The sharp decline in tourist dollars – due to hotel closures and travel warnings bringing the tourism industry to a virtual standstill – will ultimately lead to a “sizable falloff” in the Central Bank of The Bahamas’ (CBOB) external foreign reserves.
The threat to the historically stable foreign reserves is caused by the uncertain and contractionary near-term economic outlook for the country due to the global COVID-19 pandemic, the Quarterly Economic Review noted.
“Tourism earnings are projected to decline sharply in 2020, becoming particularly acute over the second quarter and moderately evident before the end of the first quarter. This will lead to a large reduction in net foreign currency receipts and consequently a sizable falloff in the Central Bank’s external reserves,” CBOB stated.
Despite this threat, the Central Bank noted that the current state of the reserves is sufficient to absorb domestic foreign currency needs.
Foreign exchange reserves measure a country’s ability to manage a crisis as well as its ability to repay foreign debt.
The Central Bank noted that planned government borrowing, as well as a reduction in the typical tourism and travel related output at this time, may result in less of a strain on the reserves.
“In particular, outflows associated with tourism sector inputs have abated with the lull in the industry; non-essential domestic overseas expenditures, such as travel, are projected to abate until public health confidence recovers; and the economy stands to benefit from a considerable softening in international oil prices. The government’s budgetary financing also includes anticipated foreign currency borrowing that should supplement foreign exchange needs,” the bank stated.
Still the uncertainty regarding how long the slowdown in the tourism industry will persist, and the speed of the anticipated recovery, remain the overall economic concern for the Central Bank at this time.
“Meanwhile, the domestic banking system is mobilized, given healthy capital buffers to forbear, with likely increased debt-servicing difficulties among businesses and households, and to prudently supply new credit when a recovery path opens up,” the bank stated.