Uncertainty over the strength of the global economy leaves business leaders in Cayman with dampened optimism for the state of the local economy. Yet they are more upbeat regarding their own businesses and more companies are planning to hire new staff than last year, an online survey conducted by the Journal revealed.
During the first six months of 2011, the latest available economic data, Cayman’s economy grew at an estimated 1.3 per cent, after a 4 per cent decline in 2010. Cayman was in fact one of the last countries to emerge from a recession after the 2008 global financial and economic crisis. It was also one of the few global economies that showed economic decline and a negative gross domestic product in all three years 2008 (-0.5 per cent), 2009 (-7 per cent) and 2010 (-4 per cent).
As Cayman was hit in the financial services and tourism sectors and the economy contracted, businesses responded by reducing staff, which in turn affected the local economy.
The number of issued work permits dropped by 13.1 per cent in 2010 and a further 7.5 per cent in 2011 to pre-Ivan levels of 19,378, from a high of about 26,517 in 2008. Although some of the permits have been turned into permanent residence grants at least 3,000 workers, and potentially more, have left Cayman.
Despite this reduction in the labour force unemployment increased, both mathematically (the same number of unemployed in a smaller workforce means a higher unemployment rate), as well as in real terms (the absolute number of unemployed increased). According to the government’s Strategic Policy Statement Cayman Islands unemployment stood at 6.7 per cent for the first half of 2011, putting unemployment amongst Caymanians at around 10 per cent.
The pressure valve that exists in terms of keeping overall unemployment low, because foreign workers that are out of work have to leave the Islands, still had a negative effect for the retail and the rental housing market. In September, Premier McKeeva Bush estimated that 2,200 rental units are empty in Cayman.
The sectors driving the economic recovery in the first half of 2011, hotels and restaurants, financing and insurance and wholesale and retail trade, were contrasted by the still ailing construction and real estate sectors, the rental market and business services, which suffered from generally lower licensing numbers except for new business licences.
Growth in air arrivals (8.1 per cent) outweighed weaker cruise arrivals (-3.4 per cent) in the first half of 2011 in the tourism sector, but still meant that the tourism retail sector that strongly relies on cruise ship tourists suffered.
The number and volume of property transfers recovered in 2011 from a poor 2010, but was also largely buoyed by a deal that saw Dart Group’s purchase of developer Stan Thomas’ properties that included the former Courtyard Marriott, the Cayman Islands Yacht Club and extensive raw land that include 1,500 feet of Seven Mile Beach property. That deal, announced in late January helped elevate total value of properties transferred in the first half year to $395 million, a value last seen in the first half of 2006.
However, the overall performance of the construction sector declined given the severe curtailment of demand with double-digit declines in total value of building permits and project approvals in 2010 and in the first half of 2011, according to the government’s Strategic Policy Statement.
In the financial services sector, businesses started to climb out of the hole left by the financial crisis in 2008, as banking, hedge funds and captives licences increased slightly after reaching a low in the first quarter of 2011.
Outlook for 2012
Cayman’s government expects a modest recovery of GDP by 1.2 per cent in 2011 and a continued recovery of 2.2 per cent for 2012. The estimate is based on private investment activity over the next three years, especially in construction where several projects, including the cruise ship berthing facility, the development of Cayman Enterprise City, the Shetty Hospital, several projects by Dart Group to enhance tourism facilities and infrastructure along Seven Mile Beach and the extension of the Owen Roberts Airport.
It is hoped, not unreasonably judging by the statements made in this issue of the Journal, that at least some of these projects will come off the ground in 2012, potentially increasing the population and stimulating demand in other sectors.
While government is therefore slightly upbeat about Cayman’s economic growth in 2012, the expectations by business leaders for Cayman’s economy remain more subdued, according to a Mood of the Boardroom online survey. About one fifth still sees Cayman’s economy going through a recession with the remainder evenly split (around 40 per cent) between seeing a flat and a growing economy. This is largely the same result as last year.
It appears that a potential recession in Europe and weaker projected growth in the US and Asia had an effect on this general outlook for the economy.
However, business leaders were more confident regarding their own businesses with 60 per cent either somewhat or very confident that their business will grow this year. This is a 10 per cent increase over last year.
This optimism is likely to have an effect on the job market. 23 per cent stated they increased staff levels in 2011 compared to 37 per cent who stated that they had cut the number of employees last year.
In 2012 just over 22 per cent plan to hire additional staff (12 per cent more than last year) and 12.5 per cent said they would reduce staff levels (13 per cent last year) in the coming year.
With staffing issues back on the agenda and as a result of the declining population, the announced review of the seven year term limit regime for foreign workers was generally welcomed by business. Yet there remains the awareness that, although the current regime is widely considered as damaging, a balance will need to be struck between the protection of local labour and the international competitiveness of businesses in Cayman.
Asked what they would prefer to see as the outcome of the review, 65 per cent of respondents to the Mood of the Boardroom survey expressed a preference for the elimination of the seven year term limit, resulting in the opportunity for everyone to apply for permanent residence after eight years in Cayman.
12.5 per cent are in favour of maintaining the rollover while transforming the key employee status to include a wider group of people. Only 5 per cent would leave the current system in place unchanged.
The results of the review committee are expected to be passed on to Cabinet in March with concrete measures potentially following later in the year.
Amid the factors that influence economic activity in 2012 regulation is often cited as a potential inhibitor of growth in the financial services sector.
Regulatory change is perceived ambivalently by Cayman’s business leaders. New onshore legislation is generally regarded as a threat, particularly when it has the potential to increase the cost of doing business or establishing certain financial structures in the Cayman Islands. The EU Alternative Investment Fund Manager Directive, the US Dodd Frank Wall Street Reform and Consumer Protection and the US Foreign Account Tax Compliance Act are the often cited examples for such onshore legislation.
There is until now little evidence that the EU Directive and the drive towards regulated hedge fund structures have put a dent into Cayman’s fund industry. Pure re-domestication of funds from Cayman to Ireland or other European destinations has only occurred in a handful of cases. According to a study by RBC Dexia released in 2011, co-domestication, which sees European hedge funds being established in addition to a Cayman fund offering, appears to be for the moment the preferred route taken by the industry.
Hedge fund numbers have as a result remained stable throughout 2011, after a drop in the first quarter of the year to 2007 levels (9,261), third quarter figures rebounded to 9,431, roughly the same as at the end of 2010.
Domestically regulation is seen as an enabler rather than damaging the industry. The new Insurance Law for which the regulations, after industry consultation, will be released in the first half of 2012 forms a solid basis to attract new business, by having a more clearly defined regime for reinsurers for instance. This will be accompanied by a more aggressive government strategy, which includes immigration incentives, to attract reinsurers to Cayman.
The Cayman Islands Companies Law is also being reworked. A first round of amendments was passed in 2011 and not only hailed as making Cayman’s regulatory regime more competitive but also as an example of successful public-private sector cooperation, in the form of the input allowed and given by the Financial Services Legislative Committee.
A law for the regulation of master funds, which was passed in December 2011, however was criticised for its lack of industry consultation. It remains to be seen whether the warning that the newly established fee of $3,500 will have a significant impact on the industry and fund formation statistics proves correct.
A proposal for the introduction of a minimum wage was also controversially discussed in the business community, but a clear majority of respondents (55 per cent) to the Mood of the Boardroom survey said they were in favour of a minimum wage and 27.5 per cent said they are in favour of a minimum for certain specified groups of employees. Only 17.5 per cent were critical of a set minimum remuneration.
Amid an economy that is only recovering slowly, government finances continue to be a pressing issue. In November the UK asked Cayman’s government to sign a Framework for Fiscal Responsibility, outlining new rules for managing government finances. In the eyes of the business community the new framework is a no-brainer as the survey responses reflected unambiguously (100 per cent) that the UK was correct in doing so.
Reducing the size of the civil service is the most important action government should take to help balance its budget, according to 60 per cent of the survey respondents. Public private partnerships were considered by 15 per cent the most important tool to improve government finances, and 12.5 per cent believe Cayman should attempt to find new revenue sources. The sale of statutory authorities in turn received only 7.5 per cent of the votes.