After years of positive economic growth, Cayman is likely to face an economic downturn that will come sooner and be more intense than previously thought, according to Premier Alden McLaughlin.
A cyclical slump in the global economy, the impact of COVID-19 on the tourism sector, the EU tax blacklisting and the delay to the cruise port were all issues that Cayman must deal with in the coming months.
“Admittedly, this year has not started well,” McLaughlin said in his annual ‘state of the nation’ address at the Royal Fidelity Cayman Economic Outlook conference on Friday.
Since the beginning of the year, international organisations like the International Monetary Fund and the Organisation for Economic Cooperation and Development have revised their economic forecasts for 2020. Last week, the OECD said, even under the most positive COVID-19 scenario, annual global growth would be significantly lower than expected. In case of a more widespread impact of the coronavirus, countries like Japan or the eurozone could be tipped into a recession, and global growth could be as low as half of the original forecasts.
McLaughlin said Cayman had to face the reality that these impacts come at the end of a sustained decade of global growth. “I had previously been warning that, in my view, a slowdown in the global economy was inevitable in the short to medium term,” he said. “The impact of COVID-19 is likely to mean that the timescale is shorter and the impact deeper than I had previously thought.”
Although central banks are ready to respond, such as the US Federal Reserve which cut interest rates by 0.5% last week, Cayman’s economy is expected to take a hit, with lower-than-predicted GDP growth.
“Much of the impact will be the result of a drop-off in discretionary consumption and, crucially for Cayman, reductions in travel and tourism,” McLaughlin said. “We have already seen a few planned visits from cruise ships being cancelled as Cayman tries to stay infection free. The longer-term impact on the cruise industry could be considerable. Weaker investment and the knock-on effects in financial markets will also impact our economy.”
However, the premier added, “We are in a much better position than we were in 2008 to ride out these storms. Slowdowns are cyclical after all, and we shall be ready to take full advantage once we all come out the other side.”
The fundamentals of the Caymanian economy were sound, he noted, but the country is also at a point in its development, where it needs to find drivers of future growth.
Speaking to the Cayman Compass after McLaughlin’s speech, economist Marla Dukharan said Cayman’s economy is resilient and a benchmark in the Caribbean, with the lowest unemployment rate and debt-to-GDP ratio in the region and consistently growing in the past few years. Compared to the region, “the Cayman Islands is a huge positive outlier”, she said. “So, clearly, the government is doing something right.”
Dukharan, a chief economist with financial technology company Bitt in Barbados, ascribes much of the consistent success of the Cayman economy to fiscal prudence.
“Many, if not all, governments in the Caribbean, except the Cayman Islands, have people [who] believe that the government has to spend money to create jobs. That is actually not the case.”
She said it is a fallacy propagated by governments that, at times, want to spend to expand their popularity. Because 80% to 90% of all things that are purchased have to be imported, most spending leaks out through imports. As a result, no country in the region has a fiscal multiplier above 1, meaning that every dollar spent generates less than a dollar of economic impact in terms of GDP.
The same applies to Cayman, but, Dukharan said, Cayman has created the environment for private sector-led growth with a strong, stable institutional and regulatory framework, and an immigration work permit programme that allows the private sector to access the labour it needs.
The former chief economist with RBC said she would not be surprised to see an economic slowdown in Cayman, given that global growth has been steadily declining and the fundamentals were already bleak, even without any impact from COVID-19.
Tourism is also likely to slow down because of geopolitical tension and general uncertainty, during which consumers tend to hold off on discretionary spending.
However, Cayman’s low debt-to-GDP ratio of 6% to 7% could, if necessary, give the government room to spend to meet development goals in terms of healthcare, housing or infrastructure, she said. And in the next downturn, the government would also be able to step in with some countercyclical, fiscal spending to help those who are vulnerable and suffer the most.