• Aims to protect retail investors from 'headwinds'

• Demand on course to exceed 2022's 1/4 billion

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday foreshadowed reforms to protect Bahamian retail investors from potential “headwinds” in an overseas investments market that is this year on track to exceed 2022’s $250m outflow.

John Rolle, addressing the regulator’s 2023 second quarter economic briefing, said he wanted to ensure there was “sufficient balance” such that smaller investors are able to access foreign exchange for legitimate portfolio investments overseas and not be squeezed out by larger “wholesale” demands.

Confirming that the Central Bank is eyeing reforms to the administrative policies governing the Investment Currency Market (ICM), and plans to consult with the Government on any reforms and adjustments prior to the 2023 third quarter’s end, he disclosed that first-half foreign currency demand has already outpaced that seen in the first six months of 2022.

“We are seeing a steady increase in interest, and I think that’s probably because of the lower premium with investment currency purchases, which is now just 5 percent,” Mr Rolle said in response to Tribune Business questions. “Just by way of a comparison, in 2022 for the annual numbers, it was about a quarter of a billion dollars in investment currency-related transactions. We expect this year for the numbers to look the same or greater.”

The investment currency market is frequently used by Bahamians, acting individually or through broker/dealers and financial advisers, as well as institutions to acquire overseas stocks, securities and real estate. Explaining the rationale for the Central Bank’s review, the Governor said: “We also know that in those numbers we also see some bulky transactions.

“What we think is important is to begin to anticipate how we manage what we term as wholesale investments especially for the retail side where there is a much greater scope for transactions. Part of the retail side is what we term the depository receipts (BDRs).”

BDRs are derivative securities that enable Bahamians to purchase and hold investments, such as stocks and bonds, which are denominated in foreign currency. Local broker/dealers have a quarterly BDR allocation that they can access to effect purchases of international securities on their clients’ behalf, and Mr Rolle indicated the Central Bank is concerned to preserve access by small retail investors and ensure they are not squeezed out from foreign currency access.

Indicating that BDR investments have become increasingly popular among Bahamians seeking to diversify their portfolios and/or a part of their retirement savings structures, the Governor said: “That’s a segment of the market where, if we are encouraging savings in a diversified way, we want to make certain they don’t run into any headwinds because there is insufficient balance in how access is being managed.

“We expect this year that the investment currency volumes will be at, or above, where they were in 2022. We are already ahead of the 2022 half-year estimates, so there’s no reason to believe that the end of year number will look any different.”

Mr Rolle, speaking earlier during the briefing, added: “The Central Bank is reviewing the administrative policies in place for the Investment Currency Market and the access permitted to overseas investment funding through the Bahamas Depository Receipt or BDR framework.

“On sum, the demand for investment currency, in particular, has accelerated, and the [Central] Bank is of the view that additional refinements are now needed to sustain more retail investor access, while moderating potential wholesale outflows, within a more defined multi-year framework.

“In addition, the Central Bank is continuing to explore how BDR activity, which already has a more concentrated retail appeal, could be increased. The Central Bank expects to consult with the Government on such reforms and other administrative adjustments to the Exchange Control policies before the end of the third quarter this year.”

Elsewhere, Mr Rolle said the Central Bank is “exploring” how it can give Bahamian commercial banks more “flexibility” to lend without compromising credit quality or risk management. Indicating the regulator is seeking to balance prudence with kickstarting the still-clogged lending market, he indicated that it was focusing on easing down payment requirements for borrowers.

“The Central Bank maintains a policy posture toward more growth in private sector credit, however in a sustainable fashion that does not outpace our comfort level for the external reserves,” Mr Rolle said.

“The Bank is therefore exploring how lending institutions can be given more flexibility in processing loan applications by varying downpayment requirements, including for mortgages, while guided by limits on debt service ratio and relative valuation of real estate compared to the amounts being financed. For The Bahamas, these are still the most important or effective policy levers in influencing the amount of credit flowing to the private sector.”

Mr Rolle said the surplus liquidity in the commercial banking system, now standing at $2.9bn, represents a risk that the Central Bank is monitoring given that it represents a funding source that could leak out in terms of financing foreign exchange outflows that impose pressure on the external reserves.

“In this regard commercial bank liquidity, which remains buoyant, is also a risk to be monitored, as it could be a pent-up source for outflows over the medium-term. This places renewed emphasis on increasing the private sector’s net take up of government debt that still sits on the Central Bank’s balance sheet. However, this is a medium-term policy emphasis,” Mr Rolle said.

“There continued to be improvements in credit markets, although most concentrated in declining delinquency rates on outstanding commercial bank loans. The fraction of private sector loans that were three or more months behind in payments fell to just 7.4 percent in June 2023 from 9 percent in June 2022.

“This further repositioned the delinquency rate below where it was at the start of the pandemic. In the lending space, though, commercial bank credit to the private sector was only incrementally expanded during the first half of the year, with lending for commercial purposes boosted. However, there was still no uptrend in consumer loans and mortgages.”