Moody’s Rating for Cayman Islands Stays at AA3
That Moody’s most recent rating of Cayman Islands stayed at AA3 is great news in the current financial crisis. It is further support for CIREBA’s (Cayman Islands Real Estate Brokers Association) position that Cayman’s economy is inherently stable and there has never been a better time to invest here. The research report is dated June 29, 2010.
“Ratings
Outlook - Stable
Government Bonds - Aa3
Cayman Islands Outlook - Stable
Country Ceiling: Fgn Currency Debt - Aaa/P-1
Country Ceiling: Fgn Currency Bank Deposits - Aa3/P-1
Credit Strengths
- Very low external debt and debt service; resilient foreign exchange earnings
- Very high per-capita income
- Prudent macroeconomic management
- A well-functioning legal system; effective and adaptable financial regulatory system; longstanding political stability
Credit Challenges
- Narrow economic base highly dependent on off-shore financial services and tourism
- Statutory and economic constraints on fiscal flexibility
- Vulnerability to external shocks and to natural events, i.e., hurricanes
Rating Rationale
The Aa3 government bond ratings are supported by a stable political system, relatively high income levels, prudent economic policies and a favorable external debt position, with low and manageable levels of debt. According to Moody’s sovereign bond methodology, the Cayman Islands’ economic and institutional strength both rank as “high” on a global scale. Despite a very small economy (nominal GDP of $3.0bn) and a narrow economic base (tourism and off-shore financial services - the Cayman Islands are the largest offshore mutual fund registration center in
the world and the second largest offshore insurance center), GDP per capita is very high at $55,000. Long-term concerns center around the challenges for maintaining competitiveness in the tourism and offshore industries, which are the mainstays of the economy.
The Cayman Islands’ status as a British overseas territory has contributed to its strong legal and accounting systems. The Cayman Islands has taken legal and regulatory measures to satisfy concerns regarding money laundering through offshore banking, ultimately leading to its removal from the OECD’s “gray list” of jurisdictions that have not fully implemented internationally agreed tax standards. The government’s financial strength is considered to be “very high.” A traditionally prudent fiscal policy stance and low — albeit rising — debt levels compensate for the
constraints posed by a tax regime that excludes direct taxation on income and a recent infrastructure-related one-off capital expenditure boost.
The Cayman Island’s credit fundamentals have demonstrated resilience to successive external shocks — US recessions, the effects of September 11, damage inflicted by Hurricane Ivan — and, more recently, to domestic fiscal pressures in light of a sharp drop in revenues. The Aaa ceilings on the foreign debt obligations of the offshore banking industry reflect the separation of such entities from the domestic payments system, their limited ties to the local economy and the ease of relocation.
Rating Outlook
The stable outlook assumes that the authorities will undertake fiscal tightening measures required to reverse the recent build-up in debt levels seen in recent years.
What Could Change the Rating - Up
In view of the Cayman Island’s narrow economic and revenue base, factors that would lead to upward movement from the relatively high rating are difficult to envisage in the near to medium term.
What Could Change the Rating - Down
The rating could come under pressure if fiscal policy continues to be relatively loose, allowing public sector debt to rise to levels well above those of its rating peers. A sharp and permanent fall off in tourism and off-shore financial services would also be credit-negative as it could significantly impair macroeconomic performance exerting pressure on the balance of payments.
Recent Developments
An ambitious capital expenditure program, together with a drop in revenues related to the global crisis, has led to a considerable deterioration in public finances in recent years. Preliminary results for 2009/2010 (the fiscal year ends in June) show a fiscal deficit exceeding 6.0% of GDP for the third straight year. The 2010/2011 budget points to another year of a large deficit, with the central government expected to post a 7.1% ofGDP deficit. Public debt levels are estimated to reach over 30% of GDP, once all contingent liabilities are included.
In discussions with the UK Foreign Commonwealth Office (the Cayman Islands is a U.K. territory and its finances are closely monitored by the U.K.), the authorities obtained “authorization” to complete their borrowing plans this year in order to finalize several infrastructure projects. Concurrently, the authorities presented a three-year comprehensive fiscal consolidation plan which envisions revenue increases (mostly via higher custom tariffs), operational expenditure cuts (mostly payroll), caps on capital expenditures and a series of privatizations. These efforts should enable a sharp turn-around in the fiscal position, with a fiscal surplus by 2012.
Fiscal consolidation will be challenging given sluggish economic activity. Official projections point to an economic contraction of over 6.6% in 2009 with the recession extending into 2010 . Stay-over tourist arrivals declined by 10.2% in 2009, a drop comparable to the post-September 11 period, but the numbers through April this year are showing an increase, albeit still below the levels enjoyed before the September 11 attacks. Data for mutual funds registration showed a 3.0% drop during 2009, while insurance company registrations were flat. Although the drop is not sizeable, relocations of high-profile offshore insurance companies to Ireland (a low-tax jurisdiction without the stigma of a tax haven), driven by concerns about increased scrutiny of offshore centers, is symptomatic of the potential long-term negative impact that regulatory changes could have on the outlook for the financial service industry — financial services account for more than 50% of GDP.”
© Copyright 2010, Moody’s Investors Service.
J.C. Calhoun
Broker/Owner
Coldwell Banker
Cayman Islands Realty
P.O. Bx 32308
1364 West Bay Road
Grand Cayman KY1-1209
CAYMAN ISLANDS
Ph: 345-623-4411
Fx: 345-945-4307
jc@cirealty.ky
www.caymanislandsrealty.com