FS Statement on SPS
Financial Sscretary's Statement
on the 2009/10 Strategic Policy Statement
Madam Speaker, I rise in support of Government Motion No.10 /of 2008-09.
My contribution will focus on the economic and financial forecasts contained in the Strategic Policy Statement (the SPS).
The SPS is a forward looking forecast and planning document that outlines the Government's strategic outcomes and establishes the broad parameters within which the up-coming 2009/10 Budget will be prepared.
Madam Speaker, we are living in very turbulent economic times with countries across the world experiencing a high degree of economic uncertainty.
In mid-November, Leaders of the Group of Twenty Nations (the G-20) held a Summit in Washington, D.C. to discuss the current global economic and financial difficulties. At the summit, Leaders of the G-20 resolved that the current global financial turmoil could be traced to the following, and I quote from the declaration issued after that Summit:-
"During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption."
Madam Speaker, that statement and the fact that the G20 nations held a specific summit to discuss these issues highlights the many complexities and challenges facing the global economy today. These problems are not isolated to any particular country or group of countries, they are global issues. That said, we all have a part to play in the solution to these problems and it is necessary for all individuals and businesses in the Cayman Islands to make prudent financial decisions: the Government is leading the way in this regard and is committed to ensuring the continued prosperity of these Islands.
The Cayman Islands is a small, open, services-based economy that is affected by changes in the global economy: in particular, to changes in the US economy. It is inevitable that this current period of difficulties will affect the Cayman Islands, but at this point in time it is difficult to predict the extent of the impact.
It is well understood that the Cayman Islands financial services industry does not operate in isolation and that we are not immune from the volatility and uncertainty in the global financial markets. Our consultations with the financial services industry suggest that this situation is not expected to start improving until late 2009/2010.
While, on average, year over year growth statistics relating to entities regulated by the Monetary Authority and those entities formed with the General Registry, have not exhibited precipitous declines, and in fact there are areas that are maintaining growth, overall contractions are expected over the SPS period in both new registrations and licencees and among existing registrations and licencees, and this has been factored into revenue forecasts. The exact quantum of change will become clearer in the period January to March of 2009.
Overall, the areas expected to suffer most are those connected with hedge funds and structured finance. Current global market conditions in the hedge fund arena are characterized by heavy redemptions, suspensions and re-structuring coupled with much-reduced new fund formations. In the structured finance arena there has been severe drop-off in deal flows as a result of the freezing of the global capital markets. By some expert estimates, the number of hedge funds globally could contract by 20 to 30 per cent.
We are confident that through strong industry partnership, a concerted approach to Cayman's competitiveness, and the existing base of strength and quality of our service offerings, we will be able to see our way through this challenging environment.
Madam Speaker, I will turn now to the main features of the economic and financial forecasts contained in the SPS document.
World Economic Position and Outlook
The global economy, particularly the advanced economies, was increasingly challenged in 2007. In the second half of the year, the financial crisis that originated from the mortgage sector in the United States has spread to other advanced economies and has affected their growth performance. At the same time, a general increase in commodity prices, particularly for fuel and food, pushed inflationary pressures globally. Against this backdrop, global economic growth in 2007 was estimated at 5.0 percent, a slight decline from the 5.1 percent recorded in 2006.
Global growth came largely from the emerging and developing economies as they recorded a combined growth of 8.0 percent in 2007, a slight improvement from the 7.9 percent growth in 2006. On the other hand, advanced economies which comprise the majority of the Cayman Islands financial services and tourism industries, slid from their combined growth of 3.0 percent in 2006 to 2.6 percent in 2007.
Inflation among the advanced economies eased slightly in 2007 to 2.2 percent from 2.4 percent in 2006, due to the moderation of consumer spending that partially checked the pressures from higher commodity prices. However, in emerging and developing countries where demand growth remained strong, consumer prices rose higher at 6.4 percent in 2007 from 5.4 percent in 2006.
World output was estimated to have slowed anew in the first half of 2008, and further weakening is projected for the second half of 2008. Consequently, global growth for the year is foreseen at 3.9 percent. This outlook is cast amidst a sharp downturn in the financial sector that has resulted in the restructuring and consolidation of major institutions, particularly in the US, resulting in a further tightening of credit for consumer and business spending.
The weakening of global output growth is anticipated to be accompanied by higher inflation. Inflation in 2008 is foreseen to reach 3.6 percent among advanced economies, and 9.4 percent among emerging and developing economies.
The US remains an important market for the Cayman Islands. US growth deteriorated in 2007 to 2.0 percent from 2.8 percent in 2006, as the housing finance crisis further reduced demand for residential construction. Weakened income position of households along with higher commodity prices softened private consumption expenditure and non-residential investment, especially in the last quarter of 2007. On the other hand, the weakening of the dollar improved US net exports while government spending boosted domestic demand.
The growth of US Gross Domestic Product (GDP) in the first three quarters of 2008 averaged 1.1 percent as compared to 3.2 percent in the same period a year ago. Further weakening is projected for the rest of the year, in light of diminished consumer confidence. US GDP growth in 2008 is forecasted at 1.6 percent.
Meanwhile, other advanced economies are also expected to show softer performance to bring the combined growth of the group to 1.5 percent in 2008. Sharp growth adjustments are foreseen for the United Kingdom (from 3.0% in 2007 to 1.0% in 2008) and Canada (from 2.7% in 2007 to 0.7% in 2008).
The global outlook for 2008 is expected to extend to 2009, as world output growth is projected to further weaken at 3.0 percent. GDP growth among advanced economies in 2009 is expected at 0.5 percent, led by the US with its growth forecasted at 0.1 percent. The UK is foreseen to experience a recession, with its growth forecasted at -0.1 percent, while Canada is expected to rebound at 1.2 percent.
Meanwhile, global inflation is projected to ease in 2009 on the back of curtailed growth in domestic demand and improved outlook on commodity prices. The inflation rates for the US and the advanced economies are forecasted at 1.8 percent and 2.0 percent, respectively.
The Cayman Islands' Economy - Performance in the 2007 and 2008 Calendar Years
Madam Speaker just before I get into the forecasts it is important that we take a few moments to review the Cayman Islands' economic performance for the period January 2007 to June 2008.
In 2007 our overall economic performance was bolstered by a resilient financial services industry, strong growth in public consumption expenditure and robust growth in stay-over tourism. GDP grew by 2.2 percent during the year, albeit this was lower compared to the 4.6 percent growth in 2006. Indicators in the first half of 2008 for the major industries - financial services and stay-over tourism - show signs of softening and are consistent with the projected slide in GDP growth for 2008.
The financial services industry displayed its resilience throughout 2007, notwithstanding the global financial turmoil. With the exception of banks and trust licences which dropped by 3.4 percent, increases were recorded in insurance company licences (3.4%), mutual funds (15.7%), stock exchange listings (42.7%) and new company registrations (15.9%). During the first half of 2008, these services remained on the growth path, albeit at lower growth rates: mutual funds increased by 11.9 percent while insurance licences and stock market listings rose by 2.6 percent and 17.9 percent respectively. However, banks and trusts licences declined by 2.4 percent while new company registrations slipped by 3.3 percent.
A mixed performance emanated from the tourism industry in 2007. The stay-over market showed strong performance as arrivals rose by 9.1 percent; this was extended in the first 6 months of 2008 as arrivals improved by 9.3 percent. In contrast, cruise arrivals fell by 11.1 percent in 2007 and by 13.5 percent in the first half of 2008. Overall, tourist arrivals went down by 8.7 percent in 2007 and by 10.5 percent in the first half of 2008. Consequently, tourism receipts dipped by 6.6 percent in 2007 to reach $399.1 million.
In 2007, construction moderated from the strong performances over the last two years. Building permits reached 1,090 (or 15.5% lower than in 2006) valued at $446.3 million (up marginally by 0.1 percent compared to 2006). Building permits for the first half of 2008 fell by 2.9 percent to settle at 599; total value of these permits fell to $211.5 million or 26.2 percent lower compared to the same period in 2007.
Total labour force as of fall 2007 was estimated at 36,476, reflecting a marginal growth of 1.4 percent over 2006. The unemployment rate went up to 3.8 percent in 2007 from 2.6 percent in 2006 as total employment increased modestly by 0.2 percent to reach 35,081.
The average Consumer Price Index continued to increase in 2007. The average inflation was 2.9 percent, higher than the 0.8 percent recorded in 2006. However, the inflation rate was on the down-trend throughout the year: from 4.4 percent in March 2007, this fell to 3.2 percent in June, 2.5 percent in September and 1.7 percent in December.
For the first six months of 2008, average inflation was 4.0 percent, due to increases in the average prices of food (3.6%), household equipment (7.5%), transport and communication (5.3%), housing (5.1%), clothing (4.0%), education and medical (4.2%), personal goods and services (0.9%) and alcohol and tobacco (0.5%).
Merchandise imports declined in 2007 to $881.8 million, from $888.7 million in 2006. This was mainly due to a strong reduction in capital goods imports by 21.9 percent, while consumption goods also fell by 2.9 percent. In contrast, the value of fuel imports grew by 21.7 percent which could be traced to increases in both the unit price and the quantity of oil and petroleum products imported. For the first six months of 2008, merchandise imports rose by 2.1 percent from the same period a year ago to reach $457.6 million. This increase is due largely to oil and petroleum products which posted higher prices in the world market. The volume of fuel imports also grew moderately by 3.5 percent to settle at 38.3 million imperial gallons.
Total merchandise exports in 2007 was estimated at $21.5 million, an 11.9 percent improvement above the previous year, mainly due to significant increases in rum exports and re-exports. Meanwhile, exports of services were estimated at $442.9 million, a surge of 3.6 percent over 2006, mainly on account of the growth in visitor expenditure which resulted from stay-over tourism.
Economic Forecasts for the Next Three Fiscal Years
Section 3 of the SPS provides the forecast economic position of the Cayman Islands for the 2009/10 to 2011/12 financial years. These forecasts were prepared by the Economics and Statistics Office (the ESO) within the Portfolio of Finance and Economics.
The ESO forecasts that the Cayman Islands economy, measured by changes in real GDP will grow by 1.7% in the coming 2009/10 financial year and should accelerate to 2.5% in 2010/11 and 2.4% in 2011/12. These growth prospects assume that the world economy and in particular the economy of the USA will recover from its current difficulties.
Employment levels, measured by the numbers of persons employed, are expected to be 35,729 in 2009/10; 36,161 in 2010/11 and 36,523 in 2011/12. Conversely, the unemployment rate is forecasted at 3.9% in 2009/10, and 3.7 per cent in both 2010/11 and 2011/12.
The local inflation rate, which is highly influenced by inflation rates in the United States of America, is forecasted at 2.7% in 2009/10 and 3.0% in both 2010/11 and 2011/12.
The balance of payments current account is forecasted at 25.3% of GDP in 2009/10 and 2010/11 and 24.7% in 2011/12.
Madam Speaker, all of these economic forecasts are indicating that the Cayman Islands economy will remain strong and healthy in the coming financial years and that while we are likely to experience some adjustment as a result of the current global financial environment, the effects will not be long-term.
Madam Speaker, every year the Government goes to great lengths to make sound plans for the country's limited financial resources. This year, the global economic environment has made the exercise particularly challenging. Despite these challenges the Government has ensured that it operates its financial affairs in full compliance with the Principles of Responsible Financial Management defined in the Public Management and Finance Law (the PMFL). This will mean that Government agencies will have to reduce their operating expenses and become more creative and innovative in the way they deliver services.
n taking this approach to managing its finances the Government is not just complying with the PMFL it is also ensuring that it retains the capacity to effectively respond to any sudden unexpected external shocks to the economy.
Core Government operating revenue is forecast to be $535 million in 2009/10, $555.4 million in 2010/11 and $571.8 million in 2011/12.
Core Government operating expenses are forecasted at $488.6 million in 2009/10, $502.2 million in 2010/11 and $514.7 million in 2011/12.
Financing expenses are forecasted to be $18.2 million in 2009/10, $23.7 million in 2010/11 and $25.1 million in 2011/12.
Surpluses are forecasted to be $28.1 million in 2009/10, $29.6 million in 2010/11 and $32.0 million in 2011/12.
On the balance sheet, Government's net worth (which is the difference between its total assets and its total liabilities) is expected to increase steadily over the forecasted period.
Aggregate borrowing (which is the balance outstanding at the end of a financial year in respect of those borrowings) is also expected to increase over the forecast period. This increase is in line with the Government's planned capital investment programme.
The anticipated borrowings in the 2009/10 to 2011/12 period result in Debt Servicing ratios that remain under the maximum 10% level prescribed by the Principles of Responsible Financial Management, in the PMFL.
Net operating cash flows are targeted to remain strong in line with the forecast operating surpluses. The Government has continued its policy of maximizing the use of cash generated from operating surpluses to help finance its planned capital programme over the next three fiscal years.
Net investing cash flows or the amount of funding available for the Government's capital development programme is forecast to be $147.8 million in 2009/10, $76.2 million in 2010/11 and $72.6 million in 2011/12. The decrease in the 2010/11 and 2011/12 financial years reflect the expected completion of major projects in the 2009/10 fiscal year.
The net financing cash flows reflect the Government's anticipated borrowings over the three-year period less its repayment of debt principal.
The targeted closing cash balance for all years satisfies the level of cash reserves required by the Principles of Responsible Financial Management. The forecast cash balances for the 2009/10 to 2011/12 fiscal years are: $116.1 million, $121.6 million and $124.1 million. These balances are sufficient to meet the legal requirement specified in the PMFL that Government must maintain cash balances at the end of each financial year - starting from the 2009/10 year and onwards - that cover 90 days (or a quarter of a year), operating expenses.
Overall, the financial targets indicate an affordable fiscal position over the three-year forecast horizon.
Madam Speaker, these are trying and demanding economic times but it is during times like these that the Caymanian people shine with their strong determination and resilience that has seen this country through difficult times in our past and I believe we will once again come out on top.
The Cayman Islands has a robust, innovative, diversified and well regulated financial services industry which must be vigorously defended and encouraged as it is a major component of our economic engine. In addition, our excellent high quality tourism product must continue to be refined and improved to ensure that the Cayman Islands remain a destination of choice for discerning travellers. Together, financial services and tourism form the core of the Cayman Islands economy.
The Government is leading the way in terms of balancing continued economic development with prudent financial management, this SPS sets out challenging but achievable targets for all Government agencies which together will allow the county to conform to the requirements of the PMFL while at the same time continuing to provide the services and infrastructural development necessary for the continued success of these Islands.
I give my full support to this Motion and ask all Honourable Members to do the same.
Thank you, Madam Speaker.
For further information contact: Susan Watler