While many business leaders express optimism about the economic outlook for 2014, mainly based on major new developments, the hard data still presents a mixed picture. Government finances are expected to improve, but GDP growth is flat and unemployment remains unchanged. Meanwhile, the number of work permits declines, dropping once again below the 20,000 mark.
When the GDP growth in the Cayman Islands accelerated from 0.9 percent in 2011 to 1.6 percent in 2012, many expected a fledgling recovery. They did not, however, foresee a drop in economic activity of 0.6 percent and the potential for a new recession in the first quarter. Since then, the economy has rebounded and is estimated by rating agency Moody’s to have reached 1.5 percent last year with a similar growth rate predicted for 2014.
The economic bounce-back last year was led predominantly by hotels and restaurants and the construction industry, with construction activity at Cayman Health City, the Esterley Tibbetts bypass extension and the WaterColours and Casa Luna condominiums just some of the examples of major projects reaching their peak last year.
Any further rebound in the local economy this year is expected to come from the same industries and major projects coming online.
Moody’s notes Cayman’s main industries, offshore financial services and tourism, are very well established and, barring major structural changes, should generate modest growth rates in the medium term.
“Diversification efforts and private investment could bolster growth going forward and there are a few major projects in the pipeline,” the rating agency said, naming in particular Health City Cayman Islands, Cayman Enterprise City, and the plans for a cruise pier as initiatives that could bolster existing industries and diversify the economy.
Speaking to business leaders, they say these large projects also give them reason to be optimistic.
“Given all of the projects that are in progress and coming online, I think the economic outlook for Cayman is very good,” says Charlie Kirkconnell, CEO of Cayman Enterprise City. “Cayman has set itself up for a decade of growth and perhaps beyond that as well.”
He says seeing major investments and trust by other businesses in the Cayman economy encourages him in his endeavors and he hopes the same is the case when businesses see the developments at Cayman’s special economic zone.
Another source of significant development in 2014 is Dart, with the construction of 18 Forum Lane, a mixed-use office and retail building at Camana Bay, and the construction of the Kimpton Grand Cayman hotel.
Dart CEO Mark VanDevelde believes “Cayman’s future is bright” and he expects Cayman to benefit from the continuation of the global recovery predicted for this year.
As Dart continues to grow both locally and internationally, it will benefit the company’s base in the Cayman Islands, he says.
The finance industry presented a mixed picture. In 2013, the total number of hedge funds increased by 5 percent to 11,379. But this includes master funds, which did not have to be registered before 2012. Excluding master funds, the number of funds actually declined by 2.3 percent, the lowest figure since 2007.
The number of banks and trust licenses continued its decline, dropping by 4 percent to 213. In contrast, bank cross-border deposits recovered, according to the latest available figures. Cayman still ranked fifth and sixth globally in terms of cross-border liabilities and assets, respectively, a position that reflects its status as a global financial intermediary.
The captive insurance sector in turn remained fundamentally solid. Following a strong 2012 with 53 licenses granted and the largest number of new captives since the hard market of 2004, 2013 continued to show steady growth. A combined total of 39 new licenses resulted in a 3 percent increase, with the total number rising to 761. Total premiums of US$12.6 billion and total assets of US$69.2 billion as of Dec. 31, 2013, remained strong.
The number of trust companies saw a modest 1.4 percent drop, but this was offset by the growth of controlled subsidiaries (13.3 percent) and private trust companies (14.3 percent).
New company registrations also experienced a resurgence in 2013. Through November, 8,770 new companies were registered, a 6.2 percent jump over the same period in 2012. Registrations were set to exceed 2012’s total of 8,971 and reach the highest number of new formations since 2008 (11,861).
New partnership registrations in Cayman through November 2013 (2,170) increased 13.75 percent year-on-year and are expected to surpass the highest annual number of 2,188 from 2008. Active partnerships on the register already reached a record high in September 2013 at 14,165.
Tourism was one of the major economic drivers last year, despite a contrasting performance in stay-over and cruise tourism. As air arrivals soared to near record highs, cruise arrivals dropped to a 10-year low.
The total 345,387 stay-over visitors were just 10,000 shy of the record and still the best result since 2000. Some hotels like the Comfort Suites said they enjoyed a record-breaking year as a result.
Tourism Minister Moses Kirkconnell is confident that the upward momentum will continue in the coming years.
“I am very pleased with the solid increase in air arrivals, which represents our best arrival figures since 2000, and I am optimistic that the proposed airport enhancements, in collaboration with our ongoing marketing initiatives, will help to maintain the positive momentum,” he said.
Better airlift, accessibility and a better visitor experience will be key to improving the numbers.
Cruise tourism, on the other hand, an important source of revenue for tour operators, taxi drivers and other small businesses, struggled with the worst arrival figures since 2001. But a turnaround is expected for 2014 and 2015 as bookings have improved and new itineraries will come online. Further improvements will hinge on the ability to develop a cruise berthing facility, despite constrained government finances.
“In terms of cruise visitation, while the reduction in passengers is regrettable, it underscores the critical importance and necessity for the cruise berthing facility, which my ministry is working exceedingly hard to bring about, to help balance cruise arrivals with stay-over arrivals,” the tourism minister said.
Moody’s predicts that Cayman’s debt burden will decline to a debt-to-GDP ratio of 22.4 percent in 2013 and 21.9 percent in 2014, after peaking at 24.5 percent in 2011.
Government’s estimated fiscal surplus of 3.6 percent of GDP in 2013, in Moody’s view, indicates “a gradual convergence to the government’s goal of a balanced budget.”
The fiscal adjustment is driven by both expenditure reductions and higher revenues. The rating agency expects revenues to rise from 18.5 percent of GDP in 2009 to 22.2 percent in 2013 and expenditures to fall from 26 percent to 22.8 percent of GDP in the same period. These lower deficits have allowed Cayman to limit debt growth.
Still, there is a need to be realistic about Cayman’s fiscal situation, says VanDevelde. “It is a reality that our government simply does not have the financial resources needed to fund every business, economic, social or environmental initiative which we need as a country.”
In many areas, business will need to fill the void in cooperation with government through viable public-private partnerships.
One concern for the economy in general and local retailers and service companies in particular is the declining number of work permits. In January 2014, the number of work permits tumbled 4 percent compared to four months earlier, as 550 former Term Limit Exemption Permits holders left the islands. Another 300 work permit holders decided to leave at the same time.
As a result, total work permit numbers of 19,793 (as of Jan. 28) are now even lower than at the end of 2011, the year which saw the nadir of work permit numbers during the past 10 years. The last year work permit numbers were lower at the end of a calendar year was 2003.
This is bad news for local supermarkets and other retailers, as well as landlords who will see further downward pressure on the rental rates they can charge. Only 54 former TLEPs had applied for permanent residency, which indicates that few of the remaining 900 former TLEPs will stay longer than 2015.
Although the government said the vacant positions were open to Caymanians willing and qualified to do the work and the National Workforce Development Agency is working with employers to hire Caymanians for jobs vacated by those who held TLEPs, the success of this initiative is as yet uncertain.
In any case, a declining population will dampen the growth of the economy.
One market where the number of transactions is partially impacted by the number of people on island is real estate.
The local economy and real estate market are improving, but only at a slow pace in terms of genuine activity, according to Kim Lund at RE/MAX. Sales overall improved by 4 percent to 5 percent, he said, but in terms of the absolute number of sales, this growth is not impressive. Condominium sales, meanwhile, remained flat.
While hardening prices and the absence of “low-ball” offers indicate improving market conditions for real estate sales, Lund predicts the real recovery for 2015, after gradual improvements this year.
The same could be said for the economy as a whole.