Analysis by Paul Byles, guest columnist
The global COVID-19 pandemic is obviously posing serious challenges to economies everywhere and we should expect the same in the Cayman Islands.
The measures taken to minimise the impact of the disease such as restrictions on social gatherings, the closure of bars and restaurants, guidance on social distancing, and the temporary closure of air travel and of schools will likely result in the following key socioeconomic issues:
* A large drop in consumers for many businesses
* Less access to staff or inconvenient working arrangements faced by local companies resulting in lower productivity
* In some cases, a severe strain on operational capital, particularly for small businesses, that will find it difficult to weather the storm (even if it’s as little as four to six weeks)
* Lower incomes earned by some individuals particularly those working in tourism and hospitality
* A potential increase in mental health issues as people struggle to deal with the crisis (the initial onset of ‘panic buying’ and misinformation in a small community with only one recorded case of the virus is telling)
For simplicity in examining the potential impact of COVID-19, let’s look at three primary sectors: financial services, tourism/hospitality/retail and construction. A convenient way to examine the challenges is to look at each sector’s potential impacts in three areas: existing business, new business and operational/financial challenges.
Access to staff a challenge for financial services sector
Existing business:
This sector relies heavily on clients based overseas. The vast majority of the firms in this sector do not engage in frequent face-to-face meetings with clients.
Generally, most firms already deal with the majority of client business through remote means and therefore social distancing and travel restrictions, while inconvenient, are unlikely to seriously damage a firm’s ability to transact with existing clients.
New business:
The same cannot be said, however, for the new business efforts of these firms as many will initiate new contacts via trips overseas including private meetings and conferences. This is likely already having a material negative impact on financial services firms.
Operational/financial challenges:
A large percentage of firms operating in the financial services sector are regulated by the Cayman Islands Monetary Authority and will therefore already need to have in place business continuity plans, appropriate financial capital to support the businesses in cases of emergency, and succession plans for replacing staff and senior management during emergencies.
These requirements mean that many firms should be able to financially support their operations during a temporary period of diminished revenues.
Smaller firms in the sector and those that are not formally regulated by CIMA may find this access to capital support more challenging.
Generally, the impact on revenues in financial services also depends on the extent to which firms are reliant on ad hoc revenues (for example legal advice, consultancy or other new business gained throughout the year) versus recurrent revenues for services carried out annually or periodically.
Another area of impact relates to the sector’s institutional client base. To the extent that institutional clients are themselves negatively impacted by the crisis, they may collapse or reduce the services offered by their existing vendors including those based in the Cayman Islands.
As an example, the volatility in the global financial markets will be impacting many investment funds.
Depending on the strategy being deployed by the fund, this could be a good thing or a disaster.
Another area is the airline and shipping sector which has been experiencing severe negative fallout for the past few weeks. In these cases, our financial service providers face the risk of losing institutional clients if they are unable to weather the storm.
One of the bigger obstacles facing firms, irrespective of size, will be access to their staff during the period.
The challenge of having to arrange for staff to work remotely and how that might impact client servicing, new business development and productivity generally will also put a direct financial strain on all firms.
Tourism faces the most significant impacts
Existing business:
This sector is expected to experience the most significant negative impact. With the suspension of cruise-ship visits, closure of the airport and all the other measures introduced, thousands of customers will be lost by hotels, restaurants, tour providers and others.
We already know that approximately 4,000 people are employed by the cruise tourism sector and this number will be even higher for tourism, hospitality and retail in general.
An often-ignored fact is that while financial services contributes significantly more (estimated to be as high as 60%) to the Cayman Islands GDP than tourism and hospitality, this sector contributes far more to direct employment than financial services because it includes hundreds of large and smaller businesses.
Existing business for this sector means locals, residents and temporary visitors on any given day.
The number of tourists has now dropped significantly and there has already been a significant decline in all resident clientele primarily due to the large gatherings ban and social distancing impact. Many businesses are trying to make adjustments (for example, restaurants are increasing take-out offerings) in order to maintain some semblance of cash flow.
New business:
As a direct result of the measures implemented by the government (which are necessary to stem the spread of the virus) there is little or no new business for this sector to look forward to over the coming six to eight weeks (with the possible rare exception that a few restaurants may find that their new take-out offerings are sufficient to outweigh the significant losses in revenues elsewhere).
Operational/financial challenges:
There are a small number of retail businesses that are experiencing an increase in sales as consumers purchase additional goods and supplies.
A smaller subset of these business will have benefited significantly from so-called ‘panic buying’.
But for the most part many of the smaller businesses will face financial challenges because most are unlikely to have accumulated the surpluses to put aside up to three months of operating expenses.
Furthermore, the smallest businesses and micro enterprises will face immediate cash flow difficulties after only two to three weeks of experiencing a decline in their revenues.
Construction sector will struggle
Existing business:
One of the biggest challenges facing businesses in the construction sector is that they cannot work remotely.
The need to protect their workers coupled with the individual decisions taken by these staff members will mean that very little work would be carried out unless the construction firm insists that workers are available to do the jobs under some other arrangements.
Completing existing projects may therefore become challenging, largely from a staffing perspective.
One additional possible implication of missing deadlines is that investors and banks will hold back certain payments/draw downs, precisely at the time that a company desperately needs them.
New business:
Another potential challenge for the construction sector is that pending projects will be delayed as financial institutions tighten up on lending or because existing project investors delay investment, which is a common response during times of crisis.
Operational/financial challenges:
The challenges here are similar to the retail businesses in general. Many of the smaller construction firms are unlikely to be in a position to weather the storm as operational capital becomes thinner and thinner. This sector is also prone to experience labour- and immigration-related issues.
Impacts will be felt across the labour market
One challenge common to all the sectors is how to deal with general recruitment and existing work permit holders. Naturally, firms with declining revenues tend to consider cutting costs as part of their defence. There are a variety of challenges for both the firms and their employees, including
* Firms feel that may need to cut permit holders now but those same workers will very likely be needed after the virus challenge is gone, leading to higher recruitment costs and administration for firms.
* Work permit holders face challenges because they will not be able to return to their home country immediately due to travel restrictions there.
* The government has recognised this challenge and has made temporary adjustments to immigration policy. There will be a need for extended stay by work permit holders as some lose their jobs.
To the extent that firms need additional workers, general recruitment will now become difficult/impossible because job seekers are unavailable due to the impact of social distancing, while overseas workers will not be able to enter the country.
The country has a law governing minimum wage. But some firms will feel that one way to address the short-term crisis is to negotiate lower wages while keeping most staff employed, and some employees will prefer that to losing their jobs entirely. These types of negotiations may be challenging, especially in the sectors where wages are already barely above the minimum wage.
Government has acted quickly:
Thus far the government has acted quickly by putting strong measures in place early to stem the spread of the virus. Opposition politics has also been largely put aside during this short-term window and has been generally positive.
If you scan social media and mainstream media there is a clear sense that the community feels that the country needs to come together to fight the crisis and that government is doing a good job in addressing it.
In terms of the potential negative impact on individuals and businesses, the government has put plans together by working directly with utility companies and banks, to name a few key stakeholders.
It also recently announced measures to provide financial support for the most vulnerable.
These are all very good efforts to minimise interruption to key services and assist with individuals’ cash flows, but realistically they will not be sufficient to prevent business failures and severe stress on some individuals and families. In this sense, the crisis has a similar or worse impact than that of a major hurricane.
The way the crisis affects the government directly is a key aspect of any economic impact assessment.
In addition to the challenges to the public sector operationally, in terms of delivering services, staffing and finances, the government faces a decline in revenue.
Fees that are based on day-to-day transactions such as those from tourism, construction and retail activity. will already be in decline.
Can the government do more?
The short answer is that the government will need to reassess the country’s needs regularly as the situation is dynamic.
The difficulty with using policy to address the pandemic is that leaders everywhere are seeing that the economy cannot easily be ‘boosted’ during the period because any policy (e.g, rate decreases by the US Fed) still relies heavily on the assumption that individuals will be motivated to transact within the economy but, even if they are willing, many businesses will be closed or operating on limited hours.
Fiscal policy such as increased government spending will also be ineffective for the same reason.
The only effective fiscal policy at this stage is to treat the event in similar fashion to a major hurricane whereby transfer payments are made by the government to assist small businesses, the vulnerable and the elderly, and to provide key public services.
This is also not the type of crisis that can be addressed by the government alone. Multiple stakeholders need to step up to help.
A good example of this so far are the charitable efforts to assist the elderly and the willingness of utility companies and banks to help individuals and businesses.
Additional financial assistance to help smaller businesses is also key to the solution. These businesses employ the vast majority of staff so helping some of them to stay afloat is necessary to prevent a major economic collapse.
A difficult balancing act
Finally, one of the key questions facing the country is how it balances the need for some economic activity against the need for drastic measures to protect the health and safety of everyone.
The government seems to have got the balance right up to now. But that balancing will need to be revisited frequently and as the threat of the virus lingers it will be a near-impossible choice to make.
The difficulty lies in the fact that a major economic downturn cannot be viewed as an isolated financial event whereby businesses face a fallout.
It is a major social event which causes direct hardship on thousands of individuals. This hardship can have severe negative impact on a person’s mental and physical health.
The balance therefore isn’t a simple trade off between saving the economy and saving lives because, as the country’s struggle with COVID-19 persists, these two objectives become intertwined.
* Paul Byles is director of FTS which provides regulatory and management consulting services. He is a board member of the Special Economic Zone Authority in the Cayman Islands and a past president of the Cayman Islands Chamber of Commerce.
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