The Cayman Islands has the best managed economy in the Caribbean region, according to RBC Group economist Marla Dukharan.
The fact that Cayman generated growth while at the same time having fiscal surpluses is unheard of in the region and the Cayman Islands government had done a “fantastic job,” she said, speaking at the Cayman Economic Outlook conference last week.
“This is the best run economy in the entire Caribbean,” she said. “You should have a conference here and invite all the ministers of finance from around the Caribbean and tell them how to run a country because there is a lot they can learn.”
One of the reasons for Cayman’s comparative success is that government spending, practiced by the rest of the region, rarely works, she said, because 80 to 90 percent of what governments spend leaks out in the form of imports. “So when our governments spend, it does not support our economies. It supports the economy of China and the U.S. and whoever else we import from.”
Many Caribbean countries therefore have high levels of debt but not the desired increase in economic growth.
In Cayman, employment has increased and resulted in the lowest unemployment rate in the Caribbean. At the same time, Cayman has seen five consecutive growth years since the financial crisis, which regionally was only matched by the Dominican Republic.
But growth in itself is not enough, Ms. Dukharan said. “You have to have growth that is inclusive.”
She noted that Cayman has the lowest level of poverty in the Caribbean and a level of inequality “that is kind of in the middle.” However, Cayman’s inequality is somewhat different given that the lowest income earners are largely expatriate workers.
This group of people may not be able to vote but they can choose to leave. “The thing is, you need them,” the RBC economist said. “The Cayman Islands needs that kind of labor to be the world-class destination that it is.”
She said Cayman’s level of service is unsurpassed because expatriate workers really want to work and are dedicated because they have to send money back home to their families. “You need to look after them and think about that.”
Dollar to strengthen
Ms. Dukharan expects the U.S. dollar to continue to strengthen against major currencies like the sterling, the Canadian dollar and the euro.
That means for Cayman, whose currency is tied to the U.S. dollar, that it will lose competitiveness in exports to holders of those currencies, especially in tourism.
Cayman may have to consider adjusting its pricing to remain an attractive destination for both visitors from non-U.S. dollar countries and U.S. visitors who otherwise may opt for cheaper alternatives.
In addition to Cayman’s tourism product becoming more expensive, stopover arrivals have stagnated at a high pre-crisis level due to issues around capacity and airlift. Meanwhile, the product offering in Cuba still has a certain appeal, she said.
The marginal decline in cruise arrivals, on the other hand, is not so much of an issue because cruise ship tourists spend less. “If you have the choice between building a big cruise terminal like St. Maarten or the Bahamas or remaining a stopover destination, I would choose stopover,” Ms. Dukharan said.
The other issue for Cayman is that from even before the global financial crisis, Cayman has seen a steady decline in the number of entities licensed by the Cayman Islands Monetary Authority.
“The industry is facing an existential crisis,” she said and “strategic changes” are needed.
Cross-border financial flows have declined rapidly and the Cayman economy is going to be affected by this, she said. But despite being an offshore financial center, Cayman “is the most stable and least vulnerable in the Caribbean.”
Cayman’s government simply has to recognize the direction in which the offshore industry and tourism are heading and mitigate the obvious risks.
Ms. Dukharan’s general outlook, in contrast, is much more negative with increasing economic, political and social instability and disruption on a global scale. This will drive uncertainty and prompt a flight to safety.
“I expect U.S. bonds and U.S. treasuries to rally and gold as well” and “there will be a correction in the stock market,” she predicted.