DAGONG Global Credit Rating Co. Ltd. : Dagong Maintains Cayman Islands’ Credit Rating as AA- with Stable Out…

11/15/2013 | 06:41am US/Eastern

Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) decides to maintain the local and foreign currency sovereign credit ratings of Cayman Islands (hereinafter referred to as “Cayman”) as AA- and each with a stable outlook. This is based on the successful general election of Cayman government, steady economic growth, stable financial system, improved fiscal conditions, and mitigation of the debt overhang. In addition, Cayman has large current-account deficits and a weak economic structure. What’s more, Cayman’s economy is vulnerable to hurricanes.

The main rating rationales are as follows:

1. The overall debt repayment environment is steady. In 2013, People’s Progressive Movement became the new ruling government instead of United Democratic Party by smooth transfer of government. With strong policy continuity, the new government carries on the policies of thriving its major industry and fiscal consolidation. Besides, Cayman’s social stability, the international offshore financial center status as well as good international relations maintains its economic development and the government’s ability to service its debt.

2. In the short term, impacted by weak global economic growth, Cayman’s economy is falling to register much momentum. In the long term, due to the economic impact of vulnerable external dependency and the uncontrollable hurricane, Cayman’s economy will face potential risk. Drivers of economic progress still primarily rely on financial service and tourism because of Cayman’s small size and shortage in resources, which lead to a low GDP growth rate. The GDP growth is expected to be 1.3% in 2013 and 1.7% in 2014 respectively, and the average GDP growth is estimated to be 1.5% in the medium and long term.

3. The high level of Cayman’s financial internationalization, e.g. the improvement of banking system contributed to a slight increase in the number of its registered financial agencies. The financial system will be stable in the short term. Although Cayman’s financial regulation is strict, the deposits in bank are mostly from non-resident and domestic credit is concentrated on highly risky household’s mortgage. It will make Cayman’s financial stability face some challenges in the medium and long term.

4. The central government saw a small amount of fiscal deficit in 2012, and it would have budget surplus in the next two years. Low government debt burden, prudent debt management measures, large net assets of the central government and strong financing capacity guarantee the ability of the government’s repayment. As the positive fiscal consolidation is going to improve the fiscal condition, the ratio of the fiscal surplus to GDP is expected to be 0.5% in 2013 and 0.8% in 2014 respectively. Meanwhile, the ratio of the central government total debt to GDP is expected to be 20.9% in 2013 and 19.1% in 2014, and it tends to decline in the medium term.

5. The huge current account deficit still existed in 2012, and this situation is hard to change in the future, which will continue to result in external fragility. However, the fixed exchange rate system and strong external financial capacity back its external debt. Besides, the ratio of total external debt to GDP and the central government external debt to GDP are at a low level, 24.1% and 12.1% respectively. So the government external debt service risk is controllable.

Cayman is sensitive to international economic environment. In the next two years, Cayman’s GDP growth will be limited by the slow recovery of global economy. But as the new government continued to implement the contractionary fiscal policy, the fiscal balance of the central government will be improved obviously, also its low level of debt burden will continue to decline. Meanwhile, the central government

‘s debt service capacity can be guaranteed by strong external financial capacity as well as good international relations. Therefore, Dagong maintains the stable outlook for both the local and foreign currency sovereign credit ratings of Cayman in the next 1-2 years.