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August 2004

Published: Monday October 4th, 2004

Indications are that the tourism sector's strong momentum continued to support healthy growth in the Bahamian economy during the first eight months of 2004, with gains evidenced in both the monthly and cumulative pickup in foreign currency inflows through the banking system. August marked the seasonal peak in tourism, with inflows expected to subside over the remainder of the year. Meanwhile, the demand stimulus from private sector credit is expected to firm, following the August 9th lifting of the Central Bank's lending restrictions; albeit, the effects might be indiscernible from those created by hurricane relief facilities.

Damage caused by Hurricanes Frances and Jeanne, particularly in Grand Bahama and Abaco, is expected to adversely impact the economy over the remainder of 2004, and alter spending priorities in the Government's budget. Some hotel properties on these and several of the easterly islands of the Archipelago are expected to be closed for repairs for the rest of the year. Fortunately, the disruption should only marginally diminish the expected growth in expenditure for 2004, since the storms hit at the close of the peak tourist season and spared the bulk of the industry's capacity in New Providence from any major damage. Moreover, most properties are expected to re-open in time to benefit from a resumed business growth in 2005, favoured by the healthy outlook for the United States' economy.

It is anticipated that hurricane recovery efforts will spark increased construction expenditure which, up to this point, has been supported by steady net residential mortgage lending. A significant portion of these outlays will be financed by re-insurance inflows, minimizing the impact on external reserves. Public sector outlays on infrastructural repairs will have a similar effect on construction, however these will inevitably increase the budget deficit, coinciding with reduced revenue yields owing to customs duty concessions on imported building materials and decreased taxes from tourism and productive activities on the severely affected islands. Beyond these short-term stimuli, the gradual pickup in foreign investments is still expected to provide the main support to building activity during 2005 and over the medium-term.

Money and credit trends remained more sustainable than in 2003 but with resumed growth in net claims on the Government, following last year's external bond issue, the proceeds from which, conversely, paid down net liabilities to banks. Both external reserves and bank liquidity remained buoyant and are expected to close the year at higher levels than in 2003, owing to stronger net foreign currency inflows through the private sector.

As to the outlook, rising short-term interest rates, as the Federal Reserve tightens its stance against inflation, could temper travel spending among US households and limit the domestic economy's upside potential. The firming trend in oil prices also poses some uncertainty, contributing to higher operating costs in the travel industry and impeding global economic growth. 

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