Moody’s affirms the Cayman Islands’ Aa3 rating; maintains stable outlook
New York, March 21, 2019 — Moody’s Investors Service (“Moody’s”) has today affirmed the Cayman Islands’ Aa3 government bond and issuer ratings. At the same time, the rating outlook was maintained at stable.
Today’s action reflects the following credit drivers for the Cayman Islands:
1. Continued fiscal surpluses that have resulted in low and falling government debt metrics.
2. A very high per-capita income balanced by the risks posed by a small, narrow economy susceptible to weather-related shocks.
3. A strong institutional framework, reflecting broad consensus on macroeconomic policies and supported by fiscal oversight from the UK.
The Cayman Islands’ foreign currency bond ceiling, and the long-term local-currency bond and deposit ceilings, all remain unchanged at Aa2. The long-term foreign currency bank deposit ceiling remains unchanged at Aa3. The short-term foreign currency bond and foreign currency bank deposit ceilings remain unchanged at P-1.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Aa3 RATING
FIRST DRIVER: FISCAL SURPLUSES LEAD TO LOW AND FALLING GOVERNMENT DEBT BURDEN
Caymans’ government has run budget surpluses averaging 2% of GDP since 2013 and we expect continued fiscal surpluses in 2019 and 2020. Moody’s projects that the continued surpluses will lead to government debt of only 6.4% of GDP this year, a fraction of the 39.5% of GDP median for Aa-rated sovereigns. While the debt may rise slightly in 2020 as Cayman ramps up public investment projects, the rating agency expects continued low debt metrics, with a debt burden remaining below 10% of GDP, for the next two years.
SECOND DRIVER: HIGH PER CAPITA INCOME THAT BALANCES A SMALL UNDIVERSIFIED ECONOMY
Recent updates to national income accounts data place Cayman’s GDP per capita among the highest of all rated sovereigns. Moody’s estimates Cayman’s per capita GDP at over $90,000 for 2019, the second highest level for any Aa-rated sovereign and almost twice the $47,508 peer median. The level of wealth is counterbalanced by the scale of the economy, with a nominal GDP of only $5.7 billion this year, the eighth smallest among all rated sovereigns.
The Cayman Islands’ high level of economic development increases its resilience in the face of economic and natural disaster shocks, which is of particular importance given the country’s exposure to hurricanes. Cayman’s economy is highly concentrated, and tourism and financial services represent over 60% of the island’s GDP. Moody’s forecasts that economic growth will average 2.6% in 2019 and 2020 but increased real estate and tourism-related investment could result in faster growth.
Over the last two decades many developed nations and international organizations have prioritized reducing tax evasion, increasing the risk that sanctions on Cayman’s financial sector would reduce economic growth in the islands. But Cayman Islands has consistently managed to adjust its laws and regulations, and negotiate internaitonal agreements, including tax information agreements, to reduce this risk. Moody’s expects that Cayman will continue to succeed in containing this risk to its economically crucial financial sector.
THIRD DRIVER: A STRONG INSTITUTIONAL FRAMEWORK
The Cayman Islands benefits from decades of stable institutions and respect for the rule of law. The Cayman’s Worldwide Governance indicators results are among the highest in the region and in the top 20th percentile of all rated sovereigns, including highly developed countries. A long history of policy consensus and a consistent macroeconomic approach is a key support of its economic development. The United Kingdom provides further institutional support through fiscal oversight and ultimate judicial review. Legal limits on government borrowing and oversight from the UK’s Foreign Office have contributed to the decline in public debt in recent years. Moody’s expects that those limits and oversight will remain in place in the next few years.
OUTLOOK
Cayman’s stable outlook indicates that the rating is unlikely to change over the outlook horizon. The outlook balances the high level of economic development and low debt metrics against the credit challenges resulting from a small and narrow economic base.
WHAT COULD CHANGE THE RATING UP
A positive outlook could be considered if developments alleviate the constraints that Cayman Island’s small and relatively undiversified economy poses to the sovereign credit profile. Greater and more diversified economic growth that pushed per capita GDP even higher relative to peers could lead to a positive rating action. The buildup of significant fiscal buffers to address any sudden economic shocks, and a policy framework that ensures debt levels will remain very low, could also result in a positive rating action.
WHAT COULD CHANGE THE RATING DOWN
A negative outlook could result if the debt burden begins to rise, either due to policy reasons, sustained weaker growth or both. A change to the institutional arrangements that eases current restrictions on excessive debt would also lead to a negative rating action. Sanctions to the financial sector severe enough to structurally weaken the country’s growth prospects, or storm-related damage to the country’s infrastructure beyond historical levels, could also lead to a negative rating action.
GDP per capita (US$): 83,524 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3% (2017 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.4% (2017 Actual)
Gen. Gov. Financial Balance/GDP: 2.5% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -19.4% (2017 Actual) (also known as External Balance)
External debt/GDP: 10.5% (2017 Actual)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 18 March 2019, a rating committee was called to discuss the rating of the Cayman Islands, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have increased. The issuer’s institutional strength/framework, have decreased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Gabriel Torres
VP – Senior Credit Officer
Sovereign Risk Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD – Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
