Twelve months later it appears that, despite some positive signs, this forecast will have to be delayed by another twelve months. The Mood of the Boardroom survey of business leaders in the Cayman Islands shows only a slight improvement in business confidence and the assessment of the economy.
After a massive decline in economic performance in 2009 of 7 per cent, Cayman’s economy still found itself in the midst of a recession in 2010.
In 2009 five key sectors suffered substantial economic declines, including construction (-29.3 per cent), financial and insurance services (-14.4 per cent), wholesale and retail (-11.5 per cent), hotels and restaurants (-10.2 per cent) and transport and storage (-8.1 per cent).
For 2010 estimates are that Cayman’s GDP has shrunk by a further 4.1 per cent.
Stalling and slower than anticipated growth of the US economy during the second half of 2010 may also have impacted the economic performance in the Cayman Islands economy, which is closely linked to the US. However, the first half of 2010 saw some indications of economic recovery.
New company registrations surged by 18.4 per cent in the first six months of 2010, after a massive decline of 33.7 per cent during the same period in 2009. The number of hedge funds also increased again to 9,594 (third quarter of 2010), overcoming a two and a half year low of 9,378 at the end of the first quarter 2010.
Media reports of an “exodus of funds” relocating from Cayman to Europe and Ireland in particular are “a myth”, according to Cayman Finance and others in the financial services industry. The Cayman Islands Monetary Authority could only confirm a total of four funds that re-domiciled to Europe from Cayman so far.
The tourism sector also steadied following a tumultuous 2009. By October 2010 air arrivals had jumped 5.4 per cent and in November the 2010-formed Ministerial Council for Tourism revealed that Cayman Airways flights would be scheduled to link up with Europe-originating services on Virgin Atlantic through Havana, Miami and Jamaica, providing more options for travellers. Also in November West Jet launched a new direct service from Toronto to Cayman.
Hotel occupancy rates increased from 59 to 69.2 per cent on a room stock that remained flat year-on-year. Yet, while this is positive news, it most likely has been achieved on the basis of deeply discounted room rates.
The economic downturn still affected downtown businesses, with Senor Frog’s restaurant and bar closing permanently in May. A weather-impacted cruise season led to 68 lost or diverted cruises. Nevertheless cruise arrivals grew by 2 per cent year on year.
Meanwhile, the outlook for 2011 is a mixed one. New companies Aida of Germany and Happy Cruises of Spain debuted at Cayman toward the end of the year, as did a cruise route originating in Panama, opening up new market opportunities. But it also transpired that the islands will receive 54 fewer calls from Royal Caribbean, Princess Cruises and Celebrity Cruises in 2011. This would constitute a 26 per cent decrease, and a 23 per cent decrease in visitors over the next year.
In the real estate and construction industry the negative trends of 2009 continued last year with the total value of property transfers falling by 15 per cent and building permits declining by 28 per cent. Residential construction, which largely carried the market in 2009, began to dissipate this year.
The value of apartment construction approvals in the first half of 2010 fell by more than 75 per cent from the year before, dropping from CI$100 million in mid-2009 to $23.4 million as of June 2010. The total number of project approvals has also fallen steadily over the past several years. Project approvals in the first half of 2007 were 647. In 2008 that number was 617 compared to 483 in 2009 and 436 in the first six months of 2010.
Only the commercial construction category provided a bright spot in an otherwise cloudy picture. “Intentions rebounded from a year ago to $79.1 million,” the Half-Year Economic report of the Economics and Statistics Office. “Large projects including the on-going expansion of the Camana Bay development, a national art gallery and a new commercial development accounted for $54.8 million (or about three-quarters) of the total project approvals.”
The trend of a general economic decline combined with a population falling rapidly by 7.3 per cent in 2009 continued in 2010. As a result demand for rental properties slowed dramatically leading to lower rents and a large number of empty properties on the island. House prices dropped by 15 per cent in 2010 in response to slow demand, but the luxury property market held more firmly.
At the same time the number of property transfers in the first six months of 2010 declined by 13.8 per cent.
“A modest forecast GDP growth of 0.8 per cent in 2011 will hinge on a firm rebound of the financial services industry particularly in the second half of the year, and stronger growth of tourism arrivals,” concluded the Strategic Policy Statement presented by government on 25 November 2010.
“The resulting forecast GDP growth for FY 2010/11 is -1.7 percent,” it said.
Given the uncertainty of this forecast, the Mood of the Boardroom survey of business leaders showed that 37 per cent those surveyed correspondingly believe the economy is recovering or growing, contrasted by 20 per cent stating the economy will still be in recession and 43 per cent declaring it unchanged.
Compared to 2010’s survey the share of business leaders that see Cayman’s economy as growing remains unchanged. Only the share of those expecting a recession in the new year declined from 51 to 20 per cent.
Given the general expectation from one year ago that Cayman would be witnessing first signs of growth at the end of 2010, it appears that this assessment is now delayed by another six to 12 months.
Entering 2011 business confidence in the Cayman Islands is split. While 7 per cent of the survey’s respondents said they are “very confident” with regard to revenue growth of their company, another 43 per cent they were “somewhat confident”. This is a ten per cent improvement in business confidence over last year. However, 17 per cent of all respondents are still “not confident at all” and 30 per cent said they were “not very confident”.
Cayman Islands Premier McKeeva Bush confirmed at a conference on Northern Caribbean Economic Cooperation in December 2010 that the “mood is not as optimistic as I would like it to be”.
“People are facing some of the toughest times ever, as unemployment rises together with the general cost of living,” he said.
The fallout from the 2008 and 2009 global recession continues to have a widespread effect on these islands economy, he noted. “So whereas traditionally our growth was steady and positive, within the last two years our country has undergone a sharp reversal in the growth trajectory.”
He promised to inject new life into the economy and stimulate growth with an economic programme revealed in December. Realistically, however, the Cayman Islands only has limited means to stimulate the economy through higher government spending. Aside from a duty reduction for building materials, renewed economic activity will have to come from either public-private partnerships or the private sector itself.
In 2010, the economic downturn impacted the labour supply and employment. According to the government’s Strategic Policy Statement the unemployment rate in Cayman increased from 4 per cent in 2008 to 6 per cent in 2009. Unemployment was expected to have dropped slightly in 2010 to 5.8 per cent, according to the latest estimates. A further fall in unemployment to 4.9 per cent is expected for 2011.
In 2009, the total labour force shrunk by 7.4 per cent as work permits for expatriate labour fell by 11.3 per cent due largely to the economic downturn in construction, hotels and condominiums, financial services and the government’s employment cut.
Work permit numbers fell further in 2010. Between June 2009 and June 2010 the number of non-Caymanian civil servants dropped by 35.9 per cent. The corresponding figures for all work permits for the same period fell 11 per cent, from 24,270 in mid-2009 to 21,529 in June 2010.
By mid-September 2010 the total number of work permits, including government contracts, held by foreign nationals in Cayman had dropped to 20,958. This stands in contrast to 26,517 work permit holders at the end of 2008 and means work permits and government contracts issued by the Cayman Islands government have fallen by more than 5,500 in less than two years.
Yet, unemployment among Caymanians remained relatively high.
Minister for Employment Rolston Anglin identified two separate issues in the Legislative Assembly as being responsible for unemployment in Cayman. On the one side “due to the soft economy” too many Caymanians are unemployed. But even more so Cayman did have an “employability problem”, something the ministry was tackling with its Passport2Success initiative that targeted young unemployed with a programme to make them workplace ready.
A National Workforce Development Advisory Council was going to deal with both employment and employability issues, he announced.
According to the Mood of the Boardroom survey results a major turnaround on the employment market is not on horizon in 2011. While 37 per cent of business owners stated that they reduced staff levels in 2010, only 13 per cent plan to lower the number of employees in 2011. As a result, the gap between businesses decreasing and businesses increasing staff would reduce from 14 per cent to 3 per cent, if current forecasts prove correct. But workforce reduction would still outstrip new hires in 2011. The vast majority (77 per cent) of surveyed business leaders favours a wait and see approach and plans to maintain current staff levels.
Just like in 2010 immigration will remain at the top of the agenda for many businesses in 2011. 80 per cent of Cayman’s surveyed business leaders believe that an easing of the immigration system is either important or critical for their businesses.
Nearly the same number expects that immigration and work permit regulations will actually be looser in 2011. This is very similar to the results in 2010, yet not much changed during the past year.
In December, Sherri Bodden-Cowan took over as the chairperson of Cayman’s Work Permit Board with the aim of instituting major administrative changes to improve the efficiency of the board and speed up the work permit application process.
Budget and direct taxation
While direct taxation loomed large in 2009, the share of people expecting some form of direct taxation for the next budget year has decreased in 2010 from 48 to 27 per cent.
This, however, does by no means indicate that the public is convinced that public finances are on the mend. 83 per cent of those surveyed believe there will be a deficit in the government budget. This is 5 per cent lower than twelve months ago, but does reflect the initial government forecasts of a deficit of $31.9 million after financing costs.
It also shows that the tense relationship with the UK has eased somewhat. The new Governor Duncan Taylor, general elections in the UK, which resulted in a new Conservative/Liberal Democrat coalition government and the new UK Parliamentary Under Secretary of State at the Foreign and Commonwealth Office Henry Bellingham all contributed to a thawing of the relationship between the Cayman Islands and the UK.
Most importantly, it was the permission granted by the UK to borrow an additional CI$155 million to sustain government operations during the 2010/11 budget year that eased proceedings somewhat. It came after the government presented a three year budget cut plan to the UK.
The seriousness of Cayman’s public finance situation is illustrated in the fact that even under this plan, government projections see Cayman violate three of the six principles of responsible financial management, outlined in the Public Finance Management Law, not only in this budget year but also during the next three budget years.
And this does not even factor in any unfunded future healthcare and pension liabilities, estimated to be in the hundreds of millions.
Image of the Cayman Islands
The majority (56.7 per cent) of business leaders in the Cayman Islands sees a slightly negative impact from Cayman’s image for their businesses, compared to approximately 10 per cent which note a positive effect.
The attack on offshore financial centres by the G20 and governments seeking to recover supposedly lost tax revenue has clearly taken its toll. In addition regulatory initiatives that potentially impact offshore financial services were one of the dominating issues in 2010 with EU Alternative Investment Fund Manager Directive and the Dodd-Frank Act financial markets reform in the US.
However, the final ratified version of the EU AIFM Directive turned out to be less detrimental than initially feared and the collective echo within the industry in Cayman was that significant uncertainty has been removed with the passing of the directive in the European Parliament. The impact of new US financial market legislation, although adopted, will largely depend on its implementation over time, but significant changes and more government intervention are clear.
In particular the US Foreign Accounts Tax Compliance Act (FATCA) will demand significant preparation from financial institutions and hedge funds in the Cayman Islands, not least in terms of technology, to be able to identify and report US account holders and investors. Although FATCA will only come into effect in 2013, it will already be on the agenda of financial service business in 2011.