Dagong Maintains the Credit Ratings of the Cayman Islands at AA- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
March 2, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to maintain both the local currency and foreign currency credit ratings of the Cayman Islands (“the Islands”) at AA-, each with a stable outlook. The debt repayment environment of the Islands is basically stable. Underpinned by tax reduction and infrastructure projects, the economy maintains moderate growth. Stringent fiscal consolidation and debt management contain the government’s debt burden at the lower level which continues to descend. Therefore, the government’s local and foreign currency solvency remains stable.
The primary reasons for maintaining the Islands’ credit ratings are listed below:
1. The debt repayment environment is basically stable. The People’s Progressive Movement and United Democratic Party have been alternately in power for many years. Given the current popular support, it is very likely that this party rotation will take place again following the general election in May 2017. As the two main parties have reached a high level of consensus on their main policies, policy continuity can be guaranteed in the short term. In addition, the government is highly likely to continue to support the development of the private sector and strengthen infrastructure construction, as well as promote fiscal consolidation and strengthen debt management. However, fluctuations in the external environment, such as the UK Brexit process and the change of government in the United States will result in uncertainties in the Islands’ government policy implementation. With regard to the credit environment, the slow recovery of the global economy in the short term is likely to support the development of the Islands’ tourism and financial industries, and the credit demand of the real economy will increase. Therefore, credit growth will accelerate. The overall banking system remains robust, however, a large proportion of foreign currency assets and household mortgages make the asset structure vulnerable.
2. Infrastructure construction will propel short-term economic growth, but long-term economic stability is low. In the short term, the development of industries such as tourism, construction and transportation will be driven by large construction projects, such as the update of tourism-supporting facilities and the extension of the east-west trunk road. The economic growth rate of the Islands is therefore expected to be 3.0% in both 2017 and 2018. In the medium and long terms the financial industry, which accounts for 41% of GDP, may be negatively impacted by gradually strengthening international financial supervision. The high dependence of the Islands’ pillar industries on the external economy, together with hurricane strikes and other natural disasters, renders economic stability at a low level. Thus the Islands’ average economic growth in the medium and long term is expected to remain at 2.5%.
3. The short-term fiscal surplus will narrow slightly, but repayment sources remain stable. In the short term, several one-off expenditure items, such as the general election and financial administration regulation, will increase the central government’s spending. Thus, the primary fiscal surplus is expected to fall to 5.2% in 2017, before reviving to 5.6% in 2018. Although the government has no financing needs in the short term, the ratio of government financing needs to GDP will rise to 5.4% in 2019 due to the expiration of a ten-year bullet bond. But given the government’s adequate cash reserves, the Islands’ global financial center status and fiscal regulatory support from the United Kingdom, the government has strong internal and external financing capacity. Therefore, the government’s debt repayment sources remain secure.
4. With a low and lowering debt burden, government solvency remains stable. The government has promised that in the short term no new debts will be incurred through borrowing and strict debt management will be implemented. If that is the case, the central government’s debt ratio is expected to decline to 16.7% in 2017 and 16.5% in 2018. This represents a smaller debt burden which will be beneficial to stable local-currency solvency. The Cayman Islands has had a large recurring current account deficit, and the balance of international payments has been highly dependent on service exports and financial account surplus, resulting in significant external vulnerability. Despite these drawbacks, a low external debt burden, stable currency value, as well as a strong external financing capacity will safeguard the government’s foreign-currency solvency.
In the short term, against a background of global economic recovery, the government’s tax cuts and infrastructure projects will add momentum to economic growth; a high fiscal surplus, adequate liquidity reserves and a light debt burden will protect government solvency. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency credit ratings of the Islands for the next one to two years.