By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank's governor yesterday said measures imposed to restrict foreign currency outflows will create $300m in "buffers" to safeguard the external reserves and the fixed US dollar peg.

John Rolle revealed that the regulator has suspended all approvals for Bahamians seeking to invest in foreign securities and real estate, and requested that the National Insurance Board (NIB) liquidate "some" of its overseas investments and return the proceeds back home, as part of a package intended to protect the country's monetary foundation from the COVID-19 fall-out.

Signalling the Central Bank's determination to maintain The Bahamas' one:one fixed exchange rate with the US dollar, Mr Rolle said these two initiatives will join the bar on Canadian-owned bank dividend remittances and relaxation on bank foreign exchange sales to the public in helping the foreign reserves to withstand the immense pressure imposed by the absence of tourism inflows.

And he warned that the regulator was prepared to act swiftly in imposing even harsher restrictions if the need arises, which would "target domestic import capacity" in a bid to conserve foreign currency resources that are set to experience a major reduction in 2020.

While the suspension of economic activity for the past six weeks due to the national lockdown has kept the country's foreign reserves at near-$2bn for the moment, Mr Rolle said the Central Bank is projecting a reduction "potentially exceeding $1bn" which would leave them somewhere between $800m and $1bn at year-end.

And, although this level will still offer "adequate support in place to uphold the value of the Bahamian dollar fixed exchange rate", the governor said it was essential for The Bahamas to "maintain currency stability in the interim" - and prevent any possibility of a devaluation - while the economy attempted to recover from the COVID-19 pandemic.

"I would say that collectively, between the various measures that the Central Bank has identified, we're looking at in excess of $300m in buffers," Mr Rolle replied, when asked by Tribune Business how much the restrictions will save in foreign currency outflows.

Addressing the Central Bank's quarterly economic developments press conference, he added: "One should appreciate that we're still assuming that this foreign exchange is being diverted and used for other consumption in the economy.

"When we do our overall outlook for the reserves, we assume all these measures have been in place and are contributing to the use of foreign exchange that takes place in the economy. Collectively, between the four sets of measures, we're looking at in excess of $300m in buffers provided to foreign exchange activities."

Retaining this $300m within the Bahamian economy could yet prove vital to ensuring the country has sufficient foreign currency reserves to support the one:one peg with the US dollar. Tribune Business's revelation last week about the prohibition on Canadian bank dividend repatriations sounded alarm bells in the private sector, yet this is just one measure in a wider package.

Mr Rolle said that Bahamian and resident access to foreign exchange for international capital markets and real estate investments is suspended until the economic recovery becomes "entrenched", giving no date for when this might be lifted.

This blocks investors seeking access to global opportunities via both the Central Bank's Investment Currency Market (ICM) and the Bahamian Depository Receipt (BDR) initiatives. The former, aided by the delegation of authority to the commercial banks, had allowed Bahamians and residents to buy and sell foreign currency at a 5 percent and 2.5 percent premium, respectively, above the official rate.

The BDR initiative, meanwhile, allowed Bahamians and residents to make local currency investments in investment funds whose broker/dealer sponsors then converted into foreign currency for the purpose of acquiring international securities. This programme, on annual basis was able to consume 5 percent of the external reserves up to a maximum of $35m.

Urging Bahamians and residents to focus on local opportunities, Mr Rolle said access to foreign exchange through these mechanisms will resume "once market uncertainties around the COVID-19 pandemic subside". All approvals granted under both initiatives prior to May 1 will expire on June 30, 2020.

He also justified the halt to exchange control approvals for foreign bank dividend repatriations by saying it has the "dual effect of keeping buffers in place for an expected increase in credit losses and halting remittances abroad".

"In keeping with the principle of viewing the National Insurance Board's foreign investments as an extended support for the foreign reserves, the Central Bank has requested NIB to liquidate some of its external investments and to bring the proceeds back onshore," Mr Rolle added.

"Commercial banks have been given a more relaxed margin within which to sell foreign exchange to the public, before they are able to draw on the Central Bank's foreign reserves to supply sales to the public."

NIB's foreign currency investments, according to its last audited financial statements from 2016, amounted to more than $82m. The relaxed commercial bank margin, meanwhile, has increased the ceiling on "the Bahamian Open Position" for foreign exchange transactions to the maximum 5 percent of Tier 1 capital from "the more binding $5m limit on net long exposures".

And, indicating that the Central Bank will do whatever it takes to maintain the fixed US dollar exchange rate peg, Mr Rolle warned: "The Central Bank is prepared to take additional, broader measures if necessary, to conserve on foreign exchange, and would do so in the near-term rather than later if the outlook justifies this. If adopted, these measures would target domestic import capacity....

"The economy will operate within more binding foreign exchange constraints in the near-term. However, the tools at the Central Bank's disposal can protect the foreign reserves, and prioritise access to foreign exchange. Indeed, the economy must maintain currency stability in the interim until the positive medium-term prospects are within reach."

He added that using monetary policy as an economic stimulus tool was "not an option for The Bahamas" as any reduction in interest rates or relaxation of credit policies would spark a surge in import demand and undermine the foreign reserves at the worst possible time.

Mr Rolle said the foreign reserves had remained at around $2bn through the end of March because the COVID-18 enforced lockdown had "suppressed a lot of spending in the economy. We do anticipate that as businesses start to operate and replenish inventory the reserves will begin to see some reduction.

"There's no immediate concern about the level of reserves," he added. "That is qualified by saying we look at the reserves relative to the tools we have to manage foreign exchange. We're confident The Bahamas has the array of tools needed to preserve the reserves at a comfortable level.

"There should be no concern. But we should expect, if the protracted nature of the shutdown in the economy endures for very long, the measures will have to become more restrictive to keep the reserves at a comfortable level."

Mr Rolle said the foreign reserves remain at "healthy levels" despite concerns voiced by one of his predecessors as Central Bank governor, James Smith, that they have been artificially inflated by government borrowing - especially the $750m US dollar bond that was placed in November 2017.

The present governor, though, said the Central Bank had seen "a lot of" cases where the Government had been "too eager to repay foreign currency debt and it consumes reserves at an inordinate pace".

However, Mr Rolle said the Government's foreign currency borrowings were often too quickly interpreted as a move to boost the foreign currency reserves rather than the necessary rebalancing of its debt profile.

"We focus more on the comprehensive debt management strategy of the Government," he explained. "What we have to understand in The Bahamas is that once a fiscal deficit is incurred, you have less freedom in how to finance it.

"If you finance it in Bahamian dollars you lose reserves, and if you finance it in foreign currency, you're essentially obtaining foreign exchange to support the expenditure you've incurred.

"The first thing we should try to manage and minimise is the extent of the deficit. That's not an option right now as the Government needs to stabilise the economy. If you're not managing the size and extent of the deficit, you have little freedom around what the next step looks like in an economy that's dependent on foreign exchange to cover expenditure."