The Bahamas is going through a difficult period causing people to talk about what went wrong and what should be done. A good case in point is an article ﾓ20 Years of Lending Show Banks Holding Bahamas Backﾔ by Catherine Kelly in the ﾓDollars & Senseﾔ column of the April 7th Punch.
She contends that ﾖ
ﾷ The Banks are the problem since they have been feeding ﾓthe masses a steady diet of fast consumer loans instead of bodybuilding business loansﾔ for the past 20 years. ﾓNo wonder Barbados and the Caymans are kicking our butt in financial services, and Mexico, Cuba and the Dominican Republic are leaving our tourism industry in the dustﾔﾅand ﾓthirty years after Independence, Bahamians remain enslaved to foreign mastersﾔﾅshe means ﾓforeign investorsﾔ.
ﾷ The evidence is that the loan portfolios of commercial banks in 2002 have a preponderance of consumer loans (72% including mortgages) versus business loans (25%). In 1982 the relationship was 47 per cent versus 43%.
ﾷ The solution is for the Government to increase the down payment requirements of consumer loans and decrease the duty exemption at the border. Andﾅﾓif the Bahamas doesnﾒt get in shape, weﾒll get left out of the race.ﾔ
The authorﾒs reasoning seems faulty and incomplete as an explanation for the present slowdown.
For instance, with the benefit of perfect hindsight the financial services problem is the direct result of the Governmentﾒs hasty and poorly crafted response in December 2000 to the OECD attack on the offshore tax havens. One cannot blame the commercial banks for this.
Bahamas tourism does seem to be on a decline versus other destinations. This is associated with the high operating costs and lower rates of return experienced in the Bahamas. In a situation of high costs and low returns, entrepreneurs, venture capital and banking loans will naturally flow to other opportunities where returns are more attractive. One should not blame the commercial banks for this.
A more complete analysis of tourism growth, operating costs, rates of return and solutions will be made available by the tourism industry shortly.
The $2.2 billion invested in Bahamian hotels in the 1990s created the Atlantis mega resort, the refurbishment of hotel rooms and a 6% expansion of the total installed rooms in the Bahamas. The latter was anemic compared to the Dominican Republic, Cuba, Cancun and Las Vegas where the growth ranged from 17% to 77%.
Nevertheless, this investment in the Bahamas did establish Atlantis as a premium destination and did power the country to the 1990s prosperity. Andﾅthe people participated in this prosperity; the lower 60% of Bahamian households took a bigger share (up 31%) of the bigger economic pie. This contrasts sharply with the prior decade when that share actually dropped.
The improvement in income levels in the late 1990s hardly qualifies as ﾓenslavementﾔ; it sounds more like ﾓeconomic empowermentﾔ.
Furthermore, it suggests that consumers became an improved lending risk. One should rejoice in this rather than castigate the lenders and borrowers.
Hopefully Catherine Kelly will push her analysis further and not be so ready to jump to anti-banking and foreign enslavement conclusions.
Nassau Institute
05/03/2003
