Cayman?s Economy Waiting for the Turnaround

Cayman?s Economy Waiting for the Turnaround

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Late in 2009 Cayman’s business community braced itself for a difficult 2010. Many predicted first signs of positive economic growth only for the latter half of the New Year. Twelve months later it appears that, despite some positive signs, this forecast will have to be delayed by another twelve months. The Mood of the Boardroom survey of business leaders in the Cayman Islands shows only a slight improvement in business confidence and the assessment of the economy.

MICHAEL KLEIN

After a massive decline in economic performance in 2009 of 7 per cent, Cayman’s economy still found itself in the midst of a recession in 2010.

In 2009 five key sectors suffered substantial economic declines, including construction (-29.3 per cent), financial and insurance services (-14.4 per cent), wholesale and retail (-11.5 per cent), hotels and restaurants (-10.2 per cent) and transport and storage (-8.1 per cent).

For 2010 estimates are that Cayman’s GDP has shrunk by a further 4.1 per cent.

Stalling and slower than anticipated growth of the US economy during the second half of 2010 may also have impacted the economic performance in the Cayman Islands economy, which is closely linked to the US.

However, the first half of 2010 saw some indications of economic recovery.

Financial services

New company registrations surged by 18.4 per cent in the first six months of 2010, after a massive decline of 33.7 per cent during the same period in 2009.

The number of hedge funds also increased again to 9,594 (third quarter of 2010), overcoming a two and a half year low of 9,378 at the end of the first quarter 2010.

Media reports of an “exodus of funds” relocating from Cayman to Europe and Ireland in particular are “a myth”, according to Cayman Finance and others in the financial services industry. The Cayman Islands Monetary Authority could only confirm a total of four funds that re-domiciled to Europe from Cayman so far.

Tourism

The tourism sector also steadied following a tumultuous 2009. By October 2010 air arrivals had jumped 5.4 per cent and in November the 2010-formed Ministerial Council for Tourism revealed that Cayman Airways flights would be scheduled to link up with Europe-originating services on Virgin Atlantic through Havana, Miami and Jamaica, providing more options for travelers. Also in November West Jet launched a new direct service from Toronto to Cayman.

Hotel occupancy rates increased from 59 to 69.2 per cent on a room stock that remained flat year-on-year. Yet, while this is positive news, it most likely has been achieved on the basis of deeply discounted room rates.

The economic downturn still affected downtown businesses, with Senor Frog’s restaurant and bar closing permanently in May. A weather-impacted cruise season led to 68 lost or diverted cruises. Nevertheless cruise arrivals grew by 2 per cent year on year.

Meanwhile, the outlook for 2011 is a mixed one. New companies Aida of Germany and Happy Cruises of Spain debuted at Cayman toward the end of the year, as did a cruise route originating in Panama, opening up new market opportunities. But it also transpired that the islands will receive 54 fewer calls from Royal Caribbean, Princess Cruises and Celebrity Cruises in 2011. This would constitute a 26 per cent decrease, and a 23 per cent decrease in visitors over the next year.

Construction

In the real estate and construction industry the negative trends of 2009 continued last year with the total value of property transfers falling by 15 per cent and building permits declining by 28 per cent. Residential construction, which largely carried the market in 2009, began to dissipate this year.

The value of apartment construction approvals in the first half of 2010 fell by more than 75 per cent from the year before, dropping from CI$ 100 million in mid-2009 to $ 23.4 million as of June 2010. The total number of project approvals has also fallen steadily over the past several years. Project approvals in the first half of 2007 were 647. In 2008 that number was 617 compared to 483 in 2009 and 436 in the first six months of 2010.

Only the commercial construction category provided a bright spot in an otherwise cloudy picture. “Intentions rebounded from a year ago to $ 79.1 million,” the Half-Year Economic report of the Economics and Statistics Office. “Large projects including the on-going expansion of the Camana Bay development, a national art gallery and a new commercial development accounted for $ 54.8 million (or about three-quarters) of the total project approvals.”

Real estate

The trend of a general economic decline combined with a population falling rapidly by 7.3 per cent in 2009 continued in 2010. As a result demand for rental properties slowed dramatically leading to lower rents and a large number of empty properties on the island. House prices dropped by 15 per cent in 2010 in response to slow demand, but the luxury property market held more firmly.

At the same time the number of property transfers in the first six months of 2010 declined by 13.8 per cent.

GDP

“A modest forecast GDP growth of 0.8 per cent in 2011 will hinge on a firm rebound of the financial services industry particularly in the second half of the year, and stronger growth of tourism arrivals,” concluded the Strategic Policy Statement presented by government on 25 November 2010. “The resulting forecast GDP growth for FY 2010/11 is -1.7 percent,” it said.

Given the uncertainty of this forecast, the Mood of the Boardroom survey of business leaders showed that 37 per cent those surveyed correspondingly believe the economy is recovering or growing, contrasted by 20 per cent stating the economy will still be in recession and 43 per cent declaring it unchanged.

Compared to 2010’s survey the share of business leaders that see Cayman’s economy as growing remains unchanged. Only the share of those expecting a recession in the New Year declined from 51 to 20 per cent. Given the general expectation from one year ago that Cayman would be witnessing first signs of growth at the end of 2010, it appears that this assessment is now delayed by another six to 12 months.

Business confidence

Entering 2011 business confidence in the Cayman Islands is split. While 7 per cent of the survey’s respondents said they are “very confident” with regard to revenue growth of their company, another 43 per cent they were “somewhat confident”. This is a ten per cent improvement in business confidence over last year. However, 17 per cent of all respondents are still “not confident at all” and 30 per cent said they were “not very confident”.

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