In our article titled "Understanding our Foreign Reserves" dated September, 2003, we made reference to a story appearing in the local press on August 19, 2003, that carried the sub-caption "200 million bond issue proceeds set to push reserves over $500 million by August end". As predicted, preliminary statistics released by the Central Bank recorded external reserves of $506 million at the end of November 2003 and $482.1 million by month-end December, 2003.

Now that we boast of $500 million in external reserves, is it not time to revisit the debate that affords Bahamian institutional investors the opportunity to invest a small percentage of their portfolio in the international market for increased diversification, return and liquidity?

The structure of our economy remains such that it relies heavily on new foreign investment and will continue for many years to come. We believe it is time to develop a non-partisan, long-term plan to reduce our dependence on foreign capital, devise and implement a mechanism whereby long-term capital can access the international market which will provide a constant source of foreign reserve and provide incentives for local capital to be deployed in the development of our economy.

In the June 2003 Quarterly Economic Review, the Central Bank published its latest Survey of Private Pension Plans in The Bahamas and according to the estimates, there is an excess of $ 4.5 billion in savings reserves, with just over $2.5 billion in institutional funds seeking long-term investment. We submit that the pool of available eligible long-term assets is not sufficient given institutional required rate of return, liquidity and risk tolerance.

Statistics reveal that Bank deposit rates have declined over the past year, the primary reason being an excess of bank deposits accumulating as a result of the lending cap imposed by the Central Bank. While this measure was the correct call, we propose that it is time for this cap to be lifted. Most pension funds require an actuarial rate of return in the order of 7.50%. With Government bonds yielding less than 7.00%, (when bonds are available) bank deposit rates less than 5.25%, and the struggling Bahamas International Securities Exchange (BISX) one can immediately see the danger of pension funds not being able to meet their long-term obligations.

The unequivocal challenge to The Bahamas is that we must find sustainable methods to mobilise Bahamian capital given the limited investment options available in the market.

It is our view that the Government needs to relax its policies and permit a minimum of 2.50% of long-term Institutional Funds to be invested in the international markets. These funds should be invested according to an agreed asset allocation, i.e. 50% fixed income and 50% equities. In addition, an institution such as Bank of the Bahamas, Commonwealth Bank or BISX be appointed custodian of the foreign assets and that Investment Managers be required to present semi-annual reports to the Central Bank providing among other information asset classes and portfolio value. This will allow the Government to monitor both private and government foreign currency assets while enabling institutions and pension funds the opportunity for increased diversification, liquidity and portfolio return.

On another note we would like to congratulate Mr. Garet "Tiger" Finlayson and Mark Finlayson, Chairman and Managing Director respectively of ABDAB on their most recent acquisition of Solomon Mines Ltd., a deal described as the biggest in Bahamian business history. One that will encompass approximately 140 retail stores namely Pipe of Peace, Mademoiselle and the Royal Palm Trading Company.

A deal which many believe will redefine how retail commerce will be conducted in the future. We wish them every success as they continue to contribute to the development of the Bahamian economy and our capital market.

The views expressed in this article does not necessarily reflect those of Colina Financial Advisors Ltd. Please direct your comments or questions to info@ colinafinancial.com or call us at 502-7010.

Posted: Tuesday February 24, 2004