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Wednesday, April 14, 2021

IDB: Asset inflows,outflows particularly pronounced for The Bahamas

The threshold of sudden stops in inflows (SSI) and sudden starts in outflows (SSO) are particularly pronounced for The Bahamas compared to the rest of the region, the Inter-American Development Bank (IDB) highlighted in its new macroeconomic report, pointing to a -299 percent threshold.

The IDB stated that as gross flows become relatively more important in the overall external financing picture, their behavior during the COVID-19 shock is worth considering.

In the report, entitled “Opportunities for Stronger Sustainable Postpandemic Growth”, the IDB points out that while about a third of countries experienced a sudden stop in net flows in 2020, The Bahamas by far experienced the biggest change.

“The Bahamas had strong asset inflows, likely due to compensatory flows linked to the offshore banking industry. The correlation between asset and liability flows in The Bahamas is 0.99, hence the SSO and SSI thresholds are large,” the report states.

The IDB added, “Sudden stops in outflows (assets) are effective when the annual change of the yearly flow in assets is two standard deviations below its mean. The Bahamas threshold is –299 percent.”

The Bahamas has borrowed more than $2 billion since the start of the 2020/2021 fiscal year, the bulk of which is in foreign currency.

These flows – which for The Bahamas are considered volatile “other investment liabilities” – were critical in driving extreme events, according to the IDB.

“Other investment liabilities include private flows (i.e., commercial bank loans) and official lending to countries (bilateral and multilateral). Official lending increased during COVID-19, especially among the countries with more limited market access,” the report states.

“Instead, the commercial bank loans portion of the other investment liabilities declined and was procyclical, thereby contributing the largest share of the decline among the countries where other investment liabilities dropped. The volatility of the private flows component of other investment liabilities should be monitored because it has been the source of financial instability in the past.”

The only other country in the region with a high threshold was Nicaragua, which was labeled at -19 percent.

The IDB explained that when gross outflows, inflows and net flows are standardized, a positive rank correlation (+0.27) emerges between gross outflows and exchange rate flexibility.

On the other hand, a negative correlation exists between exchange rate flexibility and gross inflows (-0.15).

“Together, the correlation between exchange rate flexibility and net flows is close to zero (-0.08). Thus, countries with greater exchange rate flexibility during COVID were more likely to see gross inflows and outflows moving in opposite directions, which in turn resulted in more stable net capital flows,” the IDB stated.

The report continued, “other countries, however, experienced either a reduction in net lending from foreigners – what is known as a sudden stop in inflows (SSI) – or a sudden increase in net savings from residents abroad – also known as a sudden start in outflows (SSO) – but did not experience sudden stops in net capital flows. While sudden stops in net flows are likely to be painful due to the required adjustment in the current account, gross flows sudden stops are not painless and may cause financial instability.”

The post IDB: Asset inflows,outflows particularly pronounced for The Bahamas appeared first on The Nassau Guardian.



source https://thenassauguardian.com/idb-asset-inflowsoutflows-particularly-pronounced-for-the-bahamas/

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