2020
Economic Forum

State of the Government Finances

by the Honourable Roy McTaggart, JP

Friday,
14 August 2020

Virtual Event

Welcome

Mr.
Woody Foster, President of the Cayman Islands Chamber of Commerce,
Members of Council, Ladies and Gentlemen, Good Morning! It is my
pleasure to be here with you this morning to provide an update on the
current state of our economy and the Government’s finances.

Just
one year ago, I delivered a similar speech at the 2019 Economic Forum
– which was held at the Kimpton Seafire Resort and Spa. I spoke of
how the Cayman Islands was then enjoying an exceptionally robust
period of economic activity with solid, sustained growth across all
sectors.

I
spoke of low and falling unemployment; low to moderate inflation;
along with strong and stable Government finances – which had
enabled us to invest in infrastructure and improve public services
while generating operational surpluses and decreasing public sector
debt.

This
as a result of a strategy, over two successive governments, of living
within our means, growing surpluses and reserves, and paying down on
debt. As at 30 June 2013 the Islands’ General Reserves stood at
$44.5 million and Operating cash balances were $21.2 million. At 30
June 2020 these had improved significantly with General Reserves of
$104 million and Operating cash balances of $382.7 million. The Debt
balance at 30 June 2013 was $573.9 million and this has decreased
substantially to $266.5 million at 30 June 2020.

Not
only were we as a Government supporting business and economic growth
because of this strategy but we were also putting our Islands in a
better place to survive the next economic down turn.

At
the Forum, we freely interacted and networked in camaraderie over
coffee breaks and lunch.

What
a difference a year makes!

Like
the rest of the world, Cayman is facing the same impacts of COVID-19
– impacts that we never imagined we would ever experience in our
lifetimes.

My
message today is not all doom and gloom. Yes, we are currently
facing severe economic and financial hardships that will require all
of us to dig deep in order to persevere and survive. But because of
the fiscal strategy employed over the past two terms, good reserves
and decreased debt, we are facing the economic impact of this
pandemic in as strong a fiscal position as I could have expected.
This level of economic strength has allowed us the leverage needed to
make certain decisions to better respond to the virus so as to
protect life and health, and then later as we started our phased
programme of recovery.

So
we have started from a place of strength. This is not just Roy
McTaggart saying this but noted economist Marla Dukharan is quoted by
the Compass as saying in April of this year that:

“Only
the countries that have built financial buffers stand ready to spend
money to kickstart the economy during the downturn, particularly at a
time when government revenues are falling.

“In
the Caribbean, the Cayman Islands stands alone in this regard, as
most of the others will end up at least partially financing their
COVID-19 response with debt,”

Whilst
we may likely in time need to access a line of credit to cover
shortfalls in revenue, we are not yet there. But I want to assure
you that the Government is doing all that it can to assist all
citizens, residents and businesses in need.

I
am confident that with the same perseverance and resilience we have
shown many times in the past, this too shall pass and we will weather
through.

I need to pause here for a moment and address a post from an online media site yesterday with a headline entitled COVID-19 Recession could lead to tax. The story was a result of an interview I did on Tuesday with CIGTV. I consider the headline to be unnecessarily alarmist and encourage everyone who is interested to view the 5 minute clip on the CIGTV Youtube channel and hear for themselves what I said. For those who might not get a chance to listen for themselves, here is the bottom line:

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.

My
reference to the word taxation in my interview referred to the
existing indirect tax regime – not direct taxation.

We
entered COVID-19 in the enviable position of having substantial cash
reserves to help our people. Because of the Pandemic and Global
Recession, our revenues are a fraction of what they were this time
last year. Through our responsible fiscal management, we have
reserves. Through our research and partnerships, we are (evaluating
several other options) which we can consider to minimise the negative
impacts on our economy and this 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.
  

This
strategy has successfully served us well and enabled the Cayman
Islands to sustainably grow our economy and meet the ever-increasing
demands for public services and improved infrastructure.

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.

The
current realities of the COVID-19 Pandemic mean that Governments
across the world are severely challenged to meet the fiscal burdens
caused by decreasing revenues; contracting economies; and increasing
demand for public services.

For
us here in the Cayman Islands we are doing everything possible to
ensure that our country and economy can rise above this crisis. We
are committed to living within our means as we meet the needs of our
people.

Pre-COVID-19 Economic Performance

Colleagues,
it would be an understatement to say we have had a turbulent year so
far.

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%.

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.

Economic projections for 2020 and 2021

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.

The
Cayman Islands’ economy is expected to contract by 7.2% in 2020
before recovering partially by 6.4% in 2021. The contraction in
output for 2020 is precipitated by reductions in economic output
associated with recent restrictions and low demand for some of our
services in the coming months. International demand for our services
will be impacted by the continuing closure of our borders and
expected contractions in the US and other advanced economies.

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.

Without
these measures, the projections presented today would be bleaker, and
we need not look far across the sea to appreciate what could have
been.

In
its June 2020 update, the IMF projected the US economy to contract by
8.0% for the year. It is worthwhile to note that this was before the
US recorded its highest annualised quarterly contraction on record of
32.9% for the June 2020 quarter, and before the recent spike in
COVD-19 infections and public utterances of new lockdown measures.

These
developments have the potential to stifle our recovery further if the
trend persists and the US enters another extended lockdown period.

The
measures and actions implemented by Government at the start of, and
during, the crisis, with the support of the business community, have
left us with a solid foundation on which to chart our future. The
collaboration by Government and the private sector to develop
world-class infrastructure and regulatory framework prior to the
crisis has allowed our financial and business services sector to
remain on a sound footing throughout the crisis and reduced the
potential fallout.

Additionally,
the actions taken by this Administration to contain the spread of the
virus and support the basic needs of our people has left us in an
arguably COVID free environment with no significant healthcare
dislocation and relatively stable socio-economic conditions.

As
a Government, we are prepared to go even further to support our local
economic infrastructure, and I hope this Forum will be a platform to
develop new ideas and collaboration for “Rebuilding a stronger and
more diverse economy.”

Growth by Industry

The
contraction in 2020 is expected to span across a lot of key sectors.

Despite
a relatively robust performance in the first two months of the year
(which now seems like a decade ago) the hotels
and restaurant
sector is expected to bear the brunt of the crisis, reflecting a
contraction of 74.6%. This reflects a reduction in the sector's
capacity, resulting from the closing of our borders and the fallout
in our major tourist markets. The reopening and subsequent rebuilding
of this segment of our economy is a very crucial component of our
recovery, and I look forward to the discussions on this topic in the
panel discussion later.

The transport, storage and communication sector is projected to contract by 14.7%, as the decline in transport outweighs a moderate growth in communication. The sector is projected to suffer the second-largest decline for the year.

The financing and insurance sector is projected to decline by 3.8% for the year. The sector showed its resilience in the short term as the industry was able to get employees to work relatively well remotely. Additionally, with the sector’s high leverage of online platforms, it was able to offer most services virtually.

The business services sector, which is comprised mainly of legal and accounting services, was also relatively unimpeded by restrictions but is expected to be impacted by the general fallout in domestic and international demand in the latter part of the year. Consequently, the sector is anticipated to fall by 1.7% for the year.

Notably,
there is a considerable downside risk to the forecast in both the
legal and accounting components of this sector. Economic activities
could be impacted by uncertainties in international financial markets
going forward.

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.

Notwithstanding
the contractions in most economic sectors, additional spending by the
Government on health and other essential services is expected to
boost economic activity in health and social services and other
Government services. Additionally, with more individuals working
remotely and resumed office activities, consumption of electricity
and water is expected to remain robust for the year.

Employment

The
unemployment rate in 2020 is forecasted at 6.9% of the labour force,
due to a fall-off in demand from the labour-intensive tourism sector
among others. Additionally, the closure and consolidation of some
industries is expected to contribute to higher unemployment levels.
The demand for labour is expected to track the GDP growth forecasts
with a decline in employment opportunities expected in the industries
primarily affected. Over the medium-term, new employment is expected
from the recovery of labour-intensive industries such as tourism. The
unemployment rate in 2021 is projected at 5.1%.

Sustaining
the local economy, in the short-term will require spending by our
local population. The success of the country to eliminate Covid 19
has enabled a good recovery of the domestic economy and this is
helping greatly. Thousands of persons have left our Islands since
March and admittedly the loss of the spend from these individuals
will have a negative impact on the economy. But as businesses are
re-emerging from the shutdown, and start to rebuild, the Government
is insisting that the re-employment of Caymanians must come first.

This will help move unemployed Caymanians back into jobs and facilitate the circulation of funds locally. We hope that the local business community will also see the value in this and support our Administration’s effort to ensure the employment of our citizens and residents.

Inflation

The
contraction in demand locally and internationally has reduced
pressures on both imported and local inflation. Consequently, the
consumer price index (CPI) inflation rate is forecasted at 0.4% in
2020, lower than the high of 5.7% observed in 2019. Falling
international commodity prices are expected to support stability in
the consumer basket and relieve most inflationary concerns from
policy decisions in the near term. Inflation
in 2021 is projected at 1.6%.

Financial Performance and Position of the Government

The
impact of COVID-19, along with the Government’s response to ensure
the health
and safety of the people of the Cayman Islands and to stimulate the
local economy, has had a significant impact on the Government’s
financial performance and position.

Operating Revenue

By
the end of the first quarter of 2020, Core Government’s Operating
Revenues were performing marginally better than the year to date
budget, by 0.3%. The Government saw positive variances in Building
and Permit Fees, Partnership Fees and Stamp Duty on Land Transfers. –
which, when combined, were $7.0 million more than the 1st
Quarter’s budget.

However,
there were significant negative variances in revenue primarily due
to:

• Other
  Exempt Company Fees – which were $3.4 million lower than budget;
  
• Security
  Investment Business Licences – which were $1.7 million lower than
  budget; and
  
• as
  expected, Tourist Accommodation Charges – which were $4.8 million
  lower than budget.
  

Three
months later, by the end of the second quarter of 2020, Operating
Revenues had deteriorated by $62.6 million or 12% lower than the year
to date budget.

Although
Partnership Fees and Stamp Duty on Land Transfers continued to
perform better than budget, by a combined $8.3 million, the impact of
COVID-19 on the economy and on Operating Revenues began reflect in:

• Tourist
  Accommodation Charges – which were down by $14.8 million;
  
• Work
  Permit Fees – down by $18.5 million;
  
• Mutual
  Fund Administrators Fees – down by $7.2 million;
  
• Other
  Import Duty – down by $13.5 million;
  
• Annual
  Permanent Resident Work Permit Fees – down by $3.5 million; and
  
• Gasoline
  and Diesel Duty – which was down by $3.8 million.
  

When
compared to the same six-month period in 2019, Core Government’s
Operating Revenues are lower by $76.7 million.

The
Government forecasts that by the end of 2020, Operating Revenues will
be at $682.1 million – which is $142.9 million or 17.3% lower than
budget.

Operating and Financing Expenditures

For
the six-month period ended 30 June 2020, Core Government’s
Operating and Financing Expenses were $5.4 million or 1.4% lower than
the year-to-date budget of $384.0 million.

This
favourable variance was mainly due to savings in Personnel Costs,
Supplies and Consumables, and Transfer Payments. The Government
forecasts that by the end of 2020, Operating and Financing Expenses
will be $855.3 million – which is $95.6 million or 12.6% higher
than budget!

A significant portion of the
$95.6 million increase in expenses can be attributed to the series of
economic stimulus measures and costs that the Government has
implemented and plans to implement to help mitigate economic hardship
on vulnerable people and to support the economy. These measures and
costs include:

1. Supporting
   a wide-range
   of healthcare activities
   and other COVID-related costs including:
   
2. the
   purchase of test kits;
   
3. the
   cost of testing;
   
4. personal
   protective equipment, medical supplies and equipment including
   equipping Jasmine (formerly Hospice Care) with a generator so that
   the premises could be used to treat Covid patients if necessary;
   
5. the
   cost of quarantine facilities and social distancing;
   
6. repatriation
   flights;
   
7. cleaning
   products, including hand sanitizers;
   
8. public
   awareness campaigns;
   
9. costs
   associated with moving Core Government staff to remote working, such
   as costs of laptops, phones and other IT equipment;
   
10. rental
    of equipment and vehicles; and
    
11. fuel.
    
12. Funding for vulnerable individuals and families which include:
13. A
    one-off payment of $425 to the disabled, seamen, veterans and
    persons already receiving personal financial assistance from the
    Government;
    
14. A
    one-off stipend of $600 paid to taxi drivers affected by the
    fall-off of cruise ship visitors;
    
    
15. A
    one-time grant of $600 to Caymanian tourism workers affected by
    the shut-down;
    
16. Additional
    monthly support of $1,000 for 3 months for tourism workers;
    
17. Providing
    $1.0 million to assist farmers to buy feed and other supplies;
    
18. Providing
    $2.0 million to expatriate work permit holders in the form of food
    vouchers; and
    
19. Paying
    the health insurance premiums for April to June 2020 for
    individuals who had been furloughed.
    
20. Supporting
    education
    expenditure and activities
    in the form of:
    
21. online
    distance learning, including cost of learning packs and the online
    learning platform;
    
22. free
    school meals;
    
23. grants
    to pre-schools; and
    
24. outsourced
    services for schools, including security, cleaning and school buses.
    
25. Supporting
    public
    sector personnel costs
    in the form of:
    
26. overtime
    payments to Core Government staff, such as Police Officers and
    Customs and Border Control Officers while maintaining security and
    compliance with curfews and, overtime payments to healthcare staff;
    and
    
27. additional
    costs incurred for essential Core Government staff, such as meals
    and refreshments; and honorarium payments for staff.
    
28. Amending
    the Pensions Law toallowpersons
    to withdraw up to 100 percent of their pension funds not exceeding
    $10,000, and 25 percent of funds above $10,000. In addition,
    pension payments were suspended from 1st April to 30th September
    2020, for employees and employers;
    
29. Supporting
    businesses by:
    
30. creatinga$5.0
    million low-cost loan facility to be provided through the Cayman
    Islands Development Bank, to businesses that are 100 % Caymanian
    owned;
    
    
31. providing
    $9.0 million in grants to small and micro businesses; and
    
32. providing
    funding of $500,000 for technical assistance and $200,000 for
    training for Caymanian-owned businesses.
    
33. Waiving
    tourism accommodation taxes and trade and business licence fees
    in the short-term; and
    
34. Enhancing
    the capacity oftheNeeds
    Assessment Unit and the Planning Department to deal with the
    increased demand for services.
    

Operating Surplus

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.

The
Government forecasts 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.

Bank Balances

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.

This
major positive variance is attributable to higher opening cash
balances for 2020 than budgeted by $86.1 million, lower year to date
capital outlays than budgeted by $74.0 million and higher than
budgeted year to date operating cash inflows of $37.5 million.

To
avoid the depletion of all of our cash reserves and to assist with
meeting our financial obligations over the next 2 years, the
Government made to decision to seek a loan of CI$500 million or
US$609.7 million.

The
Ministry of Finance has received one syndicated bid from five local
banks to its Request for Proposal.

In
compliance with procurement legislation, the Ministry of Finance’s
Entity Procurement Committee will evaluate the bid and the external
Public Procurement Committee will also assess the bid. By late
August or early September, the Government will be able to announce
whether the bid, along with the terms of the loan, will be accepted.
Therefore, at present, the offered facility has not yet been used by
Government.

If
the bid is accepted, the Government does not intend to immediately
draw down on the entire amount of the loan. The Government intends
to only draw down on the loan 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!

Debt Balances

At
30 June 2020, debt balances stood at the year to date Budget of
$266.5 million.

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.

Compliance with Principles of Responsible Financial Management

For
the 2020 financial year, the Government will not comply with all of
the Principles of Responsible Financial Management (the Principles):

1. The
   Government is forecast to have an Operating Deficit of $173.2
   million – the Government is required to maintain an Operating
   Surplus; and
   
2. the
   Government will only have 47 days of Cash Reserves to cover
   Operating Expenditures ‒ which is less than the minimum 90-day
   legal threshold. The Government believes that, although it will
   have access to several hundred million dollars of loan funds, it
   does not make fiscal sense to draw down on the loan and incur
   interest costs, just to satisfy this Principle.
   

The
Government will be in full compliance with the:

1. Net
   Worth ratio - as net worth is forecast to be positive at $1.4
   billion;
   
2. The
   Government’s Debt Servicing Cost - which includes both interest
   and principal payments - is forecast to be 9.8 % – which is within
   the 10% threshold; and
   
3. Net
   Debt – the ratio between Government’s bank balances and total
   debt - will be 42.2 % - which is less than the maximum 80%
   threshold.
   

As
a result of breaching compliance with the Principles, as required by
the Public Management and Finance Law, the Government is now required
to get written approval from the Foreign and Commonwealth Office
before:

1. the
   Strategic Policy Statement is finalised;
   
2. any
   public borrowing or any refinancing of public borrowing is
   undertaken;
   
3. proceeding
   with any project with a lifetime value of more than $10 million;
   
4. using
   public assets as collateral as part of any arrangement with a party
   external to the Government;
   
5. the
   hypothecation of any revenue stream; or
   
6. the
   divestment of public assets.
   
   

My
Ministry has had preliminary discussions with the FCO and no specific
issues have been raised as a result of this non-compliance.

The
maximum amount of time that the Government has to become fully
compliant with the Principles is three (3) years. The Ministry of
Finance is commencing the exercise of developing a plan for the
Government to become fully compliant.

Conclusion

In
2004, we weathered through the vast destruction and devastation of
hurricane Ivan. In 2008, we were pummelled by hurricane Paloma and
somewhere in the midst of recovery we were again hit by the 2009
global recession and the aftermath which that brought.

Just
as we survived those life changing occurrences, we will survive
COVID-19.

The
early decisions and actions that the Government took to mitigate the
potentially deadly impact of the pandemic on the lives, health and
well-being of its citizens and residents, were priceless.

Today
we can celebrate, with some caution, that the Cayman Islands are
COVID-19 free!

Colleagues,
amidst the hardest times the strongest bonds are formed, and this
crisis has been no different. The resilience and cooperation of
businesses and citizens over the past few months has been astounding,
our ability to come together and effectively rid these Islands of the
COVID 19 virus while others struggle is something to be proud of. I
am extremely proud to be a servant of the amazing people of these
Islands.

But
alas, our efforts must continue lest we undermine the hard work and
sacrifice of our past. I am immensely proud of the fiscal strategies
implemented and adhered to by this and the previous Administrations
that I have had the pleasure to be a part of.

The
wisdom of our three pronged fiscal strategy of:

• no
  new taxes;
  
• 
  paying down debt; and,
  
• 
  budgeting for significant
  surpluses each year, has allowed us to build significant reserves
  and prepare the country for the inevitable economic downturn that
  would come. I am the first to acknowledge that we could not
  anticipate that it would manifest itself in such a violent way! Were
  it not for this wisdom and foresight, we would be experiencing a
  world of hurt right now. We stayed the course and kept our promises.
  With the significant reserves in the treasury, we are, and continue
  to be, well placed and well prepared to face the fiscal challenges
  that were wrought upon us by Covid19. Today, I pledge to you that we
  remain committed to exercising prudent and responsible financial
  management to improve both the physical and institutional
  infrastructure necessary to manage the Covid19 crisis and facilitate
  economic recovery in a sustainable and appropriate manner.
  

However,
despite our efforts and commitment, we cannot rebuild a better Cayman
without the collaboration and leadership of the Private Sector. The
private sector has always been the catalyst of our economic
performance, and overcoming the current crisis will rely heavily on
the private sector. I underscored at the last meeting that the
collaboration between our Government and the private sector was at
the heart of our recent success. In the same breath, I firmly believe
that our continued partnership is critical to navigate the current
climate and rebuild a better Cayman. I look forward to working even
more closely with President Foster, the Chamber Council and the wider
business community, as we partner to achieve a better Cayman.

Thank you and maybe next year we will be enjoying ourselves down at the Kimpton again.