Article by Hon. Marco Archer From Cayman Finance

SUSTAINED RECOVERY

The Cayman economy has been on a steady upward trajectory in recent years: in 2011-2015, GDP growth averaged 1.7 percent, slightly higher than the potential GDP growth of 1.6 percent. The past two years have seen faster growth of 2.4 percent and 2.0 percent for 2014 and 2015 respectively. Growth in the first quarter of 2016 was estimated at 2.4 percent, demonstrating the durability of the economic upturn. The private sector has led the growth in several industries. Unemployment was reduced to 4.2 percent in 2015, and settled to its natural rate of 3.9 percent in April 2016. The greater-than potential growth took place without inflationary pressure on domestic prices, mainly for two reasons: the global oil price reduction which pushed down fuel-related costs for transport and the production of electricity, and a slowdown in the expansion of government spending which tempered inflation-inducing growth in domestic demand. The latter was driven by fiscal policy committed to curtailing government debt without further introducing new tax measures. Moving forward, the current macroeconomic fundamentals are positioning the local economy for continued expansion in the medium term against the backdrop of stable growth in the global economy.
PRIVATE SECTOR-LED GROWTH

In 2015, economic expansion was seen in all service sectors, led by real estate, renting and business activities (mainly legal and accounting services); other services (mainly employment activities of households); utilities; and financing and insurance services. The only exception was hotels and restaurants, which was negatively affected by the slowdown in the growth of stay-over visitors, following years of steady growth averaging 7.1 percent between 2010 and 2014.

In the first quarter of 2016, GDP growth was also broad-based led by transport, storage and communication, construction and wholesale and retail trade. The financing and insurance services sector which accounted for approximately 41.0 percent of GDP was estimated to have expanded by 1.3 percent in 2015. Insurance services, included under this rubric, grew by 1.1 percent as growth in gross premiums outweighed net claims. Growth in onshore financing services in 2015 was due mainly to higher interest income in the local banking sector as the weighted average interest spread widened and domestic credit grew. In the first quarter of 2016, the sector sustained its 1.3 percent growth, as domestic credit to businesses and households expanded by 0.9 percent and 1.2 percent respectively. In 2015, the real estate, renting and business activities sector was estimated to have increased by 2.9 percent with business services (mainly legal and accounting) dominating the growth. Supporting the growth was the registration of new companies which rose by 7.8 percent to 11,864, and partnerships which increased by 16.5 percent to close the year at 3,370. The first quarter of 2016 saw the sector boosting its growth to 3.1 percent, driven by higher new partnership and new company registrations. The market value of goods and services produced in 2015 by the construction sector suggest that it expanded anew by 5.2 percent.

A key indicator – the value of imported building materials including imported cement – was higher during the period. Construction activity in the first quarter of 2016 accelerated, registering a growth rate of 6.3 percent as indicated by imports of building materials.

PRODUCTIVE CAPACITY

On the demand side, growth during the period in review was driven by capital investment. The value of capital goods imports have steadily increased over the past five years, with its strongest annual growth recorded in 2015 at 17.1 percent. The first semester of 2016 saw a surge in capital goods importation, with growth of 51.5 percent reflecting two consecutive quarters of increase. Transport equipment and parts similarly recorded a strong pace of growth of 37.5 percent.

Demand for investment in buildings and road infrastructure also boosted growth. These include the expansion of the Owen Roberts International Airport, the construction of the Kimpton Seafire hotel and the largescale road engineering work connecting the West Bay Road and the Esterley Tibbetts highway.

LOCAL AND INTERNATIONAL DEMAND

The notable improvements in production raised overall employment and reduced unemployment rates to 4.2 percent in 2015 and to 3.9 percent in the first semester of 2016. Consequently, consumption demand indicators continued to improve. The importation of food and beverages, and durable consumer goods were on the rise in 2015, with the latter further strengthening in the first half of 2016. Demand for electricity grew by 3.2 percent in 2015, and by 6.1 percent in the first semester of 2016. Water consumption also increased by 0.4 percent in 2015 and by 8.2 percent in the first half of 2016.

Notwithstanding the uptick in domestic demand for 2015, the current account deficit was estimated to have narrowed by 2.1 percent to $603.1 million or 23.1 percent of GDP as inflows of funds arising from higher visitor expenditure increased, albeit at a slower rate than in 2014. Estimated receipts from off shore financial and business services also increased during the period, supported by higher registration of new companies and partnerships.

GENERAL PRICE DECLINE

Domestic demand for consumption and investment was also boosted by the general fall in prices. Global inflation declined in 2015 as international crude oil prices and non-fuel prices receded. Consequently, the local headline inflation on average was -2.3 percent in 2015 and -1.8 percent in the first half of 2016.

Housing and utilities comprise the largest group of goods and services influencing the headline inflation rate. Its price index dipped by 6.9 percent in 2015, and by 6.0 percent in the first semester of 2016. However, removing the impact of this group from the headline inflation shows that prices of other goods and services have also slowed as seen from Figure 3. The cost pushed decline in CPI reduced the pressure to raise wages in the midst of rising employment which could have dented production growth. This price environment created an ideal opportunity for investment given the reduction in price uncertainty. The trend in inflation also tempered the rise in domestic nominal interest rates amidst a sustained increase in demand for domestic credit.
GOVERNMENT COMMITMENT

From the beginning, the government’s fiscal policy has been “economic growth through fiscal prudence.” I put forward the sound reasoning that if the government would practice fiscal prudence, economic growth would follow due to investors’ and business entities’ having increased confidence in the Cayman Islands. Over the past three fiscal years, the government has worked to do just that, improving the state of public sector finances, restoring investor confidence, lowering the cost of doing business, lowering the cost of living in certain circumstances and bringing back national pride and optimism for our people.

During the year in review, the government remained committed to the Framework for Fiscal Responsibility (FFR). The result is gratifying: for the third consecutive year, the central government recorded an overall fiscal surplus. In 2015, the surplus stood at $116.1 million, an improvement over the $93.2 million in 2014. The expansion directly resulted from an increase in revenue collection due to economic growth coupled with a reduction in expenditure (see Figures 4 to 6). Several tax rates were reduced: imported diesel fuel used by CUC to generate electricity; (b) import duty for licensed traders; (c) import duty on building materials; (d) trade and business license fees for new licensees; and (e) continuation of current incentives for Cayman Brac and Little Cayman. These reductions supported greater economic activity that in turn contributed to the improvement in revenue generation (see Figures 4 to 7).

The primary balance, a standard indicator of the government’s capacity to service debt obligations, improved from a surplus of $122.4 million or 4.4 percent of GDP in 2014 to a surplus of $144.1 million in 2015 or 5.2 percent of GDP following the reduction in interest payments and an improvement in the overall fiscal balance. By end 2015, the central government’s outstanding debt declined by 4.3 percent. These actions on the part of the government will create more economic opportunities for the private sector to thrive while more government resources are placed on social, environmental and infrastructural development.
LOOKING FORWARD

The recent economic performance is setting the stage for growth in 2016 and 2017. With the recent surge in capital investment which is crucial in boosting productive capacity, economic output is projected to expand by at least 2.1 percent in 2016 and 2017. Most of the economic sectors are expected to contribute to growth. Domestic investment is foreseen to be sustained by on-going projects along with proposals in the pipeline. Although the Framework for Fiscal Responsibility constrains the central government’s spending ability, duty concessions have been provided to a few large-scale private sector development projects. Th e outlook for consumption demand is also cautiously optimistic, supported by employment growth and benign inflation. The government is committed to ending the year 2016 with a robust fi scal balance to further reduce the debt burden, and boost private sector confidence for further growth in 2017.
About the Author

Minister Archer holds a BSc. in Economics and Finance from Barry University, an MBA from the University of Miami, an LLB (Honours) from the University of Liverpool and a Postgraduate Diploma in Legal Practice from The College of Law in England.

Prior to becoming a Member of the Legislative Assembly and the Minister for Finance in 2013, he was an economic statistician and project manager with the Cayman Islands Government before becoming an attorney-atlaw with a leading offshore law fi rm. Mr. Archer was recently name Finance Minister of the Year 2016, Caribbean, by Global Markets.

He is married with three children.

All graphs sourced from the Cayman Islands Government Economic and Statistics Office

SOURCE: Cayman Finance