where recent economic indicators

have a favourable bias. It is expected that output and employment within the construction and related

industries will continue to benefit from Baha Mar and other large-scale foreign investment projects, which

are less sensitive to global developments, along with ongoing stimulus provided by Government’s

infrastructure improvement programmes. Tourism activity is poised to remain on an upward trajectory in

the near-term, supported by the sustained recovery in the key group segment of the market, along with

signs of an increase in overall hotel bookings during the important winter tourist season. In terms of prices,

domestic inflation is anticipated to remain moderate; however, geopolitical risks could adversely affect fuel

prices in 2012.

Page 7

On the fiscal sector side, improvements in the deficit and corresponding debt indicators will continue to

depend on the strength of the domestic recovery and the public sector’s ability to increase revenue and

curb expenditure growth.

On the monetary front, near term opportunities to support growth in both liquidity and external reserves are

expected to accrue from the ongoing gains in tourism and residual flows from various real sector activities,

in an environment of relatively mild consumer demand conditions. However, banks’ credit quality indicators

are projected to stay elevated for an extended period, until the recovery becomes more broad-based.

Comments

[uk bestessays]

I seldom expect much from online informational content these days, but you really got my interest. I think this is some of the best, most unique informative article I have ever read. I’m truly impressed....................................................:)