Bahamian Financial Resilience Post-Natural Disasters
John Rolle Governor*
*As prepared for Delivery.
Exuma Business Outlook
Sandals Resort, Exuma, Bahamas
24th October 2019
Introduction
It is always a pleasure to speak at the Exuma Business Outlook. This is happening at
a time of incredible change within our economy. We are paying more attention to the
immediate and long-term needs for planning and development around financial and
economic resiliency; and on leveling the playing field of access for commercial goods
and services. Post-Hurricane Dorian we are now more focused on strategies for
financial resiliency for households, businesses and the public sector; and we are
preoccupied with business continuity and recovery at the national level for critical
financial services.
The take away from my presentation is that alongside the interventions which the
Central Bank intends to make to increase the preparedness of the banking and
payments system, serious interventions will also be needed from a policy and cultural
perspective to tackle the household sector's financial vulnerability. Critical evolution
is also required in our tourism product model to make this leading foreign exchange
earner more resilient.
The Central Bank will continue to take a progressive approach to identifying and
promoting legal and regulatory reforms to accommodate financial sector
transformation in the direction of greater resilience.
General Impact of Natural Disasters
For the better part of the last two decades, The Bahamas has been experiencing the
direct impacts of climate change, particularly as it relates to the passage of tropical
cyclones (hurricanes). They have increased in both frequency and intensity. Since
1999, there have been at least eleven named storms that had a notable impact on some
part of the archipelago. These storms have had the foreseeable impact of disrupting
economic activity in both the immediate and medium-term, as shown in reduced
output, rise in unemployment; and in placing great strain on government's finances.1
Before Dorian, Hurricane Matthew (2016) exacted most recent high toll, even posing
an obstacle to the government's then articulated medium-term fiscal consolidation
plan.
The impact from Hurricane Dorian is projected to be greater than Matthew's. In the
monetary and financial sector, setbacks include the disruption in banking and
payment services; and a potential deterioration in banks' credit quality indicators as
borrowers in the impacted zones encounter a lengthy period of reduced or eliminated
incomes.
Policy Responses & Preliminary Estimates of the Impact of Hurricane Dorian on the
Banking Sector
Immediately following the storm, the Central Bank - consistent with actions taken
after other severe encounters - relaxed lending guidelines for domestic banks on a
temporary basis. Specifically, in relation to hurricane relief facilities, the 15% equity
or down payment contribution and the 40%-45% debt service ratio (for directly
impacted borrowers) were waived in order to facilitate easier, flexible access to credit.
Additionally, the Bank endorsed temporarily relaxed due diligence procedures for
money transmission businesses (MTBs), given the loss of vital documents for
customers in the impacted areas.2
For their part, commercial banks suspended loan repayments for borrowers in the
affected areas for a period of up to 6 months. In addition, with the absence of bank
branches, the customary fees on ATM usage were voluntarily suspended on Abaco
and Grand Bahama.
Our commercial banks are not under any unmanageable financial stress because of
the Grand Bahama and Abaco outages. These institutions have comfortable levels of
capital to absorb any losses that might materialize, and they are still collectively in a
position where their capital levels will need to be reduced over the medium-term.
Most of banks' credit exposures are to New Providence, where economic activities
remain intact. The Central Bank's stress testing simulations show that in a very severe,
major hurricane, that might be the case if damages were concentrated in New
Providence, banks could face significant loan losses, but would still be able to
withstand the setback generally, from their existing capital buffers.3 Where this
picture could evolve in an unsettling fashion however, is changing expectations on
the frequency of major shocks, since the system would need sufficient time to recover
between events. This takes us back to the issue of having overall macroeconomic
resilience, to contain the extent of losses for any major or successive storms.
In terms of financial sector exposure, commercial banks' credit portfolio for Grand
Bahama and Abaco totaled approximately $830 million over the July-September 2019
reporting period, which accounted for around 14.8% of total private sector credit.
Collectively just over half of the exposures were mortgages. Moreover, Grand
Bahama represented about four-fifths of the total credit-which is good in the context
of the faster pace at which this sub-economy is expected to recover.4 At the outset, the
non-performing loans rate was higher in these northern islands.
As we consider the impact and recovery from Dorian, the general outlook for the
Bahamian economy is for some setback in the near-term, with the revised growth
projection still positive for 2019, but at less than the levels forecasted prior to the
storm's passage. In 2020, the outcome could be flat to negative, with a return to
positive territory in 2021. The recovery path in both of the affected islands will
initially be dominated by extensive rebuilding activities, which will heighten the
demand for construction-related skills and services. This should partially offset the
contraction in activities other economic sectors.
The private sector component of the rebuilding activity will be partly financed by
external reinsurance proceeds. The Government will also rely on foreign currency
resources.5 This hints at an important element in our resilience to natural disasters:
that rebuilding relies on imports that must be financed with foreign exchange, at the
same timing as when the tourism earnings are disrupted. Resiliency amounts to being
able to withstand such shocks without putting the survivability of the Bahamian
dollar exchange rate into question. Reinsurance payments inflows will offer a cushion
of at least $0.5 billion to foreign exchange needs. These will be the largest such inflows
levels ever received (see chart).
In reliving these experiences in the future our national savings must also stay present
in the form of the external reserves of the Central Bank. As The Bahamas is able to
build up these buffers, we would create space to use more local currency resources to
rebuild. On the projected recovery path, our foreign reserves will experience a boost
initially from the re-insurance receipts and proceeds from government financing.
These are expected to be consumed in full next year, with the expectations that The
Bahamas could end 2020 with slightly lower foreign reserves than at the end of 2018.
The ability to see some return to activity in Grand Bahama in 2020, favors the onset of
the recovery of tourism earnings. Having the Abaco tourism plant substantially back
in production by 2021 would help to normalize return to the still positive medium-
term outlook for reserves. Until then, the tourism marketing strategy has to succeed
in attracting some of the displaced business from the northern islands to undamaged
facilities elsewhere in The Bahamas.
Resilience Post-Natural Disasters
At this point, I would like to delve deeper into the topic of resilience.
Drawing on the work of the IMF, the World Bank and others, a framework for building
resilience would consider three major elements: the physical or structural
infrastructure, financial factors and the social, post-disaster resilience. I will keep the
focus today on financial resilience.6 That said, both social and infrastructural
vulnerabilities still reduce to financial costs that ought to be addressed in policies that
build buffers and provide ample insurance for both public sector interests and private
households.
Financial Resilience
For the public sector, the World Bank and IMF inspired multi-layered approach to
managing the fiscal and macroeconomic risks of natural disasters focus on four areas.
They include:
1. Fiscal buffers (as a means of self-insurance)
2. Securing direct insurance (through risk-pooling mechanisms)
3. Pre-arranging emergency access to credit (for rapid response)
4. Securing access to international financial and humanitarian assistance
The Bahamas has made particular recent progress in the second and third areas, with
access to the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and through a
pre-arranged line of credit with the Inter-American Development Bank (IDB).7 Self-
insurance will likely have a greater impact on resilience over the longer-term, as
evidenced by our ability to generate annual budgetary savings, and to reduce the
public debt burden. This would make it possible take on extra debt if necessary-and
without concern-after natural disasters. Fiscal savings could also purchase larger
amounts of insurance in the market and finance larger natural disaster funds, both of
which are debt avoiding strategies. Further, buffers accumulate in terms of how
infrastructure is rebuilt and in some cases relocated, at greater upfront cost, to resist
extensive future damages from major hurricanes and sea level rise.8,9
Financial Resilience for Private Sector/Households
Another major consideration for the post-disaster phase is the exposure of private
sector agents (households and businesses) to losses. In particular, a significant
number of uninsured or under-insured homes exist in the damaged zones, which is a
snapshot of a greater national prevalence of the same, particularly among lower
income homeowners who find it financially challenging to purchase insurance
coverage.
This presents a significant financial risk to the Government! Fiscal costs mount when
these exposed interests require some subsidized level of recovery. For inadequately
insured middle and upper middle-income families, or small businesses, public
subsides are not likely to provide either timely or full restoration of their former
circumstances; and some losses may become permanent. This is a vulnerably that still
has to be meaningfully addressed, through households and businesses taking on more
active responsibility for it, and through intentional public policy to reduce the
financial risk to the government.
A philosophy which stresses that Bahamian households should prudently manage
their finances over a life time perspective is important-especially with mounting
climate change vulnerabilities. Just as in the case of the government, the household's
approach to savings should allow families to insure better against the setbacks from
natural disasters. Insurance has to factor into the cost of housing, just as should tax
and other maintenance obligations. A part of the solution is accepting downsized
housing, for which families can more fully afford the insurance. We must also be able
to afford more resilient physical dwellings. Aside, from being cautious about the
coastline, it could mean more acceptance of multi-family condominium style
structures, built more elevated and able to withstand higher winds forces than single-
family housing. Accepting the premise that some families are not going to be
voluntarily disciplined then public policy would have to cause the insurance to be
secured. This speaks to taxpayer funding on some direct level.
Having savings buffers also means that our families have to be more conservative
about their debt levels in ordinary times. Even with the relaxed position that local
lending institutions are now taking to accommodate borrowers after the recent storm,
there will be some families who are be unable to take on more debt to finance
necessary home repairs or to replace lost assets. Again, this means more scrutiny of
the expenditure levels that families take on in ordinary times. The policy intervention
from the Central Bank side would lean towards tighter lending standards for
households that are not yet in distress.
At the national level, regulation on lending standards will also need to reflect
uniformity across entities that are not supervised by the Central Bank. It is a macro-
prudential concern-meaning that it could undermine the stability of the financial
system in a general sense, if left untreated. In the extreme, it could affect how the
economy in the aggregate is able bounce back from natural disasters.
The Central Bank's medium-term approach will be to also explore how the incidences
of under-insurance on mortgaged properties could be suppressed. The financial
distress from underinsurance can be particularly acute when debt survives that has to
be repaid, despite major loss of the physical assets.
For the business sector, affordable bridge financing will also have to be in greater
abundance post-natural disasters. The Central Bank is already committed to studying
this issue of how even larger volumes of resources can be accumulated for such
purposes. Again, the outcome is likely to target savings in funds that are only
accessible for lower cost financing after natural disasters.
Enhancing Financial Resilience Through Technology
Moving from households to financial institutions, technology will have to feature
more prominently in our resilience and recovery plan. Indeed the recovery of access
to financial services is vital to restarting commercial activities. Payments services have
to be present for businesses to operate; for the government and aid agencies to
effectively dispense financial assistance, and even to make use of early payouts from
insurance policies. At present, there is still too much dependence on cash handling
services and therefore commerce is only able recover clumsily, when the physical
support that banks provide is missing or hampered.
Fully accessible and enabled digital mobile payments would resolve many logistical
challenges at once. Project Sand Dollar has the potential to deliver this longer-term
resilience. It would permit wireless restoration of payments connectively, avoiding
the cash shipment and cash handling frustrations. It would permit electronic
dispersing of aid; and allow families to recapture personal dignity, by restoring the
flexibility to prioritise the elements of personal need that they prefer to satisfy post-
disasters.
One of the impacts of the recent hurricane on the country's banking sector was the
significant damage to physical structures in Abaco and Grand Bahama, which also
shut down operations on those islands. Critical to restoring a sense of commerce is
the timely resumption of banking and payments systems.
For this reason, the Central Bank is exploring an early entry of Project Sand Dollar into
Abaco. It will allow the Bank to test aspects of the emergency wireless
communications features that would enable rapid financial services recovery; and to
connect with many retail businesses early in their recovery process. The Sand Dollar
infrastructure is being designed to connect with bank accounts, so that remote access
to these facilities is also quickly re-enabled for deposits and withdrawals.
Tourism Sector Resilience for the Fixed-Exchange Rate Regime
I started to touch on the stability of our fixed exchange rate regime and the value of
the Bahamian Dollar earlier. For the medium and longer-term this amounts to making
the foreign exchange earning assets more resilient. Hotels and other onshore
accommodations are The Bahamas' most valuable and most exposed assets. Damages
to Abaco are most summarized by the extent to which these assets have been taken
offline. In 2016, Hurricane Matthew similarly resulted in the loss of much of Grand
Bahama's room inventory, compounding the decline in the island's tourism output
which had already been entrenched.
If the Bahamas is to cope better with more frequent and intense tropical cyclones, it
needs to be able to keep more of its income producing resources out of harm's way.
One way to do this is through direct ownership over more mobile infrastructure. The
cruise industry does this already, and such capacity exists to a great extent with
smaller pleasure crafts. This ties in with taking more advantage of the blue economy,
yachting and ecotourism. Achieving increased direct ownership and direct
employment in the sector would expand the associated retention of economic benefits.
The Bahamian exchange control regime has already been reformed to permit
Bahamians to attract capital in foreign currency to acquire ownership in the maritime
sector. However, it is a strategy to which heightened entrepreneurial focus is now
required, and potentially public policy that would provide the same tax incentives for
maritime assets as is done for onshore tourism assets.
Concluding Remarks
In conclusion, Hurricane Dorian served as a reminder of the ongoing challenges facing
The Bahamas, given our geographic and economic makeup, set against the reality of
global warming, rising sea levels and more frequent, intense storms. We must apply
economic policies and frameworks for financial resilience that mitigate the risks
associated with this new reality. For its part, Central Bank is in the process of
developing a financial sector disaster recovery plan that will serve to enhance the
sector's preparedness and resilience to shocks, inclusive of the timely resumption of
banking and payments services. To these interventions The Bahamas must also secure
higher insurance coverage in the household sector; and the savings philosophy which
the government is pursuing must also come across strongly within households and in
the accumulated foreign exchange holdings. Whether the ills of climate change are of
our own making or not, The Bahamas cannot ignore either reality or the urgency of
protecting itself better; and accepting that certain economic and financial priorities
have to be adjusted.
Appendix of Figures and Charts
Figure 1: Recent Hurricane Impact on Stopover Tourist Trends
Source: Bahamas Ministry of Tourism Data
Figure 2: Recent Fiscal Balances Trends vs Hurricane Occurrences
Figure 3: Hurricane Induced Re-insurance Inflows
Source: Central Bank of the Bahamas and preliminary feedback from insurance industry.
Figure 4: Commercial Banks - Selected Credit Exposure Indicators (2019)
4A:Credit Shares by Island 4B: Non-Performing Loans (NPL) Rate
Source: Central Bank of The Bahamas survey.