Quarterly Review

Economy
Growth slowed in 2013

The Cayman Islands economy grew for the third consecutive year in 2013, but fell short of government’s expectation until the third quarter of last year.
The 1.2 percent gross domestic product growth at constant prices was less than the expected expansion of 1.5 percent for the year and slightly lower than the 1.4 percent recorded for 2012. In 2011, the economy had returned to growth (0.9 percent) after three recessionary years.

In particular, strong demand for stay-over tourism-related services and financial and insurance services led the growth in economic activity during the year. Domestic demand for transport, storage and communication services was also robust.
Tourism services such as hotels and restaurants showed the strongest growth (6.6 percent), buoyed by 7.4 percent more stay-over visitors last year.

Financing and insurance services, which make up nearly half of the economy, were estimated to have expanded by 1.7 percent. Value added from insurance services increased at a record pace of 7.5 percent as growth in gross premiums outweighed net claims, according to the Economics and Statistics Office’s annual economic report. Financing services, in turn, remained subdued (0.1 percent) due to the continuing softness of external markets, the ESO report said.

The transportation, storage and communication sectors (2.4 percent) were also bolstered by stronger stay-over tourism, as well as a higher volume of cargo transportation.
Growth in broadband connections and investments into the island’s fiber optics networks caused a slight expansion of the telecommunications sector.
Real estate, renting and business activities increased by 1.3 percent, as a result of higher registrations of companies and property transfers.

The annual economic report estimates that other sectors suffered setbacks. Volume indicators for the construction industry, such as the total quantity of imported cement, indicate that they contributed less to the economy. In line with the reduction of government spending, the output from government services also declined by 1.5 percent.

Inflation up 2.2 percent in 2013

The average inflation rate for 2013 was recorded at 2.2 percent, based on the Consumer Price Index surveys produced by the Economics and Statistics Office last year.

“This is the highest yearly inflation rate since 2008,” Finance Minister Marco Archer said. “It shows the impact of higher international prices for some goods such as household equipment, clothing and footwear, as well as the result of policies that affected the prices of tobacco products and health insurance.”


Ten of the 12 divisions of goods and services comprising the CPI posted price increases, led by alcoholic beverages and tobacco (9.8 percent), miscellaneous goods and services (8.5 percent) driven mainly by a 13.8 percent increase for insurance, household equipment (6.1 percent) and clothing and footwear (4.8 percent).

Education and food prices also rose by 4.6 percent and 3.2 percent, respectively. However, a reduction in the prices for housing and utilities (-1.4 percent), comprised of rental and energy costs, tempered overall price growth, given their relative weight in the basket of goods and services surveyed by the Consumer Price Index.

More Caymanians in jobs but unemployed overall increased

The number of employed Caymanians grew by 6.1 percent last year despite a shrinking labor force. While the unemployment rate in the Cayman Islands increased from 6.1 percent to 6.3 percent in 2013, due to a rise in unemployment among non-Caymanians, unemployment among Caymanians declined by more than 100 job seekers to an estimated 9.4 percent, according to the latest Labor Force Survey of the Economics and Statistics Office.

In 2012, the unemployment rate for Caymanians was 1.1 percentage points higher at 10.5 percent.

Minister of Employment Tara Rivers said, “The significant drop in the unemployment rate among Caymanians is a positive and encouraging sign.” She ascribed part of the positive development to a more active role of the National Workforce Development Agency.

Since taking office in May 2013, the ministry invested a lot of time and energy into revamping and properly equipping the NWDA to facilitate the training, development and employment of Caymanians, Rivers noted. 

“The fact that one in four unemployed Caymanians use the services of the NWDA is an indication that the agency is playing a vital role, but there is still work to be done to raise the profile of the agency in this regard,” she said.

The number of unemployed Caymanians declined from 1,925 to 1,817. However, the number of non-Caymanian job seekers increased by nearly the same amount from 485 to 596. 

Meanwhile, Cayman’s labor force, the number of people at working age who either are in employment or looking for work, dropped to 38,483 in 2013 down from 38,811 a year earlier. This was based on 1,228 fewer expatriate workers and 899 more Caymanians participating in the labor market.
While there was thus no significant change in the number of unemployed overall, the shrinking labor force caused the unemployment rate to rise slightly. Unemployment is highest among the under-24-year old job seekers (24.2 percent) and the over-65-year-old job seekers (13.3 percent).
About 2.6 percent of Caymanian survey respondents said they are underemployed, meaning they have part-time work but cannot find full-time employment. Underemployment is lower among expatriates (0.7 percent).

The number of employed Caymanians increased by 1,008 in 2013. This figure consists of about 100 fewer unemployed Caymanians, new entrants into the labor force, such as school leavers and Caymanians who had not been looking for a job in Cayman in 2012, as well as Caymanian status holders who were previously classified as non-Caymanian.

Government finances
Government passes budget

Legislators passed a budget that included $872.6 million in public sector revenue and $744 million in public sector expenditure.

Targeted tax cut measures proposed in the 2014/15 spending plan by Premier Alden McLaughlin’s Progressives-led government include a reduction of import duties on diesel fuel supplied to Caribbean Utilities Company. The duty cut would take the rate from 75 cents per imperial gallon to 50 cents per imperial gallon. That reduction is set to occur in January 2015.

The average customer was expected to see a 4.3 percent reduction on monthly power bills from that rate cut, assuming fuel prices stay at roughly current levels, Finance Minister Archer said. The fuel duty reduction will cost government $8.4 million annually in revenues.
The government also seeks to reduce import duties to “licensed traders” from 22 percent to 20 percent on “most items offered for retail sale,” again with the assumption that prices of consumer goods would be cut. The rate cut is to take effect in August, but not all retailers have pledged to cut their prices because of the reduction.

A third proposal includes reduction of small business licensing fees on a sliding scale, depending on their location in the islands.

Government civil servants received a one-off gratuity payment equal to 2.5 percent of annual salary at the end of June. The number of people working for the Cayman Islands public sector is set to increase by more than 100 full-time equivalent employees.
Government spends most of its money on personnel costs. In the upcoming 2014/15 budget plan, which runs from July 1, 2014 to June 30, 2015, civil service salaries, healthcare and pension spending were increased by $7.4 million to $241.7 million.
Statutory authorities and government-owned companies are budgeted to receive government support of $94.1 million in the 2014/15, about $6.6 million less than this year. Supplies and consumables come in at $87.7 million.

Financing expenses make up $28.5 million in the spending plan, some $2.1 million less than what was spent in the current year.

In addition to continuous government support, government also plans to spend about $20 million to pay off various debts and operational losses from certain public sector companies, including the Cayman Turtle Farm ($9.5 million), Cayman Airways ($4.85 million), the National Housing Development Trust ($2.4 million) and the Cayman Islands Development Bank ($1.5 million).

Regulation
UK delegation promotes beneficial ownership registry

A U.K. government delegation visited the Cayman Islands in June to promote the virtues of a public central register of beneficial owners of companies and other entities.

Wayne Panton, minister for financial services, told the Finance Committee of the Legislative Assembly that a team from the U.K., which included representatives of the Treasury, customs, the Metropolitan Police and a government advisory group, spent three days in Cayman to meet with the ministry, members of the private sector, the attorney general’s office’s anti-money laundering unit and the Cayman Islands Monetary Authority.

“The net result was that they gained a much better understanding of the issues that are relevant to Cayman and the concerns that we have,” Mr. Panton said. “The purpose was not to resolve issues but to communicate perspectives,” he added.
However, Mr. Panton confirmed that the delegation had come with the clear agenda of promoting the British prime minister’s vision of the importance of a centralized register.

Late last year, Prime Minister David Cameron announced plans to create a publicly accessible central registry of information on beneficial ownership in the U.K. and called on other countries to follow suit. However, Overseas Territories Minister Mark Simmonds said during a visit to the Cayman Islands last year that such a move would ultimately be a local decision.

In the Cayman Islands, the Chamber of Commerce and the Law Society have rejected the U.K. proposal of making beneficial owners of Cayman entities public, citing legitimate privacy rights and a lack of universal application as the main hurdles.
The Law Society noted in a detailed analysis of the issue that Cayman is already compliant with international tax and financial information reporting standards.

Minister Panton reiterated Cayman’s commitment to adhere to international standards, provided there is a “level playing field.” But so far there is no international consensus on the matter.

Directors Registration and Licensing Law

The Directors Registration and Licensing Law, 2014, is now in force following Cabinet approving the final regulations and the publication of the law in the Cayman Islands Gazette.

The law requires Cayman Islands-based and non-resident directors of entities regulated under the Mutual Funds Law and certain “excluded persons” under the Securities Investment Business Law to be either registered or licensed with the Cayman Islands Monetary Authority.

Individuals appointed as directors for fewer than 20 covered entities had to be registered within three months of June 4, 2014. Professional directors who are appointed as directors for 20 or more entities, as well as corporate directors, had to be licensed within six months of June 4.

The registration process has to be carried out through CIMA’s web portal. Non-professional directors have to provide their name, date and place of birth, nationality, principal and postal address, email address and telephone number, any criminal record involving fraud or dishonesty, and whether they are subject to an adverse finding, financial penalty, sanction, disciplinary action or proceeding by a regulator or professional body.

Professional directors have to file in addition a completed personal questionnaire, which is available on CIMA’s website, three reference letters, including at least one from a bank, and a recent police clearance certificate.

However, the database of registered and licensed directors will not be available to the public. A search of the database will reveal only the name of the director, registration or license number and registration or licensing date.

Non-professional directors are subject to an application fee of US$171 and an annual fee of US$854. Professional directors have to pay an application fee of US$610 and a fee of US$3,659 on their application, followed each year by a fee of US$3,049. Annual fees are payable on or before Jan. 15.

Nearly 20 percent of FATCA-reporting institutions worldwide from Cayman

Foreign financial institutions that are subject to the Foreign Account Tax Compliance Act have to register with the IRS via a FATCA portal and obtain a Global Intermediary Identification Number.

A list of financial institutions registered with the IRS, released on July 1, shows that 17,207 financial institutions from Cayman had registered by June 26, a figure representing nearly 20 percent of all FATCA reporting institutions worldwide. A total of 87,992 institutions globally had registered with the IRS by June.

FATCA came into force in July. Financial institutions will start reporting 2014 U.S. taxpayer data by March 31, 2015, if they are based in jurisdictions where no intergovernmental agreements (IGA) applies or where an IGA enables a direct reporting to the Internal Revenue Services (Model 2). Foreign financial institutions in jurisdictions with a Model 1 intergovernmental agreement will begin to report bank account, as well as debt and equity interests of U.S. taxpayers by Sept. 30, 2015, to their own government, which will collect and pass on the records to the U.S. government.

Financial services
Cayman main player in offshore M&As

The majority of offshore mergers and acquisitions once again involved Cayman Islands, registered entities in the first quarter of 2014, accounting for about a third of the volume and value of the deals.

Cayman was the venue of 164 transactions with a cumulative value of US$20.7 billion, according to a report by law and fiduciary firm Appleby.

The total deal value across all offshore jurisdictions increased significantly by 79 percent during the period compared to the first quarter of 2013, the latest edition of Offshore-I found.

“First quarter deal value across jurisdictions was the highest it’s been since the end of 2012 and represents the fifth consecutive three-month period in which offshore M&A deal values have increased,” said Simon Raftopoulos, a Cayman-based partner and member of the firm’s corporate finance and insurance teams. “There were 15 deals worth more than US$1 billion in the quarter, which is the highest number we have seen, and the top five deals, two of which occurred in Cayman, were each worth in excess of US$2 billion.”

In the first quarter of this year, Cayman deals were valued $2 billion higher in total than those completed in the previous three months, despite 30 fewer deals than last quarter. When compared to the first quarter of 2013, the number of transactions involving Cayman increased 19 percent and total deal value was 66 percent higher.

Despite the drop in transactions, Cayman remained well ahead of its nearest offshore comparators by volume of deals, including BVI, which had 107 deals, and Bermuda, which announced 96 deals during the period.
In total, there were 572 offshore deals in the first quarter, down from the previous quarter but busier than the first quarter of 2013, which saw 528 deals.

Total deal value, in turn, was up 14 percent at $62.9 billion on the previous quarter, producing the fifth quarter of cumulative deal value growth.

This quarter’s average deal size of $110 million was the highest in the past seven years, with the exception of the anomalous final quarter of 2012, when a single $56 billion transaction caused average deal values to spike.

The growth in average deal size is the clearest sign yet of a new depth to the market, as investors become ever-more willing to put money to work on larger transactions, the report said.

CLO deals grow significantly in first half of 2014

The total value of U.S.-based collateralized loan obligations in the first six months of this year increased by US$22 billion over the total for the second half of 2013, according to law and fiduciary firm Appleby.
Collateralized loan obligations securitize assets, typically leveraged loans, by pooling them together and paying out the income and principal payments from the pool to investors. Unlike mutual funds investors, who all take the same risk, CLO investors buy tranches of a transaction with specific seniority and payout structures and thus different degrees of risk.

CLOs have made a comeback after the financial crisis as they offer investors the opportunity to access leveraged loans at comparatively attractive yields with the added benefit of diversification and the ability to select customized risk profiles.

The 119 deals priced in the first half of 2013 represented a total value of US$63.2 billion, signaling that the market is thriving, Appleby said. The vast majority of deals are structured in the Cayman Islands.

“The first half of 2014 not only marked the biggest dollar amount in terms of CLOs priced since the market started picking up in 2010, but the average deal size is well above previous six month periods in recent years,” said Julian Black, Cayman-based partner and global head of Structured Finance at Appleby.

“Investors continue to recognize that CLOs are unlike ABS CDOs in that they are diversified, have strong performance history and a reassuring level of transparency and oversight by third parties,” he added.

Appleby’s latest CLO Insider report shows that at US$531 million, the average deal size was 14 percent higher compared to the second half of 2013 and up 12 percent when compared to the average of the full year 2013.

Meanwhile, total value of CLOs priced in the first half of the year was 53 percent higher than in the final six months of last year. Appleby expects that trend to continue.

“We see robust issuance for CLOs going forward; the market is flourishing and our pipeline is well-fueled to the end of 2014 and beyond,” said George Bashforth, head of Directorship Services, Appleby Trust (Cayman) Ltd. “Our CLO forecast remains strong, and we expect the full year to round-out at between the US$100 to US$120 billion range.”

Last year, there were 182 CLO deals for a total value of $86 billion, surpassing the total issuance for 2012 by $35 billion.

 

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Michael Klein

Michael Klein Editor Pinnacle Media Group Ltd.
PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands

T: 345-326-1720C: 345-815-0064
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Michael is a
financial journalist and copywriter.  In
the past he has been responsible for the Risk Management and Corporate Finance
sections of a British monthly Corporate Treasury publication.  He has
written various financial handbooks, notably on European Banking and Cash
Management and the Debt Capital Markets.  
In addition he has
worked as a copywriter for banks and investment funds and served as corporate
communications consultant to US and European blue chip companies.  
Michael holds an MA
in Political Science and International Law from the University of Bonn in
Germany. 

Pinnacle Media Ltd

Cayman Financial Review is the only magazine which promotes the Cayman Islands financial services industry at a local and international level. Produced by Cayman’s leading printing and publishing company Pinnacle Media Ltd, the Cayman Financial Review is published quarterly and is distributed in print and online to organisations and associations worldwide as well as at key financial conferences.

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