Moody’s maintained the Cayman Government’s credit rating as stable last week and reported that it is carefully monitoring developments.
In June, Moody’s assigned a credit rating of Aa3 to the Cayman Islands, indicating a very high economic, institutional or government strength and no material medium-term repayment concern, according to the agency’s rating methodology.
‘For the first time in the territory’s history, the government made an explicit request to the UK Foreign and Commonwealth Office in order to increase its debt levels,’ said Alessandra Alecci, senior analyst in Moody’s Sovereign Risk Group.
‘The request was necessary because some of the principles in the territory’s Public Management and Finance Law were violated last year, also an unprecedented development given traditional adherence to the fiscal responsibility law.’
Cayman’s government made a request to the UK government to borrow an additional CI$372 million, in loans already arranged with local banks, to see the government through to the end of the current fiscal year on 30 June 2010.
The Foreign Office turned down the government’s request for increased borrowings until it is presented with a medium-term strategy to ensure sustainable revenues. Among other things, the UK suggested the introduction of direct taxes.
The Cayman government required the permission to borrow more by the Foreign Office after it violated the requirement to maintain an operating surplus in the government budget and the provision to keep net debt below 80 per cent of core government revenue.
Leader of Government Business McKeeva Bush announced last week an annual operating deficit of CI$81.1 million in the budget for the period 2008/2009, which ended on 30 June 2009. The suggested new borrowing of CI$372 million, in addition to the existing central government debt of CI$416.5 million, would take the government’s debt well above the 80 per cent threshold of total revenues of currently CI$487.4 million.
However, Mr Bush said in a press statement, ‘The reality is that our requirement to seek the UK’s permission is based on statutory restrictions which we, the Cayman Islands Government, have placed on ourselves to ensure continued prudent fiscal management.’
In Moody’s credit rating report in June, Ms Alecci stated that Cayman’s debt levels remained contained despite a looser fiscal policy. In the report she pointed to the ‘ambitious expenditure programme’ for new roads, schools and government buildings that the previous government had undertaken. As a result Cayman’s finances deteriorated and debt levels doubled compared to just a few years earlier, reaching close to 20 per cent of GDP in 2009.
While still highly affordable, this is considerably higher than comparable debt ratios for Aa-rated peers, according to Moody’s.
Cayman’s current credit rating of Aa3 and stable outlook reflect Moody’s assumption that government finances will improve considerably once the capital expenditure programmes are completed, the ratings agency said.
‘Given the islands’ long history of fiscal prudence, Moody’s views the significant widening of the central government deficit during 2004/2005 (when the costs associated with Hurricane Ivan were incurred) and subsequently as being more the result of extraordinary circumstances than a fundamental policy shift away from fiscal conservatism,’ said Alecci.
‘However, we will be monitoring the situation to confirm that these are only temporary deviations.’
While ruling out the introduction of direct taxation in the Cayman Islands, the government has suggested private finance initiatives for its capital expenditure programmes to reduce the need for public debt and free up liquidity.
In a statement released on Thursday, Mr Bush announced that the government has adopted an investment programme through private sector partnerships, which he expects will generate up to CI$3 billion of inward investment.
Mr Bush stated that the government aims to cut expenditure by CI$89 million. In addition he identified a number of new revenue measures, including increasing customs duties, licence fees and a number of other indirect taxes.
‘We are confident that these measures will result in a surplus for the current fiscal year,’ Mr Bush said.
The leader of government business also used Moody’s confirmation of Cayman’s stable credit rating outlook to refute international media reports that the Cayman Islands was bankrupt.
‘We can confirm that these accusations are incorrect,’ he said. ‘Indeed the recent statement made by Moody’s confirms that the Cayman Islands remains one of the most highly rated financial services jurisdictions in the world.’
Credit ratings are assigned to debt issuers to give investors information about the risk involved in lending to a particular borrower. Cayman requires a credit rating to issue debt, for example via a sovereign bond, in the debt capital markets. A high credit rating indicates a low perceived risk, whereas a low credit rating would point to a low creditworthiness of the debt issuer.
The cost of debt is closely related to the risk faced by the lender or investor. A rating downgrade would mean that new government borrowings would likely be more expensive and more difficult to arrange.