Saturday, September 27, 2014

What has The Bahamas done post economic crisis? (With Audio)

The financial and economic crisis of 2008 seems much of an afterthought since first impact. But also, now that the USA, at least, is coming slowly back to normal- from the financial markets to the labour markets- people have forgotten to a large degree what actually happened and why it hit so hard, so deep and for so long.

The Bahamas, and I can speak generally for Caribbean countries and our friends in Latin America, felt the brunt of this economic crisis.

For starters, The Bahamas is significantly tied to the USA. A great deal of foreign investors with American ties were impacted by the crisis, and a significant portion of our local investors have investment and financial ties in America.

Large investments like the up-coming BahaMar development, is an example of a budding jewel that was significantly impacted by the crisis. Because as American investors and financiers lost appetite, BahaMar's teams' financing efforts shifted to China and in particular the Export-Import Bank of China.

In addition, almost all of our large companies, from importing businesses, large financial institutions (banks and insurance), manufacturers, construction and other services related companies, have subsidiaries in the USA- most notably Florida.

More importantly, we are an importing country. From food to other consumer related products, The Bahamas imports nearly all of it for domestic consumption. This is critical.

So, as it stands now, it is well within reason for Bahamians to ponder not only the likelihood of the events of 2008 happening again. But also, what will we do when it does happen again, and what institutions have we, or can we, put in place to ensure that the damage to our economic and social fabric is minimal.

Just a historical reminder on how the financial crisis and subsequent economic collapse happened: Large US investment banks were betting heavily on sub-prime mortgage loans and other mortgage backed securities.

These securities turned sour because they were economically rooted on the basis that these housing starts and the subsequent loans/debt obligations were handed to lower-income earners- as a way to give them a piece of the USA to call their own. A worthy cause!

However, as the US political cycle kicked in in late 2007, and the customary retrenchment of businesses that wanted to keep their investments and expansions at a minimum, awaiting the next congressional session and political administration, things started to change. This was topped on a softening of employment from 2006-2007, and in addition, to a slowdown in new business starts and business failures; from Silicon Valley in California to the Oil Shales in Pennsylvania.

Just to validate from a naked perspective the US political cycle dynamic, over the last 12 US presidential elections, dating back to 1968, we have noticed some interesting trends.

There were 5 noticeable drops in the real GDP growth rate prior to the year of the election. Also, more startling over the last 12 elections, there were 8 significant reductions, or negligible changes, of the real GDP growth rate in the US the following year after the election.

A great deal of inferences can be drawn from these seemingly random and unconnected occurrences, but fully understand that these occurrences happen more frequently than one can just flat out deny.

More startling, is that out of the 8 occurrences that a drop in real GDP growth was recorded, there were 5 occurrences of when the political party has changed office and the growth rate was negatively impacted- from GOP to Democrat and vice versa.

There is much more that one can drill down and extract from this phenomenon, but the evidence is becoming clearer from even this naked eye.

When you compare all of this to Bahamian real GDP growth rates, the gyrations are incredibly significant. In fact, Bahamian growth rates are not only correlated with US election and business cycles, through deeper analysis, but we are even more significantly impacted by US growth rates, born through their election and business cycles, than we are with our own election and domestically generated business cycles in almost every single instance since 1990.

This is enough information and evidence to make a lot of assumptions and draw a lot of inferences as to how important monitoring these cycles are.

This is where issues of safeguarding the Bahamian economy becomes critically important, monitoring and evaluating in a deeper and more fundamental way of both developments in the USA and The Bahamas. Particularly around the election cycle and subsequent business cycle, or other related business and economic phenomenon, we must base these on economic and social fundamentals and with that draw scenarios in which these issues change and how that may effect us. From minor changes to more dramatic and worst case scenarios.

What can we do with this new information? Knowing on top of these cycle phenomena that the USA simply can't be counted on, solely and wholly, as a bell-weather for Bahamian economic development due to the fact that it puts policy makers in a position that they cannot control, but a position that is seemingly inevitable in certain times and intervals?

For starters, the agencies responsible for monitoring international markets must be enhanced with new mandates and tools to monitor these markets effectively. New partnerships with other international financial agencies and agencies that monitor international markets must be critical for sharing best practices and gathering actionable data in real time.

New buffer requirements must be factored into the Know Your Customer (KYC) policies. Buffer requirements that adds critical value to the judgements based on the whole value of investors exposed to international markets and other anchor investments they are tied to.

The CLICO debacle comes to mind in terms of companies that were over-exposed in several markets, but ultimately local markets took a hit because the quality of the information presented didn't speak to the dangers the CLICO business model presented through the virtue of their financial statements and the true value of their parent company's balance sheet and assets.

An international/political affairs and economic unit must be created, or enhanced, and also must play a more fundamental role in our international monitoring and assessment regime. Often times regulatory regimes neglect the important function of political and government action within foreign jurisdictions. The roles of Foreign Affairs, Trade and International Finance watch-dog agencies must be enhanced based on these principles and formulas must be created within their risk matrix.

A new partnership with banks and other financial institutions must be formalized with the central bank and other international development monitoring agencies. Formalized on the basis of information sharing, with new data and assessment tools that they both share. KYC just doesn't extend far enough in terms of data analysis and data compilation of foreign investors.

We must see The Bahamas as not isolated from the global economy, and no Caribbean country should either. In fact, no matter the xenophobia and protectionist measures in place, once Caribbean countries are dependant on foreign direct investment and international NGO's for development assistance, we will never be immune from external shocks.

To some extent, neither are the USA and European countries immune to external shocks. On the contrary, they are enmeshed into the global system. Where they are more developed and sophisticated in dealing with these issues is not within their financial wealth and power status, but because they have developed agencies with networks and systems that buffer them from all out collapse, they are able to insulate themselves from most of the rigours of economic turbulence.

Moving forward post crisis, how Caribbean countries manage and deal with the catalysts of crisis and significant polyps before they become incurable tumours and full blown cancers, is where we should begin to put  our minds around reforms for the better. A new order of things!
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