Tuesday 22 September, 2020

Dukharan to CI Govt: I would encourage the Government to borrow now

“The government of the Cayman Islands is probably the best placed to weather this COVID-19 storm, compared to the rest of the region.”

These are the words of top regional economist, Marla Dukharan of Cayman’s ability to bounce back from the 15 per cent economic contraction predicted as a fall-out from COVID-19. For most, if not all of us, this would come as no surprise.

Of Cayman’s more than $500 million in government reserves, Dukharan has advised: “Indeed, I would encourage the government to borrow now, and even put these funds aside, to be spent supporting businesses in staying afloat, in particular in meeting their payroll, and in covering the government’s own expenses— payroll in particular. This kind of spending is especially important given the Chamber of Commerce’s study that shows that worst-case scenario, about 14,000 could face retrenchment.”

This advice highlights Cayman’s unique position within the Caribbean region.

Last week, Caribbean heads of state and finance ministers (including Cayman) met virtually with The Executive Secretary of the United Nations' Economic Commission for Latin America and the Caribbean, Alicia Bárcena, to review available measures to alleviate and mitigate the economic impacts of the COVID-19 pandemic.

According to Bárcena, the highly vulnerable state of the region’s economies with extremely high pre-existing levels of debt would make borrowing an unfeasible option in dealing with the current crisis.

The two-year budget that Finance Minister Roy McTaggart presented in November 2019 projected more than $1.6 billion in government revenues without the need for additional debt - but times have drastically changed, and the budget is now largely obsolete.

The Cayman Islands has proven itself highly capable of managing its debt position. Since the current administration came into office, it has undertaken no new borrowings and has lowered its debt to approximately half over a period of five years (from $548 million in June 2014 to $284 million in at the end of 2019).

At the close of 2019, Cayman’s debt to GDP ratio stood at just 6.4%, one of the lowest in the world.

According to Dukharan, Cayman’s counter-cyclical fiscal policy and prudent fiscal stance over the past several years have resulted in the country’s debt being the lowest in the region, and the most highly rated.

Another factor in favour of government borrowing at this time is that interest rates are at an all-time low and hence, the cost of debt for a highly rated sovereign such as Cayman would be relatively negligible.

“Should [Cayman] decide they wish to borrow in order to boost spending to counteract the socio-economic impact of this crisis, I am sure there would be no shortage of lenders/ investors willing to support them. As a matter of fact, their debt is so low that they are on the ascending/left-hand side of their debt sustainability curve, meaning that they will see increasing growth for each additional dollar of debt, until debt reaches about 30% of GDP, within the parameters of Cayman’s Public Management and Finance Law,” advises Dukharan.

Legal restrictions, as per Cayman’s Public Management and Finance Law, curb the amount that Government can borrow, such that interest payments plus repayment of principal in respect of Government's borrowing cannot exceed 10% of Government's revenue and total debt cannot exceed 80% of core government revenues.

It is apparent that based on the government’s existing low debt, the country has a lot of runway to borrow in order to add stimulus to the economy without jeopardizing future growth or its debt rating as opposed to most other tourism sensitive economies in the region which are already highly indebted and hence have no commercial borrowing capacity other than multilateral sources of financing.

Dukharan has advised that this would also be the ideal time for Cayman to begin to diversify its economy, given external pressures on the local financial services sector due to what she refers to as  “the developed world’s unreasonable, unfair, oppressive, and shamelessly hypocritical stance as it relates to tax policy and anti-money laundering policy.”

“The Cayman Islands Government is well aware of the risks of being highly dependent on any one sector, hence the building of buffers to counteract the fallout from a blow to that sector. Beyond this, the strategic shift towards medical tourism and particularly the digital economy, for example, are appropriate and exemplary,” says Dukharan.

Despite a certain decline in government revenue sources, with at least 150 businesses that are reportedly about to downsize or shut down permanently, a loss of around 14,000 jobs and with an economic contraction of at least 15 per cent, Cayman continues to be among the most resilient nations in this hemisphere.

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