Monthly Economic and Financial Developments, October 2018

Published: Monday December 3rd, 2018

Overview

Indications are that the domestic economy continued to show modest signs of improvement over the review period, benefiting from growth in the tourism sector and relatively stable foreign direct investment activity. Reflecting in part the initial effect of the hike in the value added tax (VAT) rate in July of this year, along with gains in international fuel costs, domestic inflation firmed during the 12 months to August. In the fiscal sector, the deficit contracted during the first quarter of FY2018/19, due to a VAT-led increase in tax receipts, which eclipsed the modest gain in expenditure. Monetary developments featured a decline in bank liquidity, as the falloff in total deposits outpaced the reduction in credit, while foreign currency loan financing to the public sector, underpinned the expansion in external reserves.Real Sector

Tourism

Tourism performance indicators suggest that the recent expansion in high-end room capacity in New Providence, coupled with sustained improvements in key source markets, contributed to the ongoing gains within the sector.

In particular, preliminary data from the Ministry of Tourism for the first nine months of 2018, showed a 7.4% expansion in stopover visitor arrivals, compared to a 6.8% decrease in the same period of 2017. A breakdown by island revealed that the most significant gains occurred in New Providence, by 13.7% relative to a falloff of 4.3% in the prior year, reflecting in part increased visitor volumes following the completion of the phased opening of the Baha Mar development. Despite the ongoing challenges in room capacity after the closure of several hotels due to hurricane damage, stopover visitors to Grand Bahama firmed by 3.5% on a year-to-date basis, a reversal from the prior period's 39.5% plunge. In contrast, visitors to the Family Islands-which firmed by 11.6% in 2017-contracted by 6.9% over the nine-month period. A breakdown by the major source markets, showed that visitors from the United States-which comprised the bulk of arrivals (80%)-firmed by 7.1% to 980,464. In addition, the stopover markets of Canada (7.6%), Europe (7.4%) and Latin America (2.2%), increased by 11.2% to 92,597, 6.1% to 90,205 and 5.5% to 27,090, respectively, while the remainder increased by 10.1% to 35,374.

The positive tourism developments were sustained in October's air departure data. Information from the Nassau Airport Development Company Ltd. (NAD), revealed a further 19.1% increase in passenger traffic through the country's major airport, following a 16.1% expansion in the previous year. In terms of the components, non-US international departures rose by 31.6%, a turnaround from a 15.7% reduction in the previous period, while the U.S. segment expanded by 17.2%, a slowdown from a 23.3% advance a year earlier. Similarly, over the ten-month period, the number of departures rose by 13.8%, overturning the prior year's 1.9% reduction, as both the non-U.S. and U.S. passenger components strengthened by 18.9% and 13.0%, vis-a-vis declines of 4.2% and 1.5%, respectively, a year earlier.

In line with the increase in stopover activity, data from AirDNA revealed a 50.5% expansion in total bookings in the short-term rental market in October, relative to the same period of 2017. An analysis of the major markets revealed that bookings in Grand Bahama firmed by 44.2%, amid gains in both the entire home and hotel comparable listings. Significant improvements in bookings were also noted for New Providence (42.6%), Exuma (40.7%) and Abaco (33.3%). During the period, the average daily room rates (ADRs)-which are generally more comparable across periods-declined by 2.3% and 3.4% to $284.20 and $128.86 per night for entire home and hotel comparable listings, respectively.

Prices

During the twelve months to August, consumer price inflation-as measured by the All Bahamas Retail Price Index-quickened by 58 basis points to 1.75%. This was mostly driven by restaurant & hotels (5.2%), recreation & culture (3.8%) and food & non-alcoholic beverages (2.3%), which reversed from declines noted in 2017, due in part to the broad-based uptick in prices following the 4.5 percentage point rise in the VAT rate to 12.0%. In addition, inflation rates also firmed for transportation and health care. Accretions to average costs slowed for housing, water, gas and electricity-the largest category-by 83 basis points to 2.4%, while average prices for clothing & footwear, furnishing & household equipment and education, declined, in offset to gains a year earlier.

In terms of domestic energy costs, the Bahamas Power and Light's (BPL) fuel charge was unchanged in October, when compared to the previous month, but remained notably higher relative to October 2017, at 19.15 cents/KWH. In terms of prices at the pump, gasoline and diesel costs firmed by 1.2% and 1.7%, month-on-month, and gained significantly over the previous year by 13.2% and 17.4% to $4.97 per gallon and $4.66 per gallon, respectively.

Fiscal Sector

Preliminary data on the Government's operations for the first quarter of FY2018/19, revealed that the deficit contracted by more than half to $52.0 million from $108.6 million. This improvement was driven by a $60.1 million (13.2%) expansion in aggregate revenue to $513.9 million, which outpaced the $4.3 million (0.8%) uptick in spending to $566.6 million.

The gains in revenue were mainly explained by a $57.5 million (13.9%) increase in tax receipts, to $471.8 million. In particular, VAT revenue strengthened by $32.0 million (19.1%), while stamp tax collections-related to financial and real estate transactions-rose by $24.1 million (79.5%). Similarly, taxes on international trade firmed by $8.5 million (8.0%), due to an expansion in customs and other import duties, which were slightly offset by declines in departure and export taxes. Additionally, non-tax inflows advanced by $2.7 million (6.7%) to $42.1 million, as revenues from the provision of goods & services (sales of goods and services), grew by $2.9 million (8.0%), while fines, penalties & forfeits increased by $1.2 million to $1.4 million.

The expansion in spending was led by a $39.8 million (8.2%) increase in recurrent outlays to $527.8 million, largely on account of a $35.4 million (41.6%) advance in purchases of goods and services-mainly related to financial transactions. Noteworthy gains were also observed for transfer payments, by $15.1 million (54.0%), subsidies, by $10.8 million (17.9%) and social assistance, by $3.0 million (37.8%). In a partial offset, outlays for employee compensation narrowed by $19.9 million (10.8%) and debt interest payments eased by $4.5 million (5.8%). In contrast, capital outlays declined by $35.6 million (47.8%) to $38.8 million, mainly reflecting a $36.9 million (56.3%) contraction in the acquisition of "other fixed assets".

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