US Financial Crisis Monitored
Published 1st December 2008, 11:14am
Statement on the Global Financial Turmoil and the Cayman Islands Government's Response by the Honorable Leader of Government Business October 9, 2008
Current global situation
Since September 17th when I first made a statement on the unfolding financial crisis in the US, it will have escaped no-one's attention here in the Cayman Islands that notwithstanding the strenuous interventions of the US government, the financial markets are far from back to normal.
As US Treasury Secretary Henry Paulson stated in a briefing he gave in the US yesterday (Wednesday), "US and global financial markets continue to be severely strained." This is because the uncertainty and lack of confidence generated by the housing correction in the US and associated difficulties in mortgage assets persist. Secretary Paulson confirmed that significant challenges remained ahead but that the federal government in turn remained fully committed to, and confident of, a successful resolution of the challenges and the emergence of a stronger and better US economy.
He also acknowledged the commitment of international partners to securing stability and growth in their respective domestic economies and to promoting the orderly functioning of the international financial system. Indeed, we have seen evidence of this in the coordinated actions of central banks worldwide to cut interest rates in concert with the US Federal Reserve cut yesterday.
Yesterday as well, the International Monetary Fund announced its preliminary assessment that many advanced economies are not expected to show economic growth until at least the middle of 2009. It also revised its estimate of losses among financial institutions to US$1.4 trillion as compared to its estimate of US$945 billion in April this year.
The Cayman Islands Government's response
It is well understood by everybody that Cayman's economy does not operate in isolation and that we are not immune from the global volatility and uncertainty. As with natural disasters (and we have had our experience with those), there are things that we simply cannot control, but we can take sensible precautions and put ourselves in the best possible position to preserve what must be preserved and restore quickly, if it comes to that, what must be restored.
Your Government here in the Cayman Islands has therefore been in "alert" if not "watch" mode. We are closely monitoring developments abroad as well as at home.
We have had preliminary consultations with stakeholders in tourism and financial services, among other economic participants, and the market intelligence on the economic outlook from that exercise, in top-line summary, is that:
- Our retail banking sector is not experiencing any stress arising from the global conditions and is in good financial health. Local lending is continuing as normal, although the banks are mindful of potential credit quality issues that could arise with any significant deterioration in the local economy.
- In relation to the rest of the financial services sector, the areas that are 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-structurings coupled with much-reduced (although not zero) 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. This situation is not expected to significantly improve until 2010. We are already seeing an impact on the public sector side, with new company registrations Jan-Sept down 10% over the same period in 2007. By some expert estimates, the number of hedge funds globally could contract by 20-30%, which will obviously affect Cayman's book of business.
- The tourism sector is cautiously optimistic about the short-term outlook, and reports that advance bookings for the winter season are on track to meet and even exceed last year's. Also, in the cruise sector, it is considered that difficult global conditions might actually have a positive impact if cruise lines from the US are motivated by higher costs to focus on shorter-haul destinations such as the Cayman Islands. However, the medium-term outlook in the tourism sector is less certain given the fixed trend of compressed booking windows which make it difficult to predict demand. It has already been identified, for instance, that the global financial conditions will have a negative impact on the group/incentive travel segment. By this I am referring for example, to clients, shareholders and directors meetings which are often held in Cayman. I should note as well that Cayman Airways and the public and private sector tourism sector stakeholders reported that they are in close cooperation to ensure that business objectives are suitably aligned.
- In the economy generally, there are contractions or retrenchments that have taken place or are expected in the restaurant sector and the commercial real estate development sector in particular.
The Government is currently reviewing the local outlook for GDP, inflation and employment as we need to align these with the global assessment released by the IMF that I referred to earlier. In relation to employment, the results of the labour force survey that will be conducted by the Economics and Statistics Office beginning this Sunday (October 12) should be helpful.
Further, we are implementing a three-pronged strategy to protect our economy:
- Engagement with the private sector
- Expedited implementation of government action items from the Economic Monitoring and Advisory Group
- Budgetary activism
On Tuesday, I led the Cabinet in a meeting with representatives from the financial services industry, the tourism industry and the Chamber of Commerce. The Governor was also in attendance. Our joint purpose was to be in a position to make a realistic assessment of the short-to-medium term economic outlook and start to identify possible actions to alleviate economic difficulties.
I am very pleased with the quality of the input we received and moving forward, we would like this exchange of views and ideas to continue, in order to facilitate pro-active policy-making that will minimize the adverse impact of the global financial crisis on the domestic economy.
Hence, today I am announcing the creation of an Economic Monitoring and Advisory Group which I will chair and which will meet monthly or more frequently as needed, until we have successfully navigated the local impacts of the global economic storm. The Group will comprise a broad array of representatives from the private sector and members of the Cabinet. Its terms of reference are to facilitate the sharing of updated information on the local economic situation, and identify issues that need to be addressed as they may arise.
Even in the face of difficult circumstances and changing operating landscapes, opportunities inevitably arise. We need to position ourselves to take advantage of these opportunities while at the same time protecting our existing business. Both of these can be achieved by ensuring that we continue to offer quality and value for money and don't impose unnecessary costs and burdens on our economy. We expect that the Economic Monitoring and Advisory Group will have some good ideas on measures that we can adopt and the government will ensure that full and expedited consideration.
Some 18 months ago the government took a decision to proceed with the major capital works programme which it had earlier announced. We did so at a time when there were already indications that the global economy was slowing. Our decision was quite deliberate. Like responsible governments around the world, we do not believe that government should merely sit on the sidelines in times of economic difficulty or uncertainty. While we certainly cannot control global economic conditions, government can affect and influence local economic conditions. We believe that the government's budget is a tool that can be used to do so. While we have a legal obligation to operate a balanced budget and while prudent fiscal practices require caution, we also believe that government has a duty, particularly in times of economic downturn, to take steps to stimulate the economy, to boost economic activity and to provide employment.
The decision we took to proceed with a number of major government construction projects including the schools and the new Government Administration Building, is having a huge positive impact on the local economy. These and other government projects are providing significant employment and are pumping millions of dollars in to the local economy each month. This will continue for at least the next 18 months to 2 years. As an example, in the case of the two schools on which construction has started, some 5 small construction companies and 6 subcontractors have been employed by Tom Jones, the general contractor, and some 257 workers are employed.
In light of global conditions, it is imperative that the local economy continues to function and to generate activity and we believe that government must lead by example. I should say, however, that at the same time government is keenly aware that its revenues are bound to be reduced as a result of the global economic environment. We are therefore taking a very careful look at both the capital development programme and at government's recurrent expenditure. This is in relation to not just next year's budget but the current budget as well. In relation to the capital budget there are a number of projects that haven't commenced. We are evaluating which to proceed with, on the basis of both need and their expected positive impact on the local economy. As far as recurrent expenditure is concerned, we are examining what measures can be taken to curtail spending on this front. Let me be very clear that the introduction of new revenue measures is not an option nor is any such move being considered.
While the Cayman economy will have its own challenges ahead in the short to medium term, we have demonstrated more than once our ability as a country and as a people to weather mighty storms, be they natural or economic. I am confident that by tapping into our collective reservoirs of common sense, cooperation and can-do attitude that we can secure the necessary economic resilience and emerge from the current turmoil as we did from Hurricane Ivan, stronger, wiser and better.