By VERNON CLEMENT JONES, Guardian Business Editor, vernon@nasguard.com

Here's a new one: The growing credit crunch on global markets and its retarding effect on foreign investment may ultimately work to this country's advantage, says a leading Scotiabank economist, suggesting hotel inventories kept in check ultimately protect room revenues.

"We've seen how severe the problem can be when the sudden mismatch of supply and demand happens in the hotel industry," Erik Nilsson, senior international economist for the bank, told Guardian Business yesterday. "That has certainly always been the risk of over development especially when the U.S. economy — the chief market for Bahamian tourism — struggles with a downturn."

To back up the point, the Toronto banker points directly to Bahamian history, specifically the emergence of the Crystal Palace on Cable Beach in 1989 and its negative impact on hotel revenues across Paradise Island and Nassau. That same year marked the beginning of recession rumblings in the U.S. economy. By the fourth quarter of 1990, those tremors had morphed into full-blown recession, with real U.S. GNP falling 1.2 percent.

The downturn, coupled with the glut of hotel rooms in Nassau, was enough to drive down room rates across the board as resorts slashed prices to compete for a dwindling number of American tourists. Not even the highest of high-end properties was immune, with the average daily room rate falling more than $20 in four years — a drop of more than 25 percent.

Occupancies also knocked back by 20 percent — despite that race to the pricing bottom.

It's the same kind of scenario The Bahamas may now have been spared considering the timing of this current recession period in the U.S. It has effectively stymied billions of dollars of resort development planned for the islands of The Bahamas over the next five to 10 years, with the global credit crunch threatening to permanently cancel many of those mixed used developments.

The overall effect may be to substantially cut the number of hotel suites that enter the room pool, said Nilsson Tuesday, in an exclusive interview with Guardian Business. In short, the recession may forestall a development boom with the potential to both lower profitability for the industry's current players as well as protect the cachet of the destination's reputation as the exclusive stomping ground of the rich. It's a niche market worth protecting.

"Yes, those high-end clients are arguably more demanding," he said, "but their spending levels are significantly higher than (budget) travelers.

"I'm a believer in adopting a steady pace of development that protects room rates and avoids downside shocks."

Nilsson's analysis may reduce anxiety levels for many worried about the slowdown at construction sites across New Providence and others in the chain.

It may also lend weight to concerns raised about the size-appropriateness of the now-scuttled Baha Mar project.

That $2.6 billion resort development project would have dropped the 1,550 rooms onto the Cable Beach strip its developer acquired in 2005. Part of that initial purchase, of course, included the Crystal Palace.

The fate of those new rooms now depends on Baha Mar finding a replacement for Harrah's Entertainment, the equity partner that walked away from the deal last March. The gaming giant's departure came as credit opportunities continued to shrink and international backers normally attracted to tourism projects increasingly sought less risky investment vehicles.

Hotel development, said Nilsson, is generally characterized by a "high spillover cost effect."

But The Bahamas — and its resort projects — will continue to attract financiers looking to take a chance on tourism-focused development, said the economist, pointing to fundamental strengths like its proximity to the U.S. and its currency peg to the greenback.