Moody’s maintains Cayman’s rating

Credit rating agency Moody’s has maintained long term issuer (foreign currency) rating and senior unsecured (foreign currency) ratings of Aa3 for the government of the Cayman Islands, stating that recent actions taken by Cayman officials would point to a fiscal surplus and a reduction in the overall debt burden.

Moody’s explained the rating by way of the Cayman Islands having one of the highest per capita gross domestic products among sovereigns and what it called “a comparatively low debt burden”, despite the small economy being strongly dependent on the financial services and tourism, which contribute more than 70 per cent to its GDP.

The rating agency put Cayman’s per capita GDP at $52,759, the tenth highest of all rated sovereigns, but noted that the country’s debt to GDP ratio of 24.7 per cent, albeit low, had risen from 8 per cent in 2007.

In addition to the high GDP, the credit rating is supported by “a history of policy consensus and a sensible macroeconomic approach”, which explained Cayman’s “high economic development and still low debt burden“ of less than 25 per cent of GDP, Moody’s said.

The rating agency also cited the World Bank’s governance indicators, which rate Cayman higher than most of its peers, and the UK’s “institutional support and ultimate judicial review” of the Islands as factors strengthening the rating. It appears that the Framework for Fiscal Responsibility, which Cayman recently signed with the UK, is a supporting factor for the rating. The FFR requires Cayman to become compliant with all six criteria set out in the Public Finance Management Law by the end of the budget year 2015/2016. Cayman is currently not compliant with three of the six criteria.

Factors limiting the improvement of Cayman’s rating include “vulnerability to hurricanes, limited fiscal flexibility given a narrow revenue base that excludes direct income taxation and dependence on exogenous sources of growth”.

A significant negative structural change in the main growth sources in combination with a steady erosion of public finances could therefore lead to negative rating actions, Moody’s said.

The rating outlook is stable as the risk posed by recent increases in the country’s sovereign debt levels is balanced by the strong economic development and low overall debt level. The rating agency noted that Cayman’s government had some success in reducing the fiscal deficit and “appears likely” to be able to induce a fiscal surplus and reduction in overall debt.

The ratings outlook would change to positive, if Cayman’s debt was effectively reduced and the existing policy framework would make increased debt unlikely. An increase in the country’s GDP per capita would lead to a ratings upgrade.

If, however, the debt levels fail to recover, as a result of ineffective policies or due to a slow economy, the rating outlook could turn negative.

The rating agency did not suggest a specific debt to GDP ratio that would trigger such action, but Moody’s said, clearly contradicting earlier statements in the report, it considers the current debt as a percentage of GDP and debt as a percentage of revenue levels as high, given the modest long term growth prospects of Cayman and the little diversification of the economy.

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