Credit rating remains high

Rating agency Moody’s has maintained the credit rating of the Cayman Islands with a stable outlook. In its latest ratings report, Moody’s listed Cayman as retaining an Aa3, indicating a very low credit risk, for example for investors who have bought bonds issued by the Cayman Islands government. It is the fourth highest of 10 ratings that are considered investment grade and of 21 ratings in total.

Minister for Finance and Economic Development Marco Archer said in a statement: “The government is very pleased with the high rating for the Cayman Islands being maintained and, equally important as the high rating itself, the outlook for the rating is stable. This should encourage investors to have utmost confidence in the Islands’ future.”

According to Moody’s, Cayman’s high per capita gross domestic product of $53,037 in 2012 is a key support of the rating because it increases the ability to deal with natural disasters such as hurricanes.

The rating agency expects a modest economic recovery for 2013 and 2014 at a growth rate of 1.5 percent.

Meanwhile, a sensible macroeconomic approach explains the high economic development and low debt burden compared to other rated jurisdiction, according to Moody’s.

“The main industries, off-shore financial services and tourism, are very well established and barring major structural changes, should continue ensuring modest rates of growth in the medium term. Diversification efforts and private investment could bolster growth going forward and there are a few major projects in the pipeline.”

Moody’s named in particular Cayman Health City, Cayman Enterprise City and the plans for a cruise pier as initiatives that could both bolster existing industries and diversify the economy.

Global tax transparency initiatives are unlikely to affect the financial industry, Moody’s noted. “Cayman’s authorities have proven adept at satisfying all such requirements, and our base scenario is that they will continue to do so.”

Other factors supporting the rating were Cayman’s strong institutions and a long history of policy consensus. “The United Kingdom (Aa1) provides further institutional support through fiscal oversight and ultimate judicial review,” the ratings agency said.

The report also claimed that the new PPM government made good on its campaign promise to relax residency requirements.

“Despite encountering some significant backlash domestically, an amended Immigration Law was passed by the Legislative Assembly in late October. We think the reform could benefit the key financial sector by helping to attract and retain a high-skilled labor force, thus improving the overall competitiveness of the industry,” Moody’s said.

The rating agency predicts that Cayman’s debt burden will decline to a debt to GDP ratio of 22.4 percent in 2013 and 21.9 percent in 2014, after peaking at 24.5 percent in 2011.

Government’s estimated fiscal surplus of 3.6 percent of GDP in 2013 in Moody’s view indicates “a gradual convergence to the government’s goal of a balanced budget.”

Interest payments as a percentage of government revenues, a key measure for Moody’s of government financial strength and debt affordability, have increased to 6 percent in 2012 from 1.8 percent in 2006, but remain relatively low.

However, government has renegotiated the interest terms for five existing loans held with local commercial banks. The new, lower fixed-term interest rates will result in interest savings of $6.2 million over the next 10 years, the Ministry of Finance and Economic Development said.

The five loans totaled $88.4 million on Nov. 30, 2013, and the new lower fixed-term annual interest rates range from 1.25 percent to 2.71 percent, down from levels of 2.82 percent to 4.25 percent for the preceding five years of 2008–2013.

The interest rates are now fixed for the remaining life of each of the five loans.

Mr. Archer said the negotiations helped government meet its objective to be fiscally prudent and reduce expenditure.

“For fiscal year 2013/14, CI$0.6 million in interest cost savings will be realized and will have a positive impact on the 2013/2014 budget surplus and debt service ratios, while building public trust and confidence in the government’s fiscal performance,” Mr. Archer said.