Uncharted waters

The Cayman Islands can no longer hide from the new economic, political and financial realities of a globalised world. Anwer Sunderji, chairman of the Fidelity Group, sees an “age of austerity” in the industrialised world that is contrasted by substantial growth in emerging markets. He predicts a transfer of wealth from the developed world to newly-industrialised and developing countries.

 “There is a lot going on in the world. The global financial landscape is changing as the world comes to grips with the aftershocks of the global financial crisis that we have experienced in 2008,” he says, referring among others to high US unemployment of just below 10 per cent.

Sunderji says it is unlikely that this is going to change soon, estimating it will take “five, six or seven years before the US recovers fully”.

At the same time Europe is experiencing troubles with the Euro in Ireland, Spain and Portugal.

“Typically these countries that have economic difficulties devalue their currencies, but in this case they simply can’t because they are tied to the Euro. So instead they are devaluing the living standards of their citizens and create a great deal of instability,” he explains.

This will not be without consequences for the Cayman Islands.

“The Cayman Islands is the fifth largest financial jurisdiction in the world. So what happens elsewhere, I am sure we will feel it here,” Sunderji says.

China changing the world
Sunderji sees transformational changes in the world which are caused by a need for austerity in the industrialised world due to high levels of public debt and contrasted by exceptional growth in emerging countries.

“I think China is the big elephant in the room. While we read about China and [think we] know what is going on, I think our knowledge is actually quite limited,” he says. Quoting labour statistics, he adds:

“If you take all the jobs in the US and export the jobs to China, China is still going to have a labour surplus. So you know that of 1.5 billion people in China a lot of people are still looking for jobs.”

There is going to be enormous competitive pressure on jobs and on wages globally, he predicts.

Meanwhile a lot of wealth is created in China. “There are 800 billionaires in China.”

As a result, the Chinese economy is not only a significant producer in the world economy but also becomes increasingly important as a consumer market.

“If you look at telephones and cell phones China has 15 million new subscribers each month. So when Nokia or Samsung or somebody else is making handsets they are not making them for the US anymore. They are making them for the Chinese market,” he notes.

While China is going to be a huge force in the global economy, the US and much of the industrialised world is losing momentum.

“I think the US and certainly a lot of the first world, the developed and industrialised world is getting impoverished and there is a transfer of wealth taking place,” Sunderji says. “China is going to be the big power. By 2020 the Chinese GDP is going to be the same as the US.”

These global changes are not solely economic. “Can the US continue to act as the global policeman, the global bank and the bastion of global democracy, when it can ill afford the cost of doing it and who in fact is going to fill up this space?” he asks.

Although China is growing very rapidly and a transformational boom is taking place it is not clear whether it will be able to occupy this space.

The “new age of austerity” in the US will also have an impact on other economies, Sunderji says, noting that the US savings rate has gone from virtually zero to plus six. 

That means that people are spending less and saving more, which will have an impact on those countries such as the Cayman Islands that are dependent on US tourism.

Gloomy scenario throws up more questions than answers
Asked whether the scenario he is envisioning is not a bit gloomy, Sunderji says: “I have a reputation for seeing the glass half empty, but I think there is no doubt these are very difficult times. Recovery is not going to be soon, it’s going to be protracted, it is going to be difficult.”

It will be a time of compromise, he says, mentioning how President Obama has to make compromises on how to shrink the deficit.

“This is a conversation that we all need to have. Doing nothing is not an option. I don’t know that anybody has a solution for these issues and they look pretty grim, if you look at them in isolation. But if they are addressed, maybe we can get out of this mess.”

Scott Elphinstone, managing director with Five Continents, attempts to balance this view.

“If I look at the glass being half full instead of half empty, we have gone through the worst economic period post war. There has not really been any worse period and the governments have done the right things to stimulate the economy, to keep everything ticking over. So not all is lost,” he says.

“We are going to have a slow growing economy, but the economy is still growing. We are not going to have another recession. We have a slow growing economy with a lot of government support.”

However Elphinstone adds, government support comes at a price. “You don’t create billions of dollars and then everybody knows exactly what is going to happen. We don’t know what is going to happen,” Elphinstone says.

“So is there a cost to that? Yes. Will that cost be inflation? Probably.” The question is what are the implication for our society, if we are suddenly in an inflationary environment, he asks. “We have been in declining inflation since the 1970s, so now we are going into a new phase where inflation rekindles itself.”

The implications are that we are heading into “uncharted waters”.

Sunderji weighs in: “We have had decades of enormous wealth being created around the world, enormous growth at the same time and that has been reset. The economies are going to grow at a much more subdued rate for several years to come. How do we survive and prosper under this new normal at lower rates of growth. What do we need to do?”

“How do we retool and reengineer our businesses to prosper at a lower economic level. How do we as individuals change our pattern of saving, investing and consumption so that we are in sync with the new reality?“ he asks.

“I am hoping that things get better and get better quickly but if you don’t talk about these issues then you cannot find any solutions.”

Cayman Islands and the global economy
Cayman needs to come to terms with a new economic reality. “Borders have become porous,” Sunderji says, exposing the Cayman Islands to greater competition than ever before.

At the same time getting the economy right in Cayman will require sacrifices. “It is a difficult task to convince Cayman citizens that sacrifices will be needed to accomplish this, a task that requires leadership,” he says.

The Cayman Islands needs to confront the issues of deficit and revenue costs and see how the budget can be balanced over time. People need to be engaged in that conversation, he adds.

The 8th Cayman Business Outlook conference titled “Uncharted Waters” will on Thursday 20 January 2011 at the Ritz-Carlton attempt to answer some of the questions raised.