The global economic crisis dominated news all over the world in 2008, and it was no different in Cayman.
The first inkling of the problem came to light with what has been called the sub-prime mortgage meltdown. These sub-prime mortgages were given to borrowers in the United States who did not really have the means to repay the loans and then packaged into complex financial instruments. When the borrowers stopped making their payments because housing prices dropped below what they owed on their properties, even AAA-rated securities were hit, leading to billions of dollars of losses by major global firms.
Company losses piled up with write-downs by Citigroup of $40.7 billion; by UBS of $38 billion; by Merrill Lynch of $31 billion; and by Morgan Stanley of $12.6 billion.
Lehman Brothers went out of business, and the US government took over mortgage giants Fannie Mae and Freddie Mac, the Federal Reserve backed JPMorgan Chase’s buyout of ailing Bear Stearns, and threw $150 billion to insurer American International Group.
The failures and bailout bids lasted through the end of 2008. Even though the problem stemmed from things that happened offshore, Cayman’s financial services industry felt the effects, as did the economy in general.
The Cayman public sensed an ill wind blowing early on. A poll conducted by the Compass in early January revealed that of the 294 respondents, two times as many thought Cayman’s economy would do worse in 2008 compared to 2007 than those who thought it will do better. And almost 70 per cent of the respondents to an October caycompass.com online poll thought Cayman’s economy would feel a fairly bad or severe impact as a result of the US financial crisis.
On 1 December, the National Bureau of Economic Research finally declared the U.S. economy had been in a recession since December 2007.
Home front impacts
In early February, Leader of the Opposition McKeeva Bush filed a private member’s motion in the Legislative Assembly asking the government to reconsider its two-year spending and borrowing plans in response to a probable US recession and possible global economic downturn, which reduce government revenues derived from the tourism industry, import duties and the financial services industry.
Mr. Bush also noted US recessions in the past had impacted real estate sales and residential construction, potentially reducing government revenues in stamp duty and planning fees.
Financial Secretary Ken Jefferson acknowledged the US economic downturn but said the government borrowing planned over the next two financial years was acceptable and affordable.
At the time, Leader of Government Business Kurt Tibbetts flatly rejected the idea.
‘Not even on the kindest of mornings could the government accept this motion,’ he said.
Ambitious government capital spending plans funded largely from borrowing were called manageable by Moody’s Investors Service in its annual report on the Cayman Islands.
But on 24 April, Mr. Tibbetts said the net effect of reduced revenue estimates would be that some public construction projects that were not already under way would have to be rescheduled in its $676 million spending plan for the fiscal year. This included delaying the construction of two new schools, George Town Primary and Beulah Smith High School in West Bay, for a few months.
Mr. Jefferson said central government revenues for the upcoming fiscal year were projected at $11 million less than they were just six months ago, largely because of fears about a rapidly weakening US economy and skyrocketing oil prices.
Still, Mr. Jefferson said he expected Cayman to have an operating surplus of more than $13.5 million by the end of the next fiscal year.
Cayman Islands forecast just 1.7 per cent growth in its growth domestic product for calendar year 2008, and 1.4 per cent growth for 2009. Meanwhile, inflation was expected to rise by at least three per cent in each of the next two years.
Unemployment rates are also projected to increase to 4.1 per cent this year, and jump again in 2009 to 4.5 per cent.
Local financial services
In October, on the heels of an announcement by EU leaders they would endorse a $2.3 trillion continent-wide emergency bailout for the European banking sector, the Cayman Islands Financial Services Association held a luncheon on address how the country can respond to the global financial crisis. A few days later, US President George Bush’s administration said it would also implement a $700 billion rescue program to help thaw frozen lending and get the economy moving again.
Later at an extraordinary G-20 summit held in Washington in November to address the global crisis, leaders agreed to set up a college of supervisors, to examine the books of major financial institutions that operate across national borders, and demanded greater international scrutiny of hedge funds and disclosure of executive pay plans that reward excessive risk-taking.
The damage in the United States has proven extensive. President-elect Barack Obama’s advisers are contemplating an economic recovery plan that could cost as much as $1 trillion over two years. So far, the direct economic impact has yet to be fully realized in Cayman.
Tourism future uncertain
Americans are the backbone of the Cayman Islands’ tourism market, constituting about 80 per cent of stay-over visitors. However, Moody’s reported this week that Americans’ wealth fell 4.7 percent to $56.5 trillion in the third quarter from the second, the biggest decline since the second quarter of 1962.
The economic downturn on Americans showed in the numbers of cruise passengers coming to Cayman, which were double digits down in percentage compared the previous year.
After months of increased air arrivals in Cayman, the trend changed to declining numbers compared to 2007 as the year went on, partially because of a series of hurricanes impacting the Cayman Islands.
The world economy, crumbling as a result of the global credit crisis, combined with skyrocketing oil prices over the first half of 2008, hit airlines hard. At one point, oil hit $148.17 a barrel, although at press time it has dropped down to around $40.
In June, Tourism Minister Charles Clifford admitted there was a danger that foreign air carriers could heavily reduce or cut service to Cayman because of the aviation crisis.
On 17 December, the Compass reported that despite the economic woes of the US, Cayman’s tourism officials were optimistic that winter tourism in Cayman can be on par with last year.
Direct Cayman Airways service to JFK airport in New York, along with resumption of service to Chicago and Washington, DC was hoped to make positive impact.
Also, the first step towards Grand Cayman having cruise berthing facilities for four ships in George Town has become a reality.
A Memorandum of Understanding was signed on 29 July by the Cayman Islands Government, the Port Authority and property developer Atlantic Star Ltd. for the redevelopment of port facilities that will separate of cargo and cruise facilities
Help in troubled times
Financial planners were also able to fund an across-the-board 3.2 per cent pay raise for civil servants.
In June, Government members pledged to consider opposition party proposals to increase welfare benefits for the poor and make it easier for small contractors to tender for government projects, increasing the benefit paid to the elderly and indigent, as well as seamen and veterans, by at least $100 per month, up from the present rate of $550 per month.