Fourth consecutive credit contraction for Bahamas

Friday, November 20, 2015

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas is on course for its fourth consecutive year of private sector credit contraction, with Standard & Poor’s (S&P) warning this is combining with elevated non-performing loans to “clog” economic growth.

The credit rating agency, in its full Bahamas country analysis, warned that commercial bank lending to companies and individuals had contracted for three successive years through to end-2014 - a trend that has continued through 2015.

For the Central Bank of the Bahamas, in its monthly economic report for September, warned that the contraction in total private sector credit for the first nine months of 2015 had accelerated year-over-year - from $3.3 million last year to $21.5 million.

“Reflecting the persistent softness in consumer demand, private sector credit fell by $21.5 million, outpacing the $3.3 million contraction recorded a year earlier,” the Central Bank said.

“Included in this outturn was a decrease in the mortgage component, by $22.3 million, after a $3.3 million decline in the prior year, and in the growth in consumer credit, to $17.4 million from $27.1 million in 2014.

“In a modest offset, the fall-off in commercial and other loans slowed to $16.6 million from $27.1 million.”

This echoes the trends identified in S&P’s report, obtained by Tribune Business, which warns that the inability of potential borrowers to access credit, combined with the reluctance of banks to lend and their already-elevated non-performing loan levels, continues to inhibit the Bahamian economy’s growth potential.

“Bank lending to the private sector continues to contract,” S&P said. “Banks continue to take a more cautious approach to lending as unemployment and non-performing loans (NPLs) remain elevated.

“Total credit to the private sector contracted for the third consecutive year in 2014, by 0.7 per cent, and as of August 2015, demand for private-sector credit remained low.”

The Central Bank’s evidence shows that private sector lending is set to contract for a fourth successive year in 2015, which S&P said compares to “average growth rates of nearly 13 per cent from 2005-2007 - the final ‘boom’ years in the run-up to the 2008-2009 recession.

The statistics show just how much work needs to be done to reverse the ‘contraction’ trend, and return to a situation where private sector credit is expanding. While the 13 per cent average expansion achieved between 2005-2007 may not be achievable or desirable, a return to ‘positive territory’ is essential if the GDP growth numbers are to pick up.

“After the abolition of credit restrictions in 2004, consumer lending intensified, especially in the mortgage sector, reflecting pent-up demand,” S&P added.

“Residential mortgages, which account for just over 45 per cent of private sector loans, increased by an average of almost 12 per cent per year during 2005-2009.

“However, with the onset of the great recession, mortgages have declined almost every year since 2009, including 2014, when they declined by just less than 1 per cent.” That trend, too, is set to continue in 2015, based on the $22.3 million fall-off in the first nine months.

Explaining the consequences for the Bahamian economy, S&P added: “High private sector loan arrears and non-performing loans persist, clogging growth.

“As of August 2015, total private sector loan arrears (over 31 days) reached over 20 per cent. Although this is slightly lower than the 22 per cent reached during the same period in 2014, it is still well above the 12.5 per cent in December 2008.

“Non-performing loans (those more than 90 days in arrears and on which banks have stopped accruing interest) also declined slightly, to about 15 per cent of total loans in August 2015, versus 16 per cent a year earlier, though this is still much higher than the 6.1 per cent from December 2008. Provisions to non-performing loans were 58 per cent in August 2015.”

S&P warned that relief would be a long time coming, with the Central Bank’s Credit Bureau - an initiative decided to improve borrower transparency, and reduce lending risk - unlikely to produce benefits until 2018-2019.

“To address the economy’s long-standing credit quality problems, the Government plans to establish a Credit Bureau, though it will be several years before the economy sees the benefits,” its Bahamas country report said.

“The rollout wouldn’t be until 2017, and because everyone in the market would start with a good credit standing, it will take some time before it will function efficiently.”

Despite these issues, S&P acknowledged that Bahamian commercial banks remain well-capitalised and largely able to manage losses and elevated non-performing loan levels - apart from Bank of the Bahamas.

However, it agreed that the troubled BISX-listed institution’s woes were not a systemic risk to the wider Bahamian commercial banking system, nor were they “representative of widespread underprovisioning”.

Yet the S&P report noted that reduced profitability had resulted in commercial banking industry jobs, a staple of the Bahamian middle class, declining by 4.5 per cent in 2014. The workforce in the international financial services sector also shrunk, albeit by a smaller 1.9 per cent, in 2014.

“In 2014, however, faced with slow growth, persistently high unemployment, weak credit demand and high levels of loan arrears and non-performing loans, domestic banks focused on cost cutting, and employment in the banking sector contracted by almost 4 per cent,” S&P said.

“In particular, employment in the domestic banking sector, which employs about 75 per cent of employees in the financial sector, declined by 4.5 per cent, while employment in the offshore sector declined by 1.9 per cent.”

S&P added that commercial and international banks were continually seeking to “outsource back office operations to keep costs down”.

Comments

SP says...

**Perry Christie declared we "turned the corner." But the idiot is going the wrong way!**

Posted 20 November 2015, 3:39 p.m. Suggest removal

Economist says...

We are now getting the truth. The Rating Agencies don't have any interest in The Bahamas other that reporting on our economic health.

No political excuses or promises, just the cold hard facts....reality.

Must say, it does not look good.

Posted 20 November 2015, 4:46 p.m. Suggest removal

observer2 says...

We need to stop listening to these international credit rating agencies. The government of the Bahamas is taking care of its citizens. The reason why private individuals are borrowing less is because the government, through its many positive projects, is borrowing more!

The government is on target to collect $300 million per annum from the Bahamian people through VAT. This money will be put to good use with Bamsi, BTC, BEC, COB, BoB, Carnival, Baha Mar concessions (non-payment of $30 million BEC bill yet the lights are still ablaze every night) etc.

Also the total national debt over the last 18 months has increased from $5.5 to $6.3 billion and is rapidly approaching 100% of GDP. These funds are being used to pay salaries and major projects of the government. Also many countries have large national debts such as Jamaica, Venezuela, Cuba, Barbados, Grenada, Puerto Rico, Detriot etc. and they are still surviving.

Now, thanks to our government, we don't need to borrow money in US dollars abroad which will increase our external debt. Now the government in borrowing almost monthly through the issuance of short term Treasury bills and notes. These are an excellent investment for Bahamian savers because instead of giving our money to the foreign banks we can give it to the government who will put it to good use to pay salaries of our hard working civil servants.

Some people are unduly concerned about our reduced US$ foreign reserves (which keeps the Bahamian dollar on par with the strong US dollar) due to the lack of big foreign investment projects. This will shortly turn around because we will be bringing in more foreigners to run our country for us - first BEC will be run by foreigners, then Baha Mar will get new foreigners and most positively we are bringing in foreigners to run our national health care system. Some people are also arguing that we need to bring in foreign lawyers and police to run our legal systems for us. This is all very positive.

All the opposition and rich Bahamians seem to be doing is complaining on Facebook about how bad things are. But the current government is taking steps to make things even better in the Bahamas!

Posted 21 November 2015, 9:34 a.m. Suggest removal

PLP Vision 2030 - Help and Hope are here today!

http://tribune242.com/users/photos/2015…

Posted 21 November 2015, 11:53 a.m. Suggest removal

**.......... Bullshit heavily infused with perfume, *is still bullshit* ............**

So "We need to stop listening to these international credit rating agencies" but keep listening to the lies, deception, and bullshit the PLP promised from "A Charter For Governance" campaign 2012?

What an arrogant and total insult to our intelligence! People cannot eat, digest and live on bullshit!

How many thousands of Bahamians trusted and voted for the PLP because of the promised "mortgage relief program" that have since lost their homes, careers, business's and everything else trusting in the PLP "Help And Hope Is On The Way" nonsense?

How many more thousands are unemployed because they trusted in the PLP 10,000 jobs promise?

How many thousands are DEAD, TRAUMATIZED, ROBBED, MUGGED, MOLESTED AND DISENFRANCHISED because they fell for the PLP promise of "having the solution to crime"?

How many of these people have any reason **whatsoever** to vote PLP again come 2017?

What invisible imaginary **tangible** "steps" have the current government taken to make things better for Bahamians?

**PLP better not come knocking on my door talking about wanting my vote.**

Posted 21 November 2015, 8:44 p.m. Suggest removal

***PLP Vision 2030?* O.K., we will just live on nothing and wait on you then**

Posted 21 November 2015, 8:50 p.m. Suggest removal

**Where y'all hiding this "Help and Hope", in offshore bank accounts? **

Posted 22 November 2015, 7:38 a.m. Suggest removal

sheeprunner12 says...

The mainstream banks have made it so difficult for a person to borrow money that it is no wonder that there is so much excess liquidity in the system .......... why should I have to have $10,000 cash in the bank or $20,000 worth of property plus a full time job and two or three persons to vouch for my character to borrow $10,000 from a bank????? ........... how many young Bahamians can meet that unreasonable standard????? .......... don't even mention the word "mortgage" or "business loan"

Posted 21 November 2015, 3:23 p.m. Suggest removal

Sheeprunner12, have you talked with the number boys? I would have thought they had money to lend. Besides what do you need a loan for? Don't you have a government job, a low income house through BoB where you don't have to pay the mortgage, a third hand broke down car imported on the island and don't your children go to a fully paid government school (Baha Mar will open to give all of our kids jobs very soon according to Christie) and free national health care will be here shortly so we will not have to pay for medical insurance. If I were you I wouldn't get a loan from these foreigners.

Posted 21 November 2015, 6:03 p.m. Suggest removal

Your description doesnot apply to me or 340,000 other Bahamians ...... and the last time I checked, the numbers houses do not operate banks ....... what is happening in those places are still generally unregulated by the CBOB and the government

Posted 22 November 2015, 9:06 a.m. Suggest removal

newcitizen says...

Why would a bank let you borrow money without providing all of those things? They stand to lose it when you fail to pay it back. $10,000 is a lot of money to trust to someone. It's not a right, it's a privilege.

Posted 22 November 2015, 8:44 p.m. Suggest removal

Observer2, the problem is that if the Rating Agencies down grade The Bahamas to Junk Bond status we could all find the B$ devalued.

The Government has borrowed a lot of US$ and the cost to pay off that debt will sky rocket.

The Insurance companies and pension funds wont want to buy The Government Bonds because it won't be able to pay the interest, indeed, it might not be able to pay some of it back.

Look to Greece to see what happens.

The IMF will be called for help.

Those in the Civil Service will find that their jobs are under threat and most government workers will be subject to a pay cut.

Posted 21 November 2015, 6:18 p.m. Suggest removal

**@Economist. Help and Hope Is On The Way. Its coming with Santa Claus**

Posted 21 November 2015, 8:56 p.m. Suggest removal

Economist. We need and we will devalue our currency in order to be competitive. All industrialized countries have devalued their currency to compensate for the strength of the US economy compared to theirs. Look at the Euro (since January it has been devalued from $1.20 to $1.06 or 16%) and look at the Canadian dollar (since January it has been devalued from $0.86 to $0.64 or 14%). These are just two examples. You should also look at Brazil, China, Russia, Norway and South Africa as well. Every developed country has devalued except the Bahamas.

With our growing debt, high unemployment, lack of foreign investment, crime, low education level etc. etc. a devaluation will be a big boost to our economy. I argue that we need to devalue our currency from $1.00 too $0.80 or 20%. The devaluation needs to be sudden and without warning just like they did in China so that people don't become afraid and try to take their money out of the banks, Bahamian stocks and bonds.

Once the devaluation is done labour will become cheaper. The increased minimum wage, national insurance rates, business license fees and VAT is making labour too expensive for foreign businesses. Foreigners will make more money in their hotels and the expanded economy will trickle down to the poor.

Take a look at pages 52 and 53 of the PLP Manifesto for 2012 (below). Their visionary identification of our current financial problems and the steps they are taking to correct the issues are spot on. With VAT, recapitalization of BoB, Bamsi etc. we are on the correct course. Steady as she goes.

Posted 22 November 2015, 7:35 a.m. Suggest removal

PLP Vision 2030 - Pages 52 and 53

Posted 22 November 2015, 7:52 a.m. Suggest removal

Posted 22 November 2015, 8:51 a.m. Suggest removal

Some very good points.

Posted 22 November 2015, 6:55 p.m. Suggest removal

Allowing any kind of devaluation of the Bahamian dollar would be catastrophic to the economy. We do no produce anything in this country, we have a trade deficit of over 95%, we have no natural resources for our own use or export. We are entirely tied to the buying power of the US dollar and being tied to it.

Posted 22 November 2015, 8:48 p.m. Suggest removal

**You Deaf or just very, very stupid?... Bullshit heavily infused with perfume, is still bullshit!**

This is an absolute insult to our intelligence!

Only the PLP will try selling an open bag of stinking rotten fish guts and tell us its fresh grouper fillet.

To start withWe **are not** and industrialized country, and have no comparison to industrialized countries!

These clowns are really trying to convince the electorate that devaluation is a good thing?

Our growing debt, high unemployment, lack of foreign investment, crime, low education level, illegal immigrant dilemma, etc. etc. are direct results of poor management, bad leadership and corruption, pure and simple!

Even a corrupt cesspool like Haiti's GDP growth is up 3.5%!

**Regionally, Dominican Republic, Turks and Caicos, Bermuda, even Cayman Islands economies are the benchmarks of where Bahamas should be heading if we had sensible leadership.!**

http://www.globalpropertyguide.com/Cari…

http://www.mapsofworld.com/united-kingd…

http://country.eiu.com/Cayman%20Islands

No question that the PLP totally ***F-A-I-L-E-D,*** Bahamas crashed and is now burning!

This PLP minion needs to admit obvious failure, instead of continuing outright blatant lying and attempting to deceive people that all is well. What fool will believe this utter nonsense?

Bahamians today are not ignorant as their parents were 25 years ago. No amount of calling bullshit pumpkin pie will ever make us believe that devaluation is a good thing.

**Knock my door asking for my vote and I will spit on you, just like you spat on our people!**

Posted 22 November 2015, 8:40 a.m. Suggest removal

Observer2 is just being very provocative ............ that's fine

Posted 22 November 2015, 9:09 a.m. Suggest removal

**.............................. Oh, we just bullshitting for true? .........................**

We should all continue trusting the unmistakable proven leadership abilities of Rt. Honorable Perry Gladstone Christie. Knowing we can rely on his lifetime of experience and service to the country. No one could possibly have any reservations, sound reason or thoughts about voting PLP All The Way, no matter how dark things look in the short, medium and long term.

P.M. Perry Christie will guide us through these perilous waters and resolve **ALL** issues important to Bahamians.

Lets stay the course with PM Christie and give him our unshakeable, blind support in 2017!

5 more years for Christie and the PLP! *Forward, Upward Onward Together! will continue to be our mantra.*

We talking bullshit, so no point in going just halfway. Bullshit pie anyone?

Wonder why I suddenly feel moronic, dizzy and nauseous?

Posted 22 November 2015, 12:13 p.m. Suggest removal