Moody’s gives Cayman Islands positive marks for fiscal management
Although the Covid-19 pandemic cost the Cayman Islands Government two years of fiscal deficits — 2.1 per cent and 2.4 per cent of gross domestic product in 2020 and 2021, respectively — fiscal balance returned to surplus in 2022, exceeding its original budget expectations for the year.
This was one of the highlighted notes by Moody’s Investors Service in affirming the Cayman Government’s Aa3 issuer ratings. The outlook remains stable.
Meanwhile, Moody’s expects fiscal surpluses between 1 per cent and 1.5 per cent in the next few years to support a reduction in the debt burden and provide the Government ample fiscal space to absorb potential shocks.
The positive remarks for the Caribbean financial services centre reflected the very low debt burden and prudent fiscal management as reflected by a track record of very small fiscal deficits or fiscal surpluses, which Moody’s expects to continue. Strong institutions and a history of macroeconomic policy consensus contributes to high income levels and economic resilience despite the economy's small size, providing support to the Aa3 rating.
Moody’s said: “Despite having no personal income or corporate income taxes, nor value-added taxes, Cayman Islands’ government generates revenue between 18 per cent to 20 per cent of GDP and has a track record of fiscal surpluses that is consistent with a declining debt burden.
“The Government relies on taxes on international trade and financial service licences, which represent about 50 per cent of government revenue. This contributes to a lower debt-to-revenue ratio than Aa-rated peers, while also supporting very strong debt affordability.
“Prior to the coronavirus pandemic, Cayman Islands’ government consistently ran fiscal surpluses, averaging 2.4 per cent of GDP between 2013 and 2019.
“This allowed the Government to reduce debt by ten percentage points of GDP over that time.”
“And last year in June, the Government drew down on a credit line it had available from local banks that was set to expire, withdrawing $393 million (7 per cent of 2022 GDP).
“By drawing on the credit line, the Government locked in its borrowing at a low fixed rate of 3.25 per cent for 15 years.
“The Government does not intend to borrow for at least the next two years, relying on its cash reserves and other liquid assets to finance capital spending.
“As a result, Moody's projects that government debt will steadily decline moving to 7.2 per cent of GDP by 2024.”
Moody’s said: “With nominal GDP of $6.8 billion in 2022, Cayman Islands is a fraction of the size of much larger Aa-rated peers (median $416 billion). However, with per capita income of $87,135 in 2022, Cayman Islands' is significantly wealthier than rated peers.
“Cayman Islands’ institutions and track record of effective policymaking mitigate risks associated with its small size and highly concentrated economic structure. The country’s institutions have supported economic development, stable and high growth, and high income levels, all of which increase the economy's shock-absorption capacity.
“The economy is highly concentrated in two sectors, financial services and tourism, which leave the country exposed to shocks. However, these sectors have supported overall GDP growth rates which are in line with rated peers.
“Between 2015 and 2019, real GDP growth averaged 3.5 per cent, and despite its high reliance on tourism, Cayman's economy contracted less during the pandemic than larger-rating peers that have a more diversified economic structure.
“An economic recovery in 2022, when real GDP expanded 3.7 per cent, was aided by the rebound in tourism, which Moody’s expects will continue to drive growth in 2023 as well. Moody’s expects the economy to grow on average 2 per cent during 2023 to 2025.
“Cayman Islands has developed a very large financial sector relative to the size of its economy, establishing itself as one of the world's largest offshore financial centres. Given this, changes in the sector could have a significant effect on Cayman Islands’ economy.
”However, Cayman has a track record of effectively adapting to international efforts against tax avoidance, tax evasion and financial transparency. Since being added to Financial Action Task Force jurisdictions under increased monitoring, or ‘grey list’, in February 2021, the Government has made steady progress toward addressing deficiencies in its anti-money-laundering regime.
“While offshore banking has declined in importance over time, as reflected in the number of banking licences, total company registrations have grown consistently.
“Moreover, as Cayman is competitive in a number of areas of financial services, the country continues to see growth in the number of mutual funds, and more recently expansion in the insurance sector. This has supported economic activity and government revenue collection.”