Caribbean & Central America - February 2021

The Bahamas Petroleum Company (BPC) began drilling an exploratory well on 20 December 2020 amid a swirl of conflicting emotions. There were some who saw the hope of a major oil discovery as a potential boon for an economy that has been amongst the world’s hardest-hit by the coronavirus (Covid-19) pandemic, and there were some who saw the prospect as a threat to The Bahamas very special environment and thus to tourism, its most important (and currently struggling) industry. For now, at least, the controversy has been resolved: on 8 February, BPC announced that the exploratory well had not found commercial quantities of oil and would be abandoned.

The Bahamas economy has taken a terrible battering in recent times. In its Article IV report of 22 January, the International Monetary Fund (IMF) noted: “The archipelago was just starting to recover from the severe damage caused by Hurricane Dorian in fall 2019, when the global outbreak of Covid-19 led to a sudden stop in tourism, the main source of its income and employment”.

According to the IMF, GDP will have contracted by 16.2% in 2020. It is hoping for a modest rebound of 2% growth in 2021, but the economy will not “converge back to its pre-pandemic level” until 2024.

Furthermore, on debt, the IMF says: “Public debt is expected to jump to almost 90% of GDP by 2021 and to remain more than 22 percentage points above its pre-pandemic level over the medium-term”.

One of the principal legacies of Hurricane Dorian is that it left the authorities with limited fiscal space to deal with the effects of the pandemic. And the pandemic itself has narrowed that space even further. In the second quarter of 2020, year-on-year revenues halved. Yet the collapse of tourism, accounting for 50% of GDP and 70% of employment, is having large-scale socioeconomic effects that must be addressed.

Faced with this impossible situation, the government turned to the IMF in June 2020, which duly made available around 40% of the additional financing needed for FY2019-2020, with the balance made up by other international financial institutions such as the Inter-American Development Bank and the Caribbean Development Bank.

As to the economic recovery, there is an interesting divergence between the IMF and the Bahamian authorities. The IMF sees risks as being “large and skewed to the downside”. It is concerned about the resurgence of the pandemic “necessitating further lockdowns” and possible delays in reaching widespread immunisation. As the IMF says, “In such a scenario, growth, the current account, and fiscal position would all deteriorate, with implications for debt sustainability”.

The Bahamian authorities, on the other hand, although they have a deeper contraction estimate for 2020 than the IMF (-19%), are expecting growth of 3% in 2021 and “they see risks as tilted to the upside”. They point to the tourism sector’s attractiveness given its close proximity to the US and the fact that the pick-up could be rapid with reopening.

• IMF policy advice

Following its Article VI Consultation, the IMF has summarised its policy advice as follows:

“The Bahamas would benefit from a comprehensive package of policies to limit the damage from the pandemic, set the stage for a resilient recovery, and achieve durable and inclusive medium-term growth:

• Fiscal Policy. In the near-term, focus on protecting lives and livelihoods, ensure rigorous appraisal and selection processes of the announced capital projects and enhance the efficiency of social spending; develop detailed contingency plans. Announce credible medium-term tax policy, revenue administration and spending measures to finance investment in infrastructure and education, strengthen resilience to climate change, and lower public debt.
• Monetary and Financial Sector Policies. Focus on reserve adequacy; gradually remove capital flow management measures once the economy is on a stronger footing. Closely monitor financial stability risks. Ensure effective implementation of crisis management reforms and strengthen central bank data collection and capacity. Continue enhancing the country’s regime to counter money laundering and terrorist financing and cybersecurity preparedness.
• Structural Reforms. Steadfastly implement reforms to enhance diversification and productivity, including streamlining administrative processes, modernising the insolvency regime, and reducing frictions in the job-matching process. END BOX

The oil disappointment

In what was a piece of potentially good news from an economic perspective (although seriously controversial from an environmental perspective), on 20 December 2020 BPC announced the start of drilling for an exploratory well 90 miles west of Andros. The company said that it was targeting oil resources of up to 1.44bn barrels. In optimistic mode, BPC Chief Executive Simon Potter raised hopes of a significant find by saying: “Our third seismic survey revealed structures that have the potential to contain a world-class barrel oil resource that, if present in the way we hope, could prove to be transformative, not just for our company, but for the nation and people of The Bahamas as a whole”.

It was not to be. On 8 February, the company admitted that “whilst the well encountered oil…commercial volumes of oil have not been proven at this well location”. The company added: “Drilling has now ceased, the well having reached a depth of approximately 3,900 metres without incident, and the well will now be permanently plugged and abandoned”.

The company added that over the coming weeks, BPC will undertake a detailed evaluation of all technical information gathered during drilling and “will review the appropriate way forward for future monetisation of its business in The Bahamas, in particular with a view to the renewal of a farm-in process”. In truth, however, it seems likely that the company will now focus on its efforts to find oil in Trinidad & Tobago and Suriname.

This news might not do much for economic optimism, but it will please the environmentalists, who have been scathing about the oil exploration. As ocean-protection activist, Alexandra Cousteau, put it: “It sounds so absurd because it is. The government of a country whose name is practically synonymous for paradise is giving the green light to an oil company to drill in its blue, pristine waters”. Simon Carey, executive director of the Bahamas National Trust (BNT) has added his voice to the opposition by pointing out that it is “duplicitous” for the country to – on the one hand – go to the United Nations with complaints about global warming and rising sea levels while – on the other – entering the fossil fuel market “as a contributor”.