Cayman’s economy expanded more than anticipated in 2017. Gross domestic product grew by 2.9 percent in real terms following similar growth of 3 percent in 2016 and 3.1 percent in 2015.

Economic expansion was significantly higher than previous forecasts of 2.1 and 2.4 percent throughout last year.

The GDP growth of 2.9 percent is also more robust than the growth of the U.S. economy last year, said Finance Minister Roy McTaggart.

At $59,748 per capita, Cayman’s economy now ranks seventh in the world, again ahead of the U.S., which ranks eighth, and many other G-20 countries, the minister noted during an economic update at a Cayman Islands Institute of Professional Accountants training event in May.

The construction industry and tourism were the main drivers of the economy last year.

Construction activity, which showed growth of 7.2 percent, dropped off slightly after even stronger growth years in 2016 (7.6 percent) and 2015 (7.9 percent), but this was due to the completion of the Kimpton Seafire resort in late 2016.

Nevertheless, construction activity saw a $800 million-record high of project approvals.

“The construction sectors growth reflects the infrastructure capacity of the islands keeping pace with the demand for residential, commercial and public facilities arising from a growing population base that was estimated at 63,400 persons at the end of 2017,” Minister McTaggart said.

Meanwhile, tourist arrivals reached 2.15 million visitors last year as Cayman benefited from the misfortune of other holiday destinations in the Caribbean that were forced to close after they were hit by hurricanes Irma and Maria.

As a result, tourist arrivals in Cayman were 2.4 percent higher than in 2016 and stay-over tourism increased by more than 8.5 percent, especially coming from the U.S. and Canada.

Tourism-related services such as hotels, restaurants and bars also showed a combined growth of 8.5 percent during the year.

The financial services industry, which includes banking and insurance and makes up 41 percent of the economy, grew 1.4 percent, partly due to the low demand for domestic credit by the public and private sector.

Combined with professional services, such as corporate registration, legal and accounting services, which are largely finance-related but classified separately under international statistical standards, the finance sector in Cayman contributes more than half of the economy – 55.6 percent of GDP.

The professional services sector grew by 3.6 percent last year.

Mr. McTaggart said the government expects Cayman’s economic strength to persist in the medium term with GDP growth projections of 3 percent in 2018, 2.7 percent in 2019 and 2.2 percent in 2020. The slight downward trajectory is a reflection of growth forecasts by the International Monetary Fund for the U.S. and other advanced economies that Cayman relies on.

Government’s optimism for the economy is mainly based on the continued strong performance of the construction sector, with many tourist accommodation and residential projects already well under way.

Two hotel developments in George Town, as well as the continued expansion of Camana Bay, are only a few of the examples, the finance minister noted. In addition, approved public sector projects such as the expansion of the Owen Roberts International Airport, the Linford Pierson Highway, a long-term residential mental health facility, a solid waste management system, and a cruise berthing facility in George Town are a sign of government’s commitment to invest in infrastructure, he said.

As far as the financial services sector is concerned, Minister McTaggart pointed to the strong new company registration statistics as an indication that Cayman remains an attractive destination for offshore services.

There were 99,327 Cayman-registered companies active at the end of 2017, a 3.2-percent increase over 2016.

Key challenges

However, two key challenges remain and could put economic projections in jeopardy.

Firstly, the threat of instituting a public register of beneficial ownership in Cayman through an order in council could have an effect.

“We do not accept the decisions of the U.K. parliament with regard to the forced implementation of public beneficial ownership registers,” the minister said.

For the time being, government must wait until an order in council is made before it can challenge it. This is unlikely to happen before the year 2020. In the meantime, government will consult with its legal advisers about the necessary steps, involving judicial review and a potential appeal, should it be necessary, Mr. McTaggart said, but he made clear: “We will fight this ‘til the end.”

The second key challenge is the ongoing risk that Cayman may still be placed on the EU blacklist of non-cooperative countries in tax matters, which could attract punitive measures. To avoid such a blacklisting, Cayman has committed to resolve any issues concerning a lack of economic substance among Cayman-registered entities, identified by the EU.

What exactly constitutes economic substance is unclear as the EU has still to define its requirements. The Cayman government is engaged with EU policymakers to influence that process, Minster McTaggart said.

“Individually, the ongoing risk to an unfavorable outcome of any one of the two issues is unlikely to mean the death knell or the crippling of the financial services industry. But collectively, and even individually, they could have a significant effect.”

Given that revenue from financial services funds 42 percent of government’s revenue and the sector employs 18.3 percent of all workers in Cayman, any downturn of financial services could have “significant ramifications” for Cayman and the continuing growth of the economy, he said.

“And the potential does exist for our country to move into a recession if both of these issues play out as their proponents intend.”