Moody’s affirms Cayman’s sovereign credit rating status

Rating agency Moody’s has affirmed its AA3 sovereign rating for the Cayman Islands. The rating outlook remains “stable” as recent actions by the Cayman Islands government “have reduced the fiscal deficit and appear likely to lead to a fall of the main debt metrics”, Moody’s said in its credit analysis. 

In December 2011, Moody’s had released a credit analysis which noted that a negative outlook or other downward rating was the second most likely scenario, following a stable outlook, due to Cayman’s rapidly rising debt burden between 2007 and 2011. 

“Since then debt to [gross domestic product] appears to have peaked at 25 per cent of GDP, reducing the risk of a downwards ratings action. But downwards credit pressure can still result if the government’s efforts to limit the increase in the debt ratios fail, either due to policy reasons, a slower economic recovery or both,” Moody’s said. 

In addition to the debt metrics, the stable outlook for Cayman’s credit rating is based on the islands’ high levels of economic development which balances a potential risk resulting from the debt burden, according to the rating agency. 

Moody’s does not have a numerical threshold in terms of debt-to-GDP that would trigger a negative rating action but in light of Cayman’s “modest” long-term growth prospects of 1 to 2 per cent GDP growth and the economy’s little diversification, it views current levels of debt as percentage of GDP or revenues “as relatively high”. 

Cayman Finance, the organisation representing Cayman’s financial services industry, welcomed Moody’s rating outlook on Cayman. Cayman Finance CEO Gonzalo Jalles said, “At a time when the global economic recovery remains uncertain and most countries around the world face serious challenges, it is pleasing to note that Moody’s recognises the strength of the Cayman economy and the long term prospects for the Cayman Islands remain very strong in the eyes of economic experts”. 

He said the decision to maintain Cayman’s current high ratings shows the long-term strength of the Cayman Islands economy. “This bodes well for our jurisdiction because it shows the resilience of our financial services and tourism industry.”  

In a scenario analysis, a positive rating outlook for Cayman is the least likely scenario due to the already high rating and the fiscal and economic challenges facing the territory and would require a significant reduction in the overall debt levels or higher per capita GDP growth relative to Cayman’s peers. Moody’s mentioned the planned medical tourism facilities as well as the Cayman Enterprise City special economic zone, as projects that could lead to higher than expected growth.  

A peer comparison showed Cayman trailing only Bermuda, which has a AA2 credit rating, as a result of its higher wealth in terms of per capita GDP at similar debt burdens and growth perspectives. Cayman’s Caribbean neighbours are typically less wealthy and have higher debt burdens translating into significantly lower credit ratings. 

Mr. Jalles said in the eyes of clients and investors, the territory’s very high sovereign rating is important to maintain and a decision factor when choosing a jurisdiction to do business with. “The strength of our economy is something we should be proud of especially when comparing to some of our competitors.” 

Despite the general scrutiny and pressure on offshore financial centres, for example to exchange tax information, Moody’s believes Cayman’s authorities have proven adept at satisfying all such requirements and will continue to do so. 

The financial services sector, which makes up 42 per cent of the economy, showed a modest recovery after the financial crisis. Tourism as Cayman’s other key industry has also shown an increase in stay-over and cruise arrivals. Both offshore financial services and tourism “are very well established and barring major structural changes, should continue ensuring modest rates of growth in the medium term”, Moody’s noted. 

The rating agency further credited Cayman’s connection to the United Kingdom for its strong institutions, stability, regulatory framework and respect for contracts. The framework for fiscal responsibility passed by government as an amendment to the Public Finance Management Law tightens prior fiscal constraints and is more comprehensive, Moody’s said. 

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1 COMMENT

  1. Devil is in the details. Cayman’s national debt now equals 25% of GDP. Interest rates are being suppressed by the Federal Reserve Bank. Currently the Fed is purchasing 100% of long term U.S. debt because there are no other buyers. At some point all this money printing will lead to robust inflation. The marketplace will overwhelm the Fed and interest rates will go up. Cayman’s debt is like a huge adjustable rate mortgage. When rates go up, the payment goes up. Tell me, just where is the Cayman government going to get the money?

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