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Cayman Business Outlook 2006

I am delighted that you have ‘outsourced’ to me the job of giving an overview of government’s plans for the New Year. Of course, government’s New Year begins not on 1 January but on 1 July, as we operate to a July- to - June budget cycle, but I am happy to enter into the spirit of a calendar new year for our purposes today. This means that the overview that I give you this morning will involve both the 2005/6 and the 2006/7 government planning cycle.

The broad outcomes that government’s policies and activities are directed towards in 2006, and which will inform the planning process until 2008/9, remain those that were set in our 2005/6 Strategic Policy Statement, namely –

  1. Deal with the aftermath and lessons from Hurricane Ivan.
  2. Address crime and improve policing.
  3. Improve education and training.
  4. Rebuild the Health Services.
  5. Address traffic congestion.
  6. Embrace Cayman Brac and Little Cayman.
  7. Conserve the environment.
  8. Strengthen family and community.
  9. Support the economy.
  10. Open, transparent, honest and efficient public administration.
  11. Sound fiscal management.

The fact is that, while it may be convenient to enumerate the 11 broad outcomes separately, they are inter-related, and so part of government’s job is to think across all of them to achieve synergy and coherence – in the UK, I believe it’s called ‘joined-up government’. For instance, as a small example that also reflects one of this conference’s themes, namely the role of the world-wide web, transparent, honest and efficient public administration is essential to support the economy and for sound fiscal management; and therefore the government’s annual Strategic Policy Statement is both tabled in the Legislature and published on www.gov.ky.

Let me now highlight some specifics in relation to government’s plans during 2006 and beyond and give you some insight into the macro- and micro- economic considerations that informed these plans.In doing this, I will focus on issues that are likely to be of particular interest to the business community.

The macro-economic fundamentals for the Cayman economy are healthy. Forecasts for calendar year 2005 indicated GDP growth of 6.5%, inflation of 8.6% and unemployment of 4.6%.As an aside, I’d like to note that initial estimates based on the latest CPI figures and the Autumn labour force survey suggest that actual performance in 2005 was better than forecast, with inflation between 7% and 8% percent and unemployment at less than 4%.

Forecasts over the 2006/7 to 2008/9 period indicate continued sustainable growth in the economy.Average GDP growth will be just above 3%.The forecast for unemployment is for a continued decline from 4.5 % in 2006/7 to 4.4 % in 2007/8 and in 2008/9. Inflation is expected to remain modest during the period, decreasing from 2.9 % in 2006/7 to 2.6% percent in 2007/8 and to 2.5 % in 2008/9. The government’s projections up to the 2015/16 financial year for average GDP and inflation per annum are 3% and 2.5%.Of course projections are just that, and rely on the underlying assumptions holding, but they do indicate a satisfactory trend for the next 10 years.

We experienced a good year performance-wise in 2005 in the financial services sector, with robust growth in the area of captives, investment funds and the CSX, as well as double-digit growth in new company registrations over 2004, and this trend seems set to continue in 2006. The tourism sector is reporting high stay-over bookings for the first quarter of 2006, which also bodes well.

The development sector is exhibiting strong activity as well, and of particular interest perhaps to the business community in terms of recruitment and retention of expatriate staff, this includes strong activity in the residential development sub-sector. During 2005, the CPA approved 316 applications for houses and duplexes and 55 applications for apartments for a total of 500 apartments units, with a total value of $208m; and 784 building permits were issued for residential development, valued at $252 million.The Department expects another very busy year in 2006 in residential applications, factoring in increased apartment development as many of the outstanding insurance cases are being resolved.

The Government understands that securing the economic future of the Cayman Islands requires addressing the country’s social and economic infrastructure needs. Beginning in the 05/06 budget, we have therefore embarked on a four-year capital programme that is the largest in the history of these Islands, and the expected capital spend over the four financial years from 2005/6 to 2008/9 is $235.6 million. While the programme is ambitious, it is also essential.That programme includes –

  • the construction of three new high schools (Frank Sound, West Bay and a redeveloped George Town (John Gray) High School); the construction of a new George Town Primary School; additional facilities at Cayman Brac High School Hall and Primary School; and a hall at East End Primary School.
  • development of the arterial road network, covering Phase 3 of the Esterley Tibbetts Highway; the connector highway between Esterley Tibbetts and Linford Pearson Highways;the Bodden Town Relief Road (Anton Bodden Road) Hirst / Shamrock Rd centre turn lane and merge extension; and the reconstruction of the Elgin Ave/Thomas Russell Way roundabout.
  • Law and order and security development, including new assets required for law enforcement, a fire station in Bodden Town, and the construction of a new Court House.
  • A government office accommodation project

Apart from the capital programme,I’d like to note some important activity and initiatives for 2006 in Education, Tourism and Financial Services.

One of the indispensable roles of education and training is to develop human capital for the utilization of the economy. The government has placed education reform high on the agenda of priorities:very sobering messages received from employers, to the effect that, without investment and corrective action, the labour force skills base may be obsolete by 2010, demonstrate the validity of this high prioritization.In September 2005, the very first National Education Conference titled “Defining Challenges, Finding Solutions – Together” was held.Over 500 teachers, representatives of business, parents, students and politicians gathered at the Mary Miller Hall over two days to participate in what was the most comprehensive conference so far, in terms of the involvement of range of stakeholders. A report titled ‘National Consensus on the Future of Education in the Cayman Islands’ resulted from this conference and it is the blueprint we are working from to enact the reform of our educational system.To actually effect the changes outlined, project teams are being established to tackle specific areas, ranging from curriculum development to the creation of new school facilities. A big part of the reform involves enhanced integration of Information Communication Technology (ICT) to enrich the education service.

In the area of training for our two economic pillars, the government will launch with the full support of the tourism private sector, an apprenticeship programme to attract, train and retain Caymanians in this key industry; and in the financial services sector, the government will work with the University College, industry partners and other stakeholders to ensure that the range of degree and certification programmes is keeping pace with the needs of that sector.

In the Tourism sector, other key initiatives for 2006 include strategically focusing on increasing European air arrivals in 2006/7; redevelopment of the Owen Robert International Airport, slated to begin in June 2006; and ensuring that legislative provisions for Special Management Areas are put in place to provide necessary protection and monitoring of our primary marine attractions such as Sting Ray City. We are also looking forward to welcoming a Mandarin Oriental property off the scenic Queen’s Highway to enhance not only our accommodations product, but also our image as a growing luxury destination.

In the Financial Services sector, the government will be implementing a comprehensive PR programme; introducing legislation to enhance product and service offerings including in the areas of fund administration and intellectual property and specialist aircraft financing structures; and exploring with the private sector opportunities in China and possibly the Middle East. I should say too that the Cayman funds industry is set to host 3 major conferences in 2006, all for the first time, namely GAIM Cayman in April/May, Hedge Fund World in June and MARHedge in December.

As important as overall economic performance is the financial performance and management on the part of government. I suspect that many of you will have been waiting to hear what I say about this ever since I mentioned the figure of $235.6m!

Sound fiscal management is and integral part of Government’s planning and the most important plank of the Government fiscal strategy. We recognize that this is the bedrock upon which investor confidence in the Cayman Islands is built.It is, and will continue to be, a key driver of the Government’s financial decision-making.

The second plank of the Government’s fiscal strategy is to generate the cash flows necessary to finance priority infrastructure needs.This involves -

  • keeping a tight rein on operating expenditure through efficiency improvements and active prioritization of expenditure demands;
  • ensuring that public authorities are financially stable;
  • undertaking new borrowing, provided that such borrowing is affordable; and
  • increasing revenue.

All of these strategies have been applied in developing the government’s financial targets over the four-year capital programme.Those targets make provision for the operating and capital expenditures necessary to achieve our outcome priorities, while at the same time complying as they must with the Principles of Responsible Financial Management established in the Public Management and Finance Law.

In order to finance the capital programme, a multi-year borrowing programme has been allowed for in the targets.This amounts to $182 million over the next three years, or $245 million taking into account the 2005/6 Budget provision.

The cost of the new borrowing, together with the operating costs of the new schools and other new assets, will increase the Government’s operating expenses by around 11% over the next three years. This is well beyond what the current revenue streams can finance. The targets therefore make allowance for $25 million of new revenue measures for the 2006/7 financial year, and $28 million thereafter.

To date no decision has been made on the specific revenue measures to be introduced. That detail will be included in the Budget when it is presented in April. However, in deciding on these measures the Government will carefully consider their likely economic impact, and give due consideration to its outcome goal of supporting the ongoing economic development of these Islands, particularly the twin pillars of tourism and financial services.

The Government takes the decision to introduce new revenue measures reluctantly but realistically. It is clear that our populace strongly desires better education, more resources for law enforcement, and better roads to reduce traffic congestion. These things come at a price and the Government will ensure that new revenue measures are only used to fund demonstrable increases in government services - such as the new schools. Any changes to existing services will be funded by natural revenue growth or expenditure re-prioritisation.

Perhaps the most important thing about the financial targets is their affordability, which is measured in terms of compliance with the Principles of Responsible Financial Management established in the Law. An operating surplus and positive net worth balance is targeted throughout the three-year forecast period.In addition the level of cash reserves is maintained at or above the statutory level throughout the period. This includes a growth in cash levels, as the Public Management and Finance Law requires reserves to be at a level equal to 90 days of executive expenses by 2008/9. The net debt ratio stays around 60% throughout the period, well below the maximum allowable 80%.

The key ratio, however, is the borrowing ratio.This measures the ability of the Government to repay public debt by comparing the amount of interest and principal repayments to the level of Government revenue.As is to be expected with the level of new borrowing allowed for in the targets, this ratio rises steadily across the three-year forecast horizon, just marginally exceeding the maximum allowable level of 10% by 0.2% in 2008/9, before reducing steadily thereafter, projected to reach 7.1% 10 years out (i.e. 2015/16). Based on our financial projections, additional borrowing is not necessary from 2011/12 onwards, as the fiscal position allows reasonable capital expenditure to be funded from operating surpluses.

Those of you who are interested in the full details may refer to the 2006/7 Strategic Policy Statement, which I tabled in the Legislature in November 2005. The main message is that the government will be addressing, not ignoring, the country’s social and economic infrastructure needs and it will do so by exercising fiscal discipline and sound financial management.And yes, we will all have to invest a bit more, but we will get value for money.

Not without design, I reserve my concluding comments for the theme you have chosen for the 2006 Business Outlook conference: ‘Outsourcing, Offshoring and a Web-enabled Global Workforce’. The audience may be familiar with King Canute, the 11th Century ruler of England, Denmark and Norway.Legend has it that this mighty king stood on the seashore and commanded the waves to cease breaking – it is said, to silence the more outrageous flatterers in his court – with predicable results.It strikes me that to try to prevent economically natural processes such as outsourcing and offshoring would at best have the same effect as King Canute’s command to the waves. Economists who have looked at this issue refer it to concepts of economic efficiency and comparative advantage and to the potential of resulting job losses as ‘creative destruction’: that is to say, old jobs are indeed destroyed, but new ones – often more of them, and higher- paying --are created.Certainly our experience with hurricane Ivan has lent a new perspective to the matter as well, since it could be said that the strong business resilience in the financial services sector in particular owed much to outsourcing/offshoring.I accept that there are at least two sides to every issue, but I suspect that ‘the Cayman way’ still has much to recommend it: ‘keep up’ by ensuring that Cayman provides an attractive commercial environment on all fronts; ‘keep on’ embracing change and looking at the big picture and ‘keep out’ of heavy-handed government control of the economy.