The list of economic areas hit by COVID-19 is long, but none is more affected than tourism.
Bans on flights, cruise ships and travellers generally, as well as cancelled events and vacations are going to severely damage the tourism industry in the Caribbean “this year and probably beyond”, economist Marla Dukharan writes in her COVID-19 Caribbean Economic Impact Report, released this week.
For Cayman, the impact will depend on two things: when borders can reopen and what the economy in the main tourism market, the US, will be like at that stage.
Dukharan cited an IMF study based on data from 2000 to 2015 that finds a 1% increase in the unemployment rate in source markets will lower tourist arrivals by 1.8%.
The massive drop in demand will also have an impact on airlines, which, if they survive, may well reduce airlift to tourist destinations in the region.
Cruise travel, on the other hand, will almost certainly be interrupted for the remainder of the year.
“The outbreak of COVID-19 on the Diamond Princess that reported 712 cases onboard and seven deaths is likely to weigh on demand going forward, and force cruise lines to rethink business models to become more hygienic and sustainable,” Dukharan stated.
The former chief economist with RBC in the Caribbean modelled three scenarios for the COVID-19 impact on regional tourism, assuming a 60%, 80% and 100% drop in tourist arrivals for the rest of this year. For Cayman, the report assumes stay-over arrivals would fall between 50% and 83% in 2020 compared to last year.
This will have an equivalent effect on tourism-related revenues, which amounted to $951 million in 2019, according to the calculations. The report estimates the tourism contribution in the Cayman Islands to be 30.1% of GDP and 31.9% of local employment, or more than 11,400 jobs.
Dukharan believes there are increasing chances of the downturn having a lingering effect for years to come.
The IMF is projecting negative growth for the world economy this year. And although the organisation expects a rebound in 2021, it is far from certain what will happen in the long term. The 2008 financial crisis also saw a rebound in 2010 but then a decade of stagnation. Growth rates never fully recovered to their pre-crisis levels, despite unconventional monetary policy, quantitative easing and negative interest rates, the economist noted.
“The socio-economic effects of COVID-19’s sudden-stop represent the most significant shock we have experienced in about 100 years,” Dukharan said.
And it is hitting an already weakened global economy as in the last three years worldwide growth has been progressively slowing.
Cayman’s fiscal position allows intervention
Halting the economy with lockdown measures will pose an immense problem for fiscal accounts.
Only the countries that have built financial buffers stand ready to spend money to kickstart the economy during the downturn, particularly at a time when government revenues are falling.
“In the Caribbean, the Cayman Islands stands alone in this regard, as most of the others will end up at least partially financing their COVID-19 response with debt,” the economist noted.
The Cayman government’s unaudited accounts for 2019 show total cash balances of more than $520 million. Cayman is also in a good position to take on more debt, if necessary. Cayman’s debt-to-GDP ratio at the end of last was just 6.4%, one of the lowest in the world.
Incurring extra debt in the current situation is not unjustified given the circumstances, Dukharan said, provided the intervention is targeted where it is needed most and thus most likely to be effective.
In an interview with the Cayman Compass last month, Dukharan said Cayman’s low level of debt gives the government room for increased spending to meet development goals in terms of healthcare, housing or infrastructure, as well as higher spending to help those who are vulnerable and suffer the most.
For that, government’s focus on budget surpluses and reducing debt in recent years will inevitably have to change.