Government has converted a US$403 million loan facility agreed with local banks by the previous Progressives-led government in December 2020 into a permanent loan.
The proceeds will fund capital expenditures approved, together with the borrowing, in the 2022-23 budget. In the interim, the proceeds will be invested into 2-Year US Treasury Notes.
Under the terms of the loan agreement government withdrew US$10 million in July 2021 to keep the facility alive. Government had to draw down the entire remaining US$393 million loan amount or the facility would have expired later this month.
Finance Minister Chris Saunders expects the terms of the loan will result in lower borrowing costs in the long term, following recent US interest rate rises.
The 15-year loan will incur a 3.25% interest rate per annum.
Saunders said, “The Prime Rate in the Cayman Islands is currently 4% and is expected to increase in the remainder of 2022, following widely anticipated US Federal Reserve rate increases.
“Such increases would expose Government to higher rates of interest in the future than the current 3.25% fixed rate offered by the consortium. Drawing the loan funds now will enable us to avoid being negatively affected by the expected upcoming interest rate hikes.”
The US Federal Reserve is expected raise rates at five more meetings in 2022, after announcing 0.75% hike in the federal funds rate on Wednesday.
Assuming another 2%-increase in the Fed Funds rate before the end of the year, Minister Saunders said government’s annual borrowing rate could have been as high as 6.75% if the existing loan facility had not been fully utilised before its expiration on 18 June.
There are no pre-payment penalties if the loan is repaid earlier than the 15-year term.
With its budget government received Parliament’s approval to borrow another CI$349.1 million in 2022 and 2023.
The planned expenditure on capital projects during that time is CI$365.4 million, slightly more than the amount now borrowed.
The finance minister emphasised that consistent with the budget the borrowed funds would not be used for day-to-day operational expenditures.
“Such expenses are covered by Government’s revenues, and that is how it will remain. The loan funds are to be used for capital projects only.”
Saunders said, “Obtaining funding for our Capital Expenditure and Capital Investment programme for 2022 and 2023 at a modest cost has led Government to the aim of not engaging in any further borrowing for the remainder of this term – that is the 2024 and 2025 financial years.”
As at 31 May 2022, Government debt stood at CI$206.4 million and the draw-down of loan funds in June 2022 will increase this balance to CI$535.5 million.
Based on a projected gross domestic product (GDP) of CI$5.4 billion at the end of 2022, Cayman’s debt-to-GDP ratio would be 9.9%.
Saunders said the now available funding would also enhance the country’s ability “to respond to any emergency that might arise in these challenging times”.
The loan has been extended by a consortium of local banks including Butterfield Bank, Cayman National, FirstCaribbean International and RBC Royal Bank.
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