Government’s fiscal situation is not as serious as initially feared with government revenues higher and expenditures lower than forecast six months ago.
Through the first 11 months of 2020, government took in revenues of $693.4 million and spent $719.2 million, resulting in an operating deficit of $25.8 million. Surpluses of $3.1 million generated by statutory authorities and government companies brought the entire public sector deficit down to $22.7 million through November.
In July 2020, government had expected full-year revenues of $682 million and expenditures of $855 million, which would have opened up a $173 million hole in the budget.
Speaking on Cayman Compass’s ‘The Resh Hour’ Wednesday, Finance Minister Roy McTaggart said, “the country’s finances have performed remarkably better than any of us could have anticipated”.
He called the two-month period last year when the economy ground to a halt “some of the darkest days”. Initial projections at the time showed collapsing government revenues and a massive budget deficit.
“The numbers really scared me,” he said, but they were the worst-case scenario.
Although the full-year results are not complete, December is typically a solid month in terms of government revenues because of the Christmas season. The results for the year should therefore not be worse than a deficit of $50-$75 million, McTaggart said.
This smaller-than-feared deficit was largely the result of government savings that mitigated increased expenditures to tackle the COVID-19 pandemic.
The largest savings included lower-than-budgeted government salaries, because the civil service did not fill certain positions that were already funded, as well as lower consumables expenditures on both operating supplies and the use of consultants and services.
The smaller government deficit also means government has more available cash to spend. While government believed in May and June that it would exhaust almost all of its free cash flow and reserves by the end of 2020, “this really hasn’t materialised”, the finance minister said.
At the end of November 2020, government had $456.3 million in cash and reserves, compared with $363.1 million in November 2019. About $279 million of the cash balance is unrestricted and available to spend immediately.
McTaggart said that since the start of the pandemic, government has been spending about $20 million more each month than budgeted. But this “cash burn rate” was much less serious than anticipated earlier last year.
At this rate, government will be able to go until the middle of 2021, and possibly longer, without having to touch the recently arranged $310 million line of credit with a consortium of local banks.
Not having to borrow at all would be an accomplishment and an incredible outcome, McTaggart said, adding, “but I do believe that we will get to a point where we end up having to borrow some of that money”.
However, government’s cash requirements for next year are “a moving target” and difficult to predict because of the uncertainty around government revenues and how quickly the economy and, in particular, the tourism industry can get back to its feet once the borders reopen.
Economic contraction and recovery
In the summer of 2020, government had projected an economic contraction of 7.2% predicated on a gradual border reopening beginning in September, which never happened.
Through the end of June, Cayman’s economy contracted by 11.3%, but that included April, May and June when there was little to no economic activity.
McTaggart expects that the full-year drop in GDP for 2020 will be somewhere between the initially projected 7.2% and the 11.3% experienced in the first half of the year.
Although the borders will not reopen before the second quarter of this year, he said other segments of the economy, like financial services, have been performing “in a stellar way”, even during the lockdown.
Meanwhile, the booming construction industry “has just picked up where it left off back in March”, he added.
“So, all of the spending activities and investment that was taking place before COVID continues post-lockdown. As a result of it, the economy is performing at a very high level minus, of course, the tourism industry, which we desperately need as well, to allow the country and the economy to get back fully on track.”
McTaggart said last year’s government forecast of a rebound of the economy, with a 4.5% expansion in 2021, is tempered by the fact that no tourism activity is taking place in the traditionally busiest first quarter of the year. While these numbers are therefore going to be moderated, he said it is impossible to make reliable economic projections at this stage.