Cayman Economic Report for 2006

CAYMAN ISLANDS 1. RECENT ECONOMIC PERFORMANCE A. Overview The robust economic performance fueled by reconstruction in the aftermath of hurricane Ivan continued into 2006, with growth tentatively estimated at 4.6%, down from 6.5% in 2005. The strength of construction was strongly supported by a rebound in tourism. The financial services industry also performed well, with registration of mutual funds continuing to grow rapidly. The stock exchange also showed strength. Prices stabilised during the year following sharp increases in 2005, and the unemployment rate fell to 2.6%. B. Sectoral Performance Financial Services The financial services industry largely maintained its growth momentum in 2006 despite a small decline in the number of bank and trust licences. In the 11 months to November, the number of mutual funds registered continued to rise steadily, reaching 8,088, up from 6,888 at the end of November 2005. This represented a net increase of 17% in registrations within that category over the period. The insurance sub-sector continued to be buoyed by conditions in the external market, in particular the steep increase in rates by traditional commercial insurance companies following 9/11. The sub-sector’s growing success was also facilitated by a good reputation for management oversight and regulation. The number of companies issued licences to provide insurance services rose to 884 at the end of November 2006, up 2.7% from the year-earlier period. Of the total, 732 (723 in November 2005) were registered to conduct offshore business only, while the number of providers with domestic licences stood at 27. Over the same period, the number of licences issued to insurance agents increased by 24.6%. 42 CDB Annual Economic Review 2006 The ongoing consolidation within the banking industry continued to affect operations within the Cayman Islands (CI). Accordingly, the total number of banks and trust licences in effect dropped by 6% to 374 at the end of September. Despite a reduction in the number of entities operating as a result of the consolidation process, total international assets held by banks in the CI increased by 11.7% in the year to June to $1,413 bn. Tourism Tourism activity improved further in 2006. The rebuilding and refurbishing exercises that began in 2005, continued well into the year, and helped boost activity in the stay-over segment of the industry to near its pre-Ivan levels. In July 2006, 3,907 bedrooms were available for occupancy, as opposed to 5,108 just before Ivan, and 3,140 in November 2005. As a result of the increased availability of rooms, and the reopening of many ancillary services, stay-over arrivals rose by 59.3% above the 167,801 visitors in 2005. September maintained the historical trend as the month with the least number of arrivals (10,155) while all other months, with the exceptions of August and October, had more than 20,000 visitors. Visitor arrivals from the United States of America (USA) continued to be very high, and accounted for 81.3% of arrivals during the year as against 70.1% in 2005. Whilst the number of visitors from the European and Canadian markets increased by 6.3% and 5.6%, respectively, their corresponding proportions of the total declined. The average occupancy rate for hotels rose by almost four percentage points to 59.4% in 2006 as a result of the sharp increase in stay-over arrivals. In contrast, occupancy levels of apartments fell to an average of 40.7% from 46% in 2005. Average length-of-stay data for both hotels and apartments remained relatively constant when Cayman Islands compared with 2005. For the former, the average stay was 4.5 days and for the latter 6.7 days; the corresponding numbers for 2005 were 4.9 days and 6.7 days, respectively. The number of cruise passengers visiting the CI during 2006 increased steadily, reaching 1.93 mn as against 1.80 mn in 2005. Record-breaking numbers were again recorded in March (253,124) as larger ships with more passengers included the CI on their itinerary. No less than 110,000 passengers were recorded for any single month. Construction The strong construction sector saw a sharp rise in both number and value of building permits issued, as well as the volume of cement imported. In the nine months to September, the total value of permits rose by 40.7% over the corresponding period of 2005. Housing construction accounted for 27.4% (by value) of those issued, while those for apartments accounted for 36.2%. While there was a small decline (3.2%) in the volume of imports during 2006 (most of it destined for the construction industry), the amount imported (367,856 short tons) was still 30% above the volume imported in 2004. Imports of cement in 2006 amounted to 81,298 short tons, up 88.8% above the 43,072 short tons imported in 2005. Real Estate The high degree of buoyancy evident in the real estate sector in 2005 prevailed throughout most of 2006. The number of properties traded for profit rose by 47.8% in the six months to June to a record 1,573. The value of these transfers, however, declined by 19.1% to $273 mn. Social Services The government’s social assistance programme continued to be implemented during the year mainly by the Department of Children and Family Services (DCFS). The major focus of the work programme shifted from providing shelter for persons displaced during Ivan as other agencies (such as the Department of Public Works and the National Disaster Reconstruction) took over that function, enabling DCFS to reverting to its core operations. As a result, activities such as the general provision of counseling services, investigations into allegations of child abuse and neglect, dealing with juvenile delinquency, and providing poor relief, dominated the Department’s work load. During the first half of the year, the department opened 174 new cases for investigation. This compared with 143 and 76, respectively, for 2004 and 2005. With an expanded staff complement, the department was able to deal more effectively with the increased workload. Cayman Islands Health The Health Services Authority (HSA) manages the health sector in the CI, in conjunction with the Department of Environmental Health, the Department of Agriculture, and the Mosquito Research and Control Unit. Councils, covering, respectively, medical, dental, nursing and pharmaceutical services, are empowered to regulate their areas of responsibility. The quality of health care in the CI, as evidenced by available data, continued to reflect high standards during the year.. Service delivery was provided by 562 practicing health professionals, including 76 doctors, 19 dentists and 232 nurses. A major achievement of the HSA during 2006 was the development of an Influenza Pandemic Contingency Plan that, based on the serious consequences of such a possible occurrence, provides a national framework for an integrated response to a major influenza outbreak. Education Ongoing work in the education sector in 2006 focused on further development of the tenpoint reform strategy adopted during an education conference toward the end of 2005. Some progress has already been made in implementing the strategy. This includes the establishment of a task force to oversee and guide the review and revision of the national curriculum, and the establishment of an Early Childhood Unit to set standards, evaluate performance, and support improvements in day-care centres, pre-schools and reception programmes. As part of the holistic approach to revamp the education sector, the authorities also emphasiszed helping children with special education needs, and completed a study to determine the deficiencies of the current system in this regard. Other aspects of the t strategy are to be implemented over time; these include the development of a plan for the maintenance and further development of educational plant, and further enhancement to teacher training coupled with the provision of professional development opportunities for teachers. Student enrollment in government-operated institutions as of September 2006 amounted to 4,650, distributed between 12 primary schools (2,384 children), three secondary schools (2,176 children), and two special education facilities (90 children). Within the primary system, there were 181 teachers, while the complement at the secondary level was 214. Consequently, the pupil-teacher ratios for the government-operated primary and secondary schools were 13.2:1 and 10.2:1, respectively. C. Prices, Wages and Employment The CPI all-items index rose by 1.2% during the first three quarters of 2006, owing mainly to increases in the CDB Annual Economic Review 2006 43 categories of Transport and Communications (6.4%), Personal Goods and Services (4.3%), Clothing (4.1%), and Food (3.2%). Negligible price movements were recorded in the Alcohol and Tobacco category, as well as for Household Equipment. The Housing index fell by 3.3% over the period, after rising substantially in 2005 following a sharp expansion in demand in the aftermath of Hurricane Ivan. The results of a wages survey conducted by the Department of Employment Relations to measure wages, salaries, and benefits by occupation across sectors were published in 2006. One finding was that the number of Caymanians in the higher income brackets at the time of the survey (September 2005).exceeded exceeded that of work-permit holders This finding appeared to be in line with the results of a labour force survey conducted by the Economic and Statistics Office, which revealed that Caymanians account for 63% of employees whose monthly earnings exceeded $4,000. D. Fiscal Policy and Debt Operations No significant issues with regard to fiscal operations were reported during the year.. Though only partial data were available, revenue collections by the Customs Department (which accounts on average for 40% of government revenues) increased by 13.8% in the 10 months to October, moving to $165.7 mn from $142.8 mn in the corresponding 10 months of 2005. Given that activity was generally upbeat in the other areas affecting domestic taxes, total revenue is very likely to surpass the amount collected in 2005. In relation to expenditure, preliminary indications are that actual spending for the central government was generally below budgeted amounts. A continuation of this trend would result in a surplus on current operations (though it is expected to be smaller than in 2005) which would facilitate implementation of the capital programme as well as reduce the borrowing requirement. Preliminary indications are that the public debt amounted to $200.4 mn at the end of December 2006, down from $217.7 mn a year earlier. This decline was largely facilitated by the sharp growth in revenue (27.4%) in 2005, which facilitated the capital development programme without the need for additional borrowing. 2. PUBLIC SECTOR INVESTMENT PROGRAMME A. Development Objectives GOCI’s development objectives are to sustain real living standards; provide access to improved health and education facilities so as to produce a healthy, well-educated and vocationally-trained resident population; diversify the economy while spreading the development gains more evenly across the three islands viz. Grand Cayman, Cayman Brac and Little Cayman; and protect the cultural identity of Caymanians by allowing an acceptable mix of both Caymanians and non-Caymanians. Strategies to attain these objectives revolve around preserving the attractiveness of the Cayman Islands as a prominent international financial centre, and as an up-market tourist destination. It is recognised that priorities for the achievement of these objectives will change given the dynamic nature of operating in a globalised environment. The current priorities in attaining the development objectives include completing the country’s recovery from the effects of Hurricane Ivan, and thereafter implementing strategies based on the lessons learnt; combating crime; improving the level and quality of education and health services; investing in essential road infrastructure; continuing support for tourism and financial services as the twin pillars of the economy; and improving environmental management. B. Composition of the PSIP During 2006, PSIP activities focused primarily on improving traffic flow in and around Georgetown. To this end, the National Roads Authority completed work on the Harquil By-Pass extension to ease congestion along West Bay road, and also on widening the highway near Savannah. Work also continued on the expansion of the road network between the Harquil By-pass and the Esterly Tibbets Highway. C. Financing of the PSIP Financing for the PSIP in FY 2006/07 is expected to come from undrawn balances of domestic loans. Thus, it is anticipated that completion of the PSIP as planned will lead to somewhat higher debt servicing costs. Given the fact that the external debt was refinanced through a bond issue in April 2003, additional new borrowing in support of the PSIP activities can be undertaken without causing a breach of the 10% statutory debt service–torevenue ratio. 44 CDB Annual Economic Review 2006 Cayman Islands D. Implementation Issues New requirements under the Public Finance and Management Law (2001) have brought improved management to PSIP implementation in the CI. The creation of a National Roads Authority on July 1, 2004, separated the functions of road planning, implementation and maintenance from those of general public infrastructure maintenance. This decentralisation has led to some strengthening of the planning process, and implementation issues are now resolved more promptly. The acquisition of hot-mix equipment by the NRA, combined with it having been granted the sole authority for disrupting road surfaces, are expected to further reduce implementation issues. the overall level of living and quality of life which both residents and visitors now enjoy. The maintenance of attractive beaches, coastline, and adjacent waters, and the continued presence of marine life, combined with well-focused targeting strategies backed by appropriate marketing, have fueled growth in tourism over the years. As a result of many of these initiatives, the CI has become renowned worldwide as a diving and snorkeling destination, and as a country known for its hospitality. The parallel development of the financial services industry has led to the expansion of opportunities for large numbers of skilled and unskilled persons to live and work in the CI. The rapid development of the tourism and financial services industries has naturally involved an equally rapid increase in visitor arrivals, which peaked at 2.11 mn in 2003. The number of arrivals declined in 2004 because of Ivan, but then returned to an upward trend in 2005 and 2006. As a result of the rapid growth, there is evidence of some stress on the environment. In particular, the popularity of the country as a diving destination continues to attract large volumes of divers that themsekves are thought to be a major contributor to some of this stress. In addition, some sites around the island are the natural habitat for several rare species of birds and animals. The fact that the sites are an integral part of the tourism product is the source of this dilemma, and this is the main reason why the Department of the Environment, and other entities with an environmental focus, continue their calls for effective management at these sites with the possibility of limiting access where appropriate. The Darwin Initiative by the DoE is a significant step towards the path of conservation and sustainability needed by the CI. C. Labour and Immigration Policies The rapid development of the CI economy and associated strong demand for imported labour has recently brought its immigration policies under close scrutiny. In 1980, 23% of the resident population was non-Caymanian. This figure jumped to 47% by 2001, and declined to 39.3% (20,443 persons) in the Spring of 2006. The number of work permits issued rose generally in tandem with the increase in the non-Caymanian population. In 1985, 3,188 work permits were issued and this figure rose to 13,883 by 2001. However, by 2004, it jumped sharply to reach 20,508, and the CI$25 mn in fees it generated represented approximately 16% of Domestic Levies on Goods and Services. This figure was 2.8 times the CI$9.4 mn in fees generated from work CDB Annual Economic Review 2006 3. MAJOR POLICY ISSUES A. Vulnerability to External Shocks The passage of Hurricane Ivan in September 2004 exposed the high degree of vulnerability of the CI to external physical shocks. This intense tropical hurricane (Category 4 when it struck CI) caused significant damage to both the housing stock and hotel plant, severely disrupting economic activity. Prior to Ivan, storm and surge damage was largely confined to the Seven Mile Beach area, but the more recent experience brought the capacity of the entire economic planning and management systems within the CI, and in particular the fragility of the eco-system, into sharp focus. In addition to the vulnerabilities associated with weather-related factors such as global warming and tropical cyclones, activity within the CI is also particularly vulnerable to economic business cycles. As one of the more important offshore financial centres in the world, there exists an intricate network of businesses operating within the jurisdiction that respond daily to market conditions in other financial centres. Such close association means that decisions made elsewhere (for instance the recent EU Tax Savings Directive) quite often have immediate and substantial impact on business operations in the CI. Hence, the strong links which have developed over time within and amongst the financial centres provide a significant source of risk for the industry, and, in the broader context, for the country. B. The Pace of Development and its Impact on the Environment The rapid pace of development within the CI resulting from strong growth in the tourism and financial services industries has contributed significantly to growth in Cayman Islands 45 permit fees in 1994. Thus there existed for a while in the CI the dilemma between additional benefits that can accrue to the economy from the granting of citizenship to eligible applicants and the corresponding negative effect it could have on the reduction in work permit fees that flow to the Ggovernment. Related to this is the tension that is created because of social exclusion on the one hand, and the seemingly undeserved sharing of benefits on the other. In an effort to strike a balance to the contending views, the Executive Council set up a committee in 2001 to review existing immigration policies and prepare recommendations aimed at providing greater efficiency and improved transparency to the process. Arising from the work of the committee, 302 persons were granted Caymanian status by the Immigration Board in 2003 on the basis of naturalisation (102) and by ordinary residence (200). Additionally, Cabinet conferred the grant of status on 2,850 persons. Meanwhile, a new immigration law (Immigration Law 2003) was passed by the Legislative Assembly and came into force on January 1, 2004. Among other things, the Law sets out the authority of immigration officers and makes provision for the establishment of three separate boards to deal with Caymanian status and permanent residency, work permits and business staffing plans, respectively. In addition, there is an immigration board administrator to co-ordinate the activities of the boards and clarification of the grounds on which appeals can be lodged. an opportunity to undertake extensive refurbishment of existing tourism plant or to design and build new facilities which may be more in keeping with modern views of the likely evolution of the industry. The negative impact on government finances, which resulted from the sharp drop in stay-over arrivals and which was further exacerbated by the duty concessions associated with the rebuilding efforts, has been reversed in 2006 based on stronger growth in tourism and its ancillary services. This will slow the rate of increase in the public debt. Continued growth is also expected in the financial services industry. The dynamism in construction sector activity which begun during 2005 and continued throughout 2006 is expected to continue for several reasons. Firstly, there is still an undersupply of housing stock which led to higher prices in the sector, particularly for rental accommodation. Secondly, work on the Caymana project (the single largest investment ever) will continue for several years, given the size and scope of the undertaking. Thirdly, the additional work being undertaken on hotel and other commercial properties is expected to continue over the medium term. Finally, construction sector activity will be boosted by the planned implementation of projects within the PSIP – especially the major interior roadways. The constraint on domestic capacity in the sector will continue to be overcome by the importation of labour, equipment and materials and by phasing of the projects. The price of oil, which appears to be sticky at a level in excess of $50 per barrel, will combine with strong domestic demand to elevate price levels within the country. Thus the CPI will likely increase by a minimum of four percentage points per annum over the medium term. 4. MEDIUM-TERM ECONOMIC PROSPECTS The continued rebuilding process which gathered momentum in 2005 will help to propel growth prospects both over the short and medium term. The damage and destruction caused by the hurricane have provided 46 CDB Annual Economic Review 2006 Cayman Islands