**Budget Communication** estimates for economic growth indicate that the rate moderated during 2007 in line with global trends, as the slowed rate of expansion in consumer spending and construction activity offset the improvement in tourism output.

As customary, the communication in the House of Assembly this week spoke to global and domestic economic developments as a background for the 2008-2009 budget presentation. The Hon. H.A. Ingraham, Prime Minister and Minister of Finance, delivered the communication, noting that conditions continued to support stable money and credit developments, although the persistent upward spiral in global oil prices caused acceleration in the rate of domestic consumer price inflation.

Taking account of the impact of financial and credit developments on the real economy, the International Monetary Fund (IMF), in its April 2008 World Economic Outlook, forecast that global economic growth slowed marginally in 2007, to 4.9% from the 5.0% recorded in 2006. In the United States the housing crisis continued to spill over into other sectors of the economy, with indications that the level of growth was 2.2%; in the Euro area it was 2.6%; and in the United Kingdom, 3.1%. The rapid pace of expansion was maintained for the Asian economies, led by China’s robust 11.4%.

**Domestic Developments**

Prime Minister Ingraham reported that the preliminary 2.8% growth rate for 2007 as estimated by the Department of Statistics follows 3.3% and 4.6% growth in 2005 and 2006. Economic growth in the Bahamian economy was supported by strong, yet tempered credit expansion and construction activity, which overshadowed improvements in the tourism sector. Growth occurred within the context of upward pressure on domestic consumer price levels, due to increases in global oil and food prices.

On the monetary side, the moderated pace of credit growth, alongside significant foreign currency inflows during the first half of the year, led to an expansion in bank liquidity. The external current account deficit narrowed, occasioned by an increase in the services account surplus which mitigated deteriorations in the merchandise trade and income accounts. A reversal in banking sector transactions to a net outflow, combined with reduced direct investment receipts, caused a sharp contraction in the surplus on the capital and financial account.

Some Highlights:

• Buoyed by higher fuel and food costs, consumer price inflation, as measured by changes in the average Retail Price Index, firmed by 2.50%, up from 1.83% in 2006.

• The unemployment rate in The Bahamas advanced moderately to 7.9% in 2007, from 7.6% in 2006, and was primarily explained by the addition of 5,850 persons to the labour force, a rise of 3.2% over 2006.

• Provisional data for the balance of payments showed a narrowing in the current account deficit by an estimated $137.7 million to $1,419.1 million in 2007, as the fuel based deterioration in the merchandise trade deficit was offset by the tourism-led gain in the services account surplus.

• The merchandise trade deficit widened by an estimated 3.6% ($87.6 million) to $2,539.2 million, as fuel imports grew by 10.0% ($70.9 million) to $779.1 million, explained by an increase in both the volume and value.

• Non-oil merchandise payments rose marginally by 1.0% ($16.7 million) to $1,760.1 million.

• In contrast, the surplus on the services account strengthened by 24.2% ($197.1 million) to $1,011.9 million.

• The capital and financial account surplus receded by $287.1 million to $928.9 million, mainly attributed to lower receipts from both direct and other investment transactions.

• The surplus on the financial account fell by $274.9 million to $1,004.7 million, as declines in net equity inflows resulted in net direct investment receipts decreasing by $13.2 million to $692.6 million.

• Trading activity on the local capital market moderated during 2007, reflecting contractions in both the volume and values of shares traded; however, market capitalization on the Bahamas International Securities Exchange (BISX) was 24.3% higher at $3.9 billion, exceeding 2006’s 20.8% advance.

• Monetary developments during 2007 were an improvement in overall liquidity conditions, reflecting in part foreign currency inflows linked to tourism and foreign investment activities. Credit growth continued at a strong pace, and the loan to deposit rate spread widened, as the rise in lending costs outweighed the increase in deposit rates.

• External reserves fell by $45.6 million (9.1%) to $454.2 million at end-2007, although balances averaged $556.5 million over the year, and reached a peak of $692.4 million at end-May. Reserves were equivalent to an estimated 11.5 weeks of non-oil merchandise imports at end-2007. (During the first three months of 2008, external reserves advanced by $85.0 million to $539.2 million.)

• The total National Debt rose by $177.8 million (6.2%) to $3,062.4 million, with total debt servicing increasing to $219.7 million, reflecting the $129.8 million increase in amortization payments and a $5.2 million rise in interest charges. The ratio of Government’s foreign currency debt service to total revenue was 3.8%.

***Financial Sector***

The domestic financial sector of The Bahamas reportedly was not affected by the turmoil in international financial markets.

Indicators of banking, insurance and investment fund activity, suggest that the financial sector experienced favourable balance sheet trends and employment conditions during 2007.

Partly reflecting ongoing consolidation developments, the number of banks and trust companies in the financial market declined marginally to 245 during 2007, but the Prime Minister pointed out that total expenditures of banks and trust companies in The Bahamas firmed to $477.2 million, buoyed mainly by higher salary payments. Total employment in the banking sector expanded by 5.6% to 4,921 persons, based on increases in both the Bahamian and non-Bahamian workforce.


The Financial Stability Forum (FSF) in speaking to the widespread disruption to the global financial system in 2007 noted that in order to re-establish confidence in the soundness of markets and financial institutions, national authorities took exceptional steps with a view to facilitating adjustment and dampening the impact on the real economy. These included monetary and fiscal stimulus, central bank liquidity operations, policies to promote asset market liquidity and actions to resolve problems at specific institutions. Financial institutions took steps to rebuild capital and liquidity cushions. Effectively, sound economic fundamentals in the major economies supported improvements in labour and equity markets worldwide and global economic activity remained moderately positive in 2007. According to the IMF, the global economic growth momentum is expected to slow in 2008, before making a modest recovery in 2009. It projects a 3.7% growth in 2008, and broadly unchanged in 2009.

In light of expectations that the US economy will recover in the second half of 2008 as financial markets normalise, and strengthen in 2009 and 2010, the Prime Minister reported that growth prospects for the Bahamian economy are cautiously positive from the second half of 2008 onwards. Inflows from foreign direct investment activities are expected to add momentum to economic activity.

In particular, the outlook for the construction sector for 2008 remains relatively positive, as several large-scale foreign investment projects, such as the Albany Development, are expected to either gain impetus or come on-stream later in the year, and mortgages continued to grow at a relatively healthy pace in the first quarter.

The performance of the tourism sector over the short to medium term is expected to be moderately positive. Despite the economic slowdown in the United States, the major tourist market, some benefits may accrue due to the sustained depreciation of the US Dollar against a basket of world currencies, which has made travel by US visitors to destinations in Europe and Asia relatively more expensive, and correspondingly, could make travel to The Bahamas more attractive. The increasing emphasis on marketing efforts towards visitors from Europe and Canada, as well as from some non-traditional US markets, is also intended to assist the industry.

He noted, however, that a serious slowdown in the US economy due, for example, to continuing problems with financial market developments, could create more challenging conditions for The Bahamas in 2008. Additional downside risks to the global economy could also arise from further pressures on the imported price of oil and other commodities.