Quarterly Review

Economy

Cayman’s economy expanded 1.5 percent in first quarter

The Cayman Islands gross domestic product expanded in the first quarter, boosted by significant growth of more than 4 percent in tourism-related sectors, including hotels and restaurants, transport and retail.

The annualized growth rate of 1.5 percent in the first quarter of 2014 compared to a decline of 0.6 percent during the same period last year.

Government expects a continuously growing economy for the rest of the year, with a projected GDP growth of 1.9 percent. This forecast would be considerably higher than the economic performance of the past three years which, after a three-year recession, reached just 0.9 percent in 2011, 1.4 percent in 2012 and 1.2 percent in 2013.

The Economics and Statistics Office report on the first quarter economic performance shows a positive development in real estate, renting and business services, construction activities, and agriculture and fishing.

However, the strengthening tourism sector, with growing air arrivals (5.2 percent) and recovering cruise arrivals (2 percent), was the most important factor driving the economy in the first quarter.

In contrast, finance and insurance and government services declined by 1.3 percent and 1.4 percent, respectively. In the financial industry, the number of banks and trust companies continued to drop (-4.5 percent) and listings on the Cayman Islands stock exchange were also down 12.1 percent compared to the same period in 2013. This was offset by a larger number of registered funds (2.5 percent), in particular master funds, a surge in new company registrations (20.3 percent) and a small increase in the number of class B insurers (2.6 percent).

The projected economic expansion for the year will rely mainly on the recovery of the financing and insurance sector and the sustained growth of construction and tourism, the ESO said.  

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Wayne Panton

Fiscal surplus

The positive economic performance in the first three months of the year also helped improve government finances. 

The fiscal surplus increased from $131.8 million in the first quarter of 2013 to $149.4 million this year, resulting from both higher revenue (4.5 percent) and a decline in total expenditure (-2.4 percent). Despite a 2.9 percent drop in total work permits, revenue from work permit and residency fees increased 15.3 percent. Revenue from financial services licenses jumped 13.1 percent.

Lower personnel costs and subsidies were the main factors causing the decline in government’s current spending. The central government’s total outstanding debt fell to $558.3 million at the end of March 2014, down from $582.6 million a year earlier.

Regulations

FCA withdraws ‘high risk’ country list

The Financial Conduct Authority, the U.K.’s financial regulator, has pulled a controversial list of countries that the organization considers high risk for money laundering and financial crime.

The Cayman Islands government and financial services association Cayman Finance had criticized Cayman’s inclusion and the lack of transparency around the methodology used to draw up the list.

The Cayman Islands government said the FCA confirmed that the information has been removed from its website and there are no plans to publish a similar directory of risky countries in the future.

The previously unpublished list of 95 countries was released by the U.K. regulator on its website on July 18 after it had entered the public domain following a freedom of information request in early July.

The Cayman Islands was the only overseas territory and the only major offshore financial center regarded as “high risk” for financial crime by the financial watchdog.

In August, the Cayman Islands government questioned the motive for putting Cayman on the list, given the acknowledgements of the robustness of its regime by other international bodies.

Minister of Financial Services Wayne Panton wrote to the FCA saying he was “astounded” to find Cayman on the list, despite its international compliance track record and high ranking in the assessment by the OECD’s 2013 Global Forum on Transparency and Exchange of Information for Tax Purposes, which put Cayman on par with the U.K. and higher than most G8 countries.

Although the list has now been withdrawn, Panton said, questions regarding the methodology used by the FCA remain. The Cayman Islands Monetary Authority will continue the dialogue with FCA officials to ensure they are accurately informed about Cayman’s regime, he added.

The FCA has committed to a full review of the methodology.

The publication of the list had reputational and practical implications as it is used by the FCA to evaluate regulated financial firms’ anti-money laundering compliance, especially during onsite visits by the regulators’ financial crime team, which focuses on a firm’s business relationships with high-risk countries.

Financial institutions in the U.K. are required to develop their own country risk categories based on publicly available information as part of their anti-money laundering regime. After learning of the FCA’s internal high risk country list, financial companies called for its publication to be better prepared in their anti-money laundering efforts.

The release of the FCA list may have caused U.K. financial firms to up their country rating of the Cayman Islands to high risk for anti-money laundering purposes.

Financial services

Offshore deals peak in second quarter

Boosted by the initial public offering of Alibaba group, mergers, acquisitions and IPOs involving companies based in offshore financial centers reached the second highest value in the past decade during the second quarter of 2014.

The 632 deals announced during the period amounted to a combined transaction value of US$80.9 billion, an increase of 23 percent over the first quarter. While the number of transactions was about the same as the 642 transactions in the first quarter of the year, the second quarter average deal size of $128 million was the highest in the past 10 years, with the exception of January 2012 when a single $56 billion transaction resulted in an unusual spike. 

Law firm Appleby, which collects the data from various offshore financial centers in its quarterly Offshore-I report, said the planned $20 billion IPO of Cayman-registered e-commerce company Alibaba Group was the main contributor to the increase. However, three deals worth more than $2 billion would have pushed the second quarter transaction values beyond all of 2013’s quarterly results even without the Alibaba listing.

The Cayman Islands remained the top target destination for offshore dealmaking, with 205 deals at a cumulative value of $40.6 billion, which represents 32 percent of the total volume and about half of the value spent on offshore companies.

Four of the quarter’s top 10 deals involved Cayman targets, including the largest: the planned IPO of  Alibaba.

In terms of deal volume, Cayman attracted nearly twice as many transactions as its nearest comparator, the report found. The British Virgin Islands followed with 112 deals, and Hong Kong recorded 100 deals. By value, Cayman outdistanced second-place Hong Kong, which reported a cumulative deal value of US$14.5 billion, while BVI followed with US$10.7 billion.

Offshore incorporations grow

Despite the political and media pressure on offshore financial centers, new incorporations of offshore companies worldwide continue to grow. 

“On the Register”, a biannual report on offshore company incorporations by law and fiduciary firm Appleby, shows that new company registrations increased in most offshore jurisdictions in the second half of 2013. 

New company registrations were up in most jurisdictions during the second half of 2013, with increases of between 5 percent and 10 percent. Overall, there was a slight decrease in the combined total number of offshore incorporations due to a decline in incorporations in the British Virgin Islands, the offshore jurisdiction that attracts the most company registrations.

In total, there were 44,615 new offshore company registrations in the second half of 2013, and the number of active companies increased by 1 percent to 671,000. Since the pre-recession period in 2008, the total number of active offshore companies has grown by 5 percent.

In the Cayman Islands, the number of new incorporations increased 5 percent last year, with the 9,433 new companies representing about 10 percent of the total registered companies.

The total number of active companies registered in the Cayman Islands of 95,530 in 2013 exceeded the jurisdiction’s 2008 pre-recession peak. The positive trend for incorporations in the Cayman Islands continued in the first six months of this year. According to statistics released by the Cayman Islands Registry, new company registrations increased 12 percent to 5,391 in the first six months of 2014 compared to 4,813 new registrations during the same period last year. The number of active companies on the register jumped to 97,747 at the end of June. 

The Seychelles and Bermuda showed the largest percentage increase of incorporations of 29 percent and 16 percent, respectively, during the second half of 2013, but the British Virgin Islands continue to dominate new offshore company registrations by volume.

The BVI added 24,185 new offshore companies in the final six months of last year, followed by the Seychelles with 10,651 and Cayman with 4,620. 
 

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Gonzalo Jalles

Cayman Finance chief executive Jalles leaves

Gonzalo Jalles, CEO of Cayman Finance, will leave the association representing Cayman’s financial services industry in November. He was appointed as the association’s first chief executive officer in January 2013.

In his role, Jalles sought to forge closer ties with the Cayman Islands government, which culminated in November 2013 in a memorandum of understanding on government-private sector consultation on industry-related issues such as new legislation, as well as joint initiatives to promote Cayman as a jurisdiction.

He had called on government to do more to endorse and defend the Cayman Islands finance industry, given that it represents more than half of Cayman’s economy and government’s revenue. Last year, he cited the lack of a promotional budget for financial services, in contrast to the $14.5 million government spends to promote tourism. 

While the agreement with government, which for the first time included a small financial contribution, was a first step, there was still a long way to go, he said in December 2013. This budget year, government pledged an additional 40 percent for promotional activities. 

Minister of Financial Services, Commerce and Environment Wayne Panton said both Cayman Finance and the government recognized the importance of working alongside one another to help dispel long-held inaccuracies and promote the integrity and transparency of Cayman’s financial system.

“Since government and Cayman Finance signed an MoU last year, we have worked more closely and effectively than ever before to promote and further build the strong reputation of the Cayman Islands,” Panton said.

“We thank Mr. Jalles for his leadership during his tenure as Cayman Finance’s CEO, and we look forward to continuing the good work between government and Cayman Finance in the future, on behalf of our jurisdiction.” 

Ian Wight, chairman of Cayman Finance, said Jalles has been instrumental in raising the profile of the Cayman Islands and building key relationships internationally. During Jalles’s tenure, Cayman Finance grew its membership by 34 percent.
 

 

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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 E: mklein@pinnaclemedialtd.comMichael 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. 

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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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