Bahamas: Bahamas Economy Profile

The Bahamas is a small yet rich island economy that faces challenges in the area of fiscal consolidation and generating GDP growth.

Strengths (+) and weaknesses (-)

(+) Stability and wealth

The Bahamas are a relatively wealthy Caribbean nation, that has a decade long history of political stability with peaceful transfers of power.

(+) Strong business environment

The country is highly attractive to investors given low levels of taxation. But the country complements that with a stable, well institutionalised and reliable institutional environment.

(-) Small economic base

The economy of the Bahamas depends for 50% on tourism, primarily US visitors.

(-) Typical small island structural current account deficit

The Bahamas are not self-sufficient in the areas of food and energy, therefore the import needs of the country are high and as it lacks a manufacturing base, (good) exports are low. Financing is only partly through FDI.

Key developments

1. Fiscal consolidation is required, but will the Bahamas deliver?

The Bahamas’ public revenues amount to only 17% of GDP. As the public debt has been rising continuously over the past few years, there has been an increasing necessity to consolidate the fiscal balance. The primary tool that the current government has chosen, is to implement a VAT scheme in July 2014. This is a highly controversial move by the government, at least on a domestic political level, as it will reduce the spending capacity of the local population at a time when the growth rates have been in the doldrums.

The VAT, together with some other reforms including increasing business license fees and setting up a Central Revenue Agency, should lead to an increase of the public revenues to 21% of GDP by 2018. Also, the government estimates that the increase of the VAT will lead to a balancing of the primary budget (total budget not accounting for interest payments) by the next fiscal year (ending in June 2015). However, according to the IMF the latter prospects seem highly optimistic, as they are based on fairly optimistic growth projections. Indeed, the urgency of dealing with the fiscal deficit has been made very clear by rating agency S&P, which warned in November 2013 that delaying the proposed consolidation efforts might lead to a downgrade of up to two notches of the sovereign rating.

A two notch downgrade would result in the Bahamas losing the investment grade status on its bonds. In turn, that may make these bonds less liquid which is likely to result in higher interest rates, while the government is already spending roughly 15% of its income on interest payments.

2. Growth dependent on the beach

Late 2014, the Baha Mar project should be fully realised. The Baha Mar resort includes four hotels with 2,200 rooms, a golf resort and a casino. Baha Mar will be aiming at the top-end of the tourist industry, and will be able to increase the number of tourist arrivals by 10%. Baha Mar was started in 2011, as the government brokered a deal with the Chinese. The project is built by Chinese companies, and is financed by the Chinese Exim bank. In the past few years, and in the current year, the project has led to an increase in imports to construct the buildings. Also, the construction efforts themselves have had a positive impact on growth.

The overall economic structure of the country should improve when the resort is finalised, as a reduction in imports and the increase in foreign tourism income will improve the current account deficit (standing at almost 17% of GDP in 2013). In all, the external financing needs will be lessened for this fully dollarised economy. Also, the net effect of less construction efforts (through reduced imports) and an increasing amount of tourists will be positive for GDP growth.

Background information

The Bahamas, located off the coast of Florida, is a relatively wealthy, politically stable, Caribbean country. However, with a GDP of USD 8.2bn, the size of the economy of the Bahamas is relatively small. Besides, the economy is undiversified, as it largely depends on tourism, which accounts for 50% of GDP and mainly caters to US visitors, and offshore financial services, which make up 15% of the economy.

Reflecting close trade links with the US, the Bahamas’ economic performance has been relatively weak in recent years. The Bahamas’ economic challenges are not unusual for an island economy, with a high import bill compared to exports leading to large trade deficits. These will have to be countered by the services sectors (tourism and banking) in order to stave off large and unattainable financing requirements.

The Bahamas is in fact a commonwealth of more than 700 islands, and is itself part of the British Commonwealth, meaning the Head of State is Queen Elisabeth. The legal environment is based on British Law, and the country is considered to have a good business environment with specifically low levels of corruption. Nevertheless, the country is faced with very high crime rates (34 murders per 100,000 people in 2012).