Tale of two economies
In the first of a five-part series running every day this week, we run the rule over the economic growth story playing out in the Cayman Islands in an effort to discover what Bermuda can learn from our fellow British Overseas Territory.
Bermuda is often compared with offshore rival the Cayman Islands — but the evidence of the past decade suggests their economies have been moving in opposite directions.
On measures of economic growth and job creation, Cayman has comfortably outperformed. Real gross domestic product growth has been trending at an average of 3 per cent over the past five years, compared to 0.1 per cent in Bermuda.
In the Caribbean territory, jobs are being added, unemployment is low and chunks of government debt are being paid off year after year.
The data show a spectacular rebound from two devastating events in the early years of the century. First, the visit of Hurricane Ivan, a Category 5 storm that caused severe damage to about two thirds of homes in 2004, causing a temporary exodus of about 8,000 people.
Barely had the territory had chance to rebuild itself when its economy was brought to its knees again by the global financial crisis which caused Cayman's flagship hedge fund industry to be battered amid a rush of redemptions.
The impact on government finances forced the debt-saddled government to go cap in hand to the British Government to request permission to take out a CI$50 million ($60 million) bank loan.
Since recovering from that double blow, Cayman has been on a growth streak, recording eight successive years of real GDP growth — expected to become nine when the 2019 figure comes in.
In contrast, Bermuda's economy has suffered a dismal decade economically, with contraction of real GDP in eight out of the last 11 years recorded. The only year during that period in which expansion topped 1 per cent was 2017, helped by a boost from hosting the America's Cup.
In real terms, the island's economy is smaller than it was in 2006. Bermuda's nominal GDP of $7.26 billion in 2018, is still higher than Cayman's US$5.48 billion, but Cayman has been closing the gap.
There is no more stark illustration of the divergence between the two economies than their records on job creation.
Just ten years ago, Bermuda had 38,097 people employed, ahead of Cayman's 34,983.
Since then, Bermuda has lost nearly 4,300 jobs, while Cayman has added 12,600.
Cayman government data show 47,622 people were employed as of March 2019 — about 11,000 more than in Bermuda, according to the Employment Survey carried out in 2018.
Cayman's unemployment rate is 3 per cent, compared to 5.2 per cent in Bermuda, while the jobless rate among Caymanians is 4.8 per cent and among Bermudians, 5.6 per cent.
A major difference between the two labour forces is the number of people categorised as underemployed: 16 per cent in Bermuda and just 3.3 per cent in Cayman. These are people in “involuntary part-time work”, that is they would like to work more.
Job creation is much easier when the population — and demand for goods and services — is rising. Cayman's population, which was 55,000 in 2010, has risen to above 68,000, while Bermuda's headcount has fallen slightly from 64,237 in the 2010 census to an estimated 63,919 in 2018.
As in Bermuda, the biggest contributor to Cayman's economy is international business, primarily financial services. However the mix is different with Cayman specialising in investment funds, while it is second only in the world to Bermuda as a captive insurance domicile.
Financial services and the legal and accounting firms that support them contributed more than half of Cayman's GDP in 2018. The financing and insurance sector grew 2 per cent in 2018 and the business services segment expanded by 4.4 per cent.
Tourism is also booming in Cayman, which welcomed about 2.4 million visitors in 2018, as air arrivals jumped 10.7 per cent to 463,000 and cruise ship visitor numbers climbed 11.1 per cent to 1.92 million. Gross value added in the hotel and restaurant sector was up 5.1 per cent in 2018, adding to its 4.3 per cent gain in 2017.
Demand for commercial, residential and public infrastructure is rising and the construction industry is growing as it tries to keep pace. Value added by the construction sector grew 8.3 per cent in 2018.
Amid the property boom, real estate is also enjoying prosperous times. In 2018, Cayman recorded 2,290 property transfers worth US$1.37 billion, an increase of nearly 38 per cent from a year earlier. The value of annual transactions has almost doubled since 2014.
Bermuda marks a stark contrast. In its real estate newsletter last month, Coldwell Banker Bermuda Realty said the number of residential property transactions in 2019 was expected to come in at less than half of what a “normal market” should produce.
Michael McWatt, managing director of Butterfield Bank (Cayman) Ltd, has a good view of the Caribbean territory's economy. He is well known in Bermuda, having worked for Butterfield on the island between 2000 and 2007 during better economic times.
“We're seeing the benefits of population growth,” Mr McWatt said. “We've seen good growth in clients and volumes. The growing economy has resulted in an active and strong real-estate market, both for owner-occupied properties and investment properties.
“We continue to see growth in our mortgage book and really good asset quality, as unemployment is about 3 per cent.”
Butterfield generated 29 per cent of its net revenue in Cayman in 2018, compared to 57 per cent in the bank's home base of Bermuda.
The fund flows through investment funds and the captives are strong, Mr McWatt added, and the growth in professional services on the island is increasing demand for premium and private banking. Local business is thriving too.
“We've seen really good growth on domestic volumes, with very strong performance from retailers, grocery stores and tour operators,” he said.
In Bermuda, retailers are struggling, with retail sales volume having fallen year over year in all but two of the last 18 months recorded and the sector's contribution to GDP having shrunk by an average of 0.4 per cent over the past five years.
Paula Clarke, chief executive officer of Gibbons Company, has argued that “the economic outlook for retail is based on population” and for 2020 the industry's outlook is “not very bright”. The situation in Cayman presents a complete contrast.
Butterfield has three Caymanian locations and is about to open a fourth in Camana Bay, a new business, tourism and residential development, described as “a small city” by Mr McWatt, and built by the island's largest developer, Dart Real Estate. The new branch at One Nexus Bay was scheduled to open as early as this month.
Camana Bay is situated near swanky Seven Mile Beach, the epicentre of luxury development on the island, north of George Town. This area has seen property valuations swell, Mr McWatt said.
“That's primarily driven by overseas purchasers, particularly from the US, but also Canadians and Europeans,” he said. “There's been significant development of high-end condos to the point where there's little more room for development along Seven Mile Beach.”
From executive mansions to more affordable homes, the development continues unabated. The absence of barriers to foreign buyers is a big driver of demand, Mr McWatt said.
“Anybody can come to Cayman and buy a vacation home and there are no impediments — anybody can buy a property any time,” Mr McWatt said. “Second homes have been a big driver.
“Over the last five years, there's been a path to citizenship and one of the criteria is owning property in Cayman. As we've seen a wave of residents going through that process, then they've really looked to move from renting to buying.”
The latest economic report, for the first quarter of 2019, found that GDP continued growing at the 3 per cent annualised rate it has averaged over the past five years. The three sectors to see strongest growth were hotels, restaurants and bars, up 7.9 per cent; wholesale and retail, up 5.9 per cent; construction, up 5.8 per cent; and real estate, 5.2 per cent.
Bermuda's economy also managed a strong growth rate in the first two quarters of 2019, more than 3.3 per cent annualised. Much of this was down to gross capital formation, related to work put in place at the new LF Wade International Airport terminal, Belco's new North Power Station and hotel developments on the island.
However, the governments of both Bermuda and Cayman have said they believe growth cooled off somewhat in the second half of last year.
• Tomorrow: population, immigration and the labour force.