FINANCE MINISTER GIVES ECONOMIC UPDATE - DISPELS DIRECT TAXATION
Cayman Islands business leaders assembled online for the 3rd annual Chamber of Commerce Economic Forum have been treated to a comprehensive overview of the state of the economy and government finances by Hon. Finance Minister Roy McTaggart.
It was just one of a series of high-level presentation and discussions throughout Friday as the private sector organisation assessed the impact of the COVID-19 pandemic.
Addressing the virtual conference held online for the first time due to social distancing restrictions necessitated by the pandemic, delegates heard how the pandemic has set back the economy.
The Cayman Islands’ economy is expected to contract by 7.2% in 2020 before recovering partially by 6.4% in 2021.
But the business leaders received strong assurances from the government that the territory was positioned to withstand the shocks inflicted by COVID-19.
“Seven months ago, I would have presented to you a thriving economy growing at an average annual rate of 3.3% between 2015 and 2019. Economic growth in 2019 was estimated at 3.2%, led by construction growth of 5.8%, and hotels and restaurants by 5.3%. Inflation averaged 5.7%, and the unemployment rate was 3.5%,” Mr McTaggart reported.
“The trend of robust economic growth was led by strong performances in the core service areas of our economy, namely; financial and insurance services, business services and tourism. These were further reinforced by substantial growth in construction, trade and other population supporting sectors.”
He said this performance continued until March when the “sudden stop” ushered in a new paradigm, with the projections for 2020 forcing us to contend with a new reality.
According to the Finance Minister, the projections are cushioned by the government’s economic management measures which have mitigated the impact of the pandemic to some degree although the outlook still poses challenges for Cayman.
“The growth estimates are in the context of measures implemented by the Government to contain the spread of the virus, increase disposable income and boost activity,” he said.
The contraction in 2020 is expected to span across key sectors which had been expanding previously.
The hotels and restaurant sector is expected to bear the brunt of the crisis, contracting by 74.6% although it is expected to bounce back with a growth of 61% by 2021.
The transport, storage and communication sector is projected to shrink by 14.7%, the second-largest decline for the year.
However, that too is forecast to have a recovery expected around 12% by next year.
Less hard hit are the financing and insurance and the business services sector, down minus 3.8% and 1.7% respectively.
While those industries are also expected return to growth next year Mr Minister McTaggart said there was nevertheless a considerable downside risk to the forecast in both the legal and accounting components of this sector.
He gave a commitment that “if this risk develops, the Government stands ready to partner with the business community to enact the necessary legislative changes to maintain a vibrant financial and business services industry.”
While the government takes credit for positioning Cayman to cope with unexpected challenges, it’s clear that the extent of the COVID-19 impact could not have been anticipated.
“The combination of the deterioration in Operating Revenues and the increase in Operating and Financing Expenses has resulted in a year to date Operating Surplus of $75.7 million - which is $57.2 million or 43% less than the budgeted year to date Operating Surplus, “ Mr McTaggart reported.
The Government is also forecasting an Operating Deficit of $173.2 million by the end of 2020 – which is $238.5 million or 365.3% lower than the budgeted Operating Surplus of $65.3 million.
The Finance Minister however pointed out that “due to accumulated surpluses, so far the Government has been able to finance the COVID-19 related costs and stimulus measures from cash reserves.”
“At the end of June 2020, total closing bank account balances, including fixed deposits, stood at $559.6 million – which is $196.7 million or 54.2 % higher than the year to date Budget.”
STANDBY LOAN STATUS
Giving an update on the government's decision to seek a loan of CI$500 million (US$609.7 million) "to avoid the depletion of all of our cash reserves and to assist with meeting our financial obligations over the next 2 years", Mr McTaggart reported that to date one proposal had been received from a syndicate of local banks.
An announcement on that is expected by late August or early September.
If the bid is accepted, the Government says it does not intend to immediately draw down on the entire amount of the loan and would only do so “as and when additional funds are required – which will help with curtailing interest costs.”
The Government forecasts that by the end of 2020, Bank Balances will be $188.2 million – which is $431.2 million or 69.6 % lower than budget!
At 30 June 2020, debt balances stood at the year to date Budget of $266.5 million.
The Finance Minister outlined that if the $500.0 million loan is approved and a portion of the loan is drawn down, debt balances are forecast to be $273.6 million by the end of 2020 – which is $23.4 million or 9.4 % more than budgeted.
READ MY LIPS, NO DIRECT TAXATION!
Meanwhile, the Hon. Finance Minister moved quickly to dispel any suggestion that the government was considering introducing direct taxation.
“I did not say Government was considering direct taxation, I said that if the situation got worse AND if we ran out of options, we would have to make some tough decisions....which could include a really tough decision, like contemplating taxation,” he explained in response to media reports.
Reiterating that “through our responsible fiscal management, we have reserves”, Mr McTaggart declared that “government does not foresee the need to introduce new taxes, and certainly not direct taxation.”
“Ladies and Gentlemen let me assure you that the Government is not contemplating any change to its well established fiscal strategy of no new taxes, paying down debt and managing expenditure to produce significant budget surpluses,” he affirmed.
“The Cayman Islands Government has an indirect tax regime that is well established and supports robust levels of economic activity and the Government does not see the need to make any changes to this regime. "
"To be clear, the Government is not contemplating any direct taxation,” Mr Mctaggart repeated.