The Cayman Islands economy should remain stable over the next two years, thanks to strong ties with the United States. However, emergent markets such as Asia and Latin America are the most promising sources for future potential growth, according to an RBC economist.
The country’s reliance on the US, specifically in the financial and tourism sectors, is currently serving Cayman quite well, as Europe and the United Kingdom look to face a difficult stretch over the next two years. However, Cayman should be striving to diversify its sources of foreign investment in order to bolster the local economy against any future instability in the US, said RBC Financial (Caribbean) group economist Marla Dukharan of Trinidad and Tobago.
“My preference would be to look to Latin America and Asia rather than being dependent strictly on developed countries,” she said.
Speaking before an audience at the Cayman Islands Chamber of Commerce 29 February, Dukharan added the caveat that the healthiness of US tourism numbers will largely depend on if oil prices remain steady. In her presentation, Dukharan surveyed economic trends for 2012-2013 on global, regional and local scales.
Emerging markets are expected to drive worldwide growth. In the Caribbean, countries are confronting serious obstacles but should benefit from the impending Panama Canal expansion. Cayman, meanwhile, remains as a bright spot in the region and should see steady numbers from tourism and finance.
Emerging markets drive global growth
On a macro level, the growth rate of global gross domestic product is expected to be about 2 to 3 per cent annually. Through 2013, advanced countries such as the US, UK and Europe are looking at 2 per cent growth, while emerging markets such as Asia and Latin America should post growth of 5-6 per cent. Most of the emerging market growth will be driven by Asia, she said.
The US is seeing some positive economic data right now, and typically, economic numbers tend to see a boost during general elections (to be held in November 2012), Dukharan said.
Several countries in the European Union are in serious economic jeopardy, though others, most notably Germany, are demonstrating resilience. Overall the EU is looking at sliding back into a recession; its banks are vulnerable; and a closer fiscal union among the member States is impending.
While the situation is not so dire in the UK, the nation is not likely to post GDP growth of more than 1 per cent and is anticipating the extension of government austerity measures.
With base interest rates likely to remain extremely low in the near term, the amounts of paper money in circulation already at high levels, and nations already having taken on immense amounts of debt, governments will have limited options for more economic stimulus measures in the foreseeable future. Dukharan said world debt levels, measured by the ratio of sovereign debt to GDP, has already surpassed debt levels during the Great Recession and are approaching World War 2-era levels.
“That kind of level of debt will take another, say, 20 years, to get down to pre-recession levels,” she said. “Governments have no room to borrow and fewer options for stimulation.”
On the plus side, global unemployment rates are expected to remain steady to 2016.
Food prices are expected to remain moderate, while oil prices are projected to stay at current high levels.
Caribbean problems, opportunities
As a region, Caribbean jurisdictions are looking to overcome a myriad of difficulties. With countries, such as Belize, already suffering credit rating downgrades, others are next in line to get negative outlook reports, such as Turks and Caicos, Jamaica and Barbados, Dukharan said. Part of the reason for this is agency Standard & Poor’s has revised its ratings system to penalise countries with economies highly dependent on vulnerable sectors like tourism, she said. That, of course, doesn’t bode well for Caribbean territories, for some of whom tourism accounts for 90 per cent of GDP.
Countries, such as Barbados or Dutch territories, who attract much foreign investment from Europe, are especially vulnerable to the unfolding Eurozone crisis. Meanwhile, Caribbean governments are grappling with fiscal deficits and mounting debt through further austerity measures.
Fierce offshore finance competition and strengthening financial regulation also will impact Caribbean economies. Especially important for countries such as Guyana and Jamaica, reliance on remittances from overseas workers is likely only to continue to grow.
On the bright side, in the surrounding region, the US is expected to exhibit moderate growth and Latina American countries are projected to have strong growth, she said. Meanwhile, foreign direct investment in the Caribbean from China and Latin America will increase. Dukharan said she feels this is a positive development, coming at a time when the region is in need of cash inflows.
Arguably the most significant development in the region is the expansion of the Panama Canal, which is expected to be complete in 2014, will double the canal’s capacity and allow for bigger ships to use the canal. The increase in the number of ships using the canal will increase transhipment opportunities, so Jamaica and Cuba (and cities up and down the US coastline) are already working to expand their port facilities in anticipation of the canal opening.
Solid prospects for Cayman
While the expectations of the entire region are heavily influenced by the US’ fortunes, Cayman’s relationship with the US is more like a hand in glove. That’s not a bad thing in the current state of global affairs, given the relative strength of the US economy compared to the EU or the UK, but in the longer term Cayman should look to forge other connections to emerging countries in Latin America and Asia, Dukharan said.
She said tourism comprises some 70 per cent of Cayman’s economy and the financial sector 30 per cent. The vast majority of tourists originate from the US, and those numbers should improve in 2012-2013 as long as oil prices remain relatively steady.
Dukharan said to expect the signing of more tax information exchange agreements with other countries, as nations continue efforts to disallow money from wrongfully escaping their tax coffers. In all, the statistics don’t show much evidence to worry about a sudden drop in the offshore financial sector, and she believes the mutual fund industry demonstrates potential for growth.
The Panama Canal expansion also poses opportunities for Cayman, in that the canal should spur growth in Latin America, which in turn will be looking for direct investment opportunities in the Caribbean and potentially Cayman. Already, territories are looking to Latin America as a source for tourism dollars, with Cayman being no exception.