Words like “crisis,” “recession” and “meltdown” have been dominating headlines around the world as the US Government’s monumental US$700 billion bailout plan was finally passed Friday, and wary consumers around the world prepare for tighter days.
Just as the Cayman Islands are dependent on the US for virtually all of its goods (not to mention probably 80 percent of its tourism revenue), so we are joined at the hip with its weakening dollar. Paul Byles, local economist and consultant of Focus Corporate Services & Consulting, recently commissioned a survey, which found that one in three residents think the local economy is suffering. And he says that we can expect it to get worse before it gets better.
“Cayman is very linked to the US economy, both in terms of tourism and the financial services sector. We should prepare for some rougher times in the short to medium term, from six to 18 months,” Mr Byles said, adding: “The bailout plan itself tells us where this sits in history. The plan is widely regarded as the most sweeping government intervention in the markets since the Great Depression.”
If there is a silver lining to the increasingly dire revelations flowing out of the US stock market, it is that consumers shouldn’t expect to see dramatic increases in prices on common items, he explained.
But there is no denying that grocery bills are higher now than they were a year ago. However, because there will be stricter limits on lending from US banks, along with higher interest rates, he believes the economy will remain slow and that could translate into fewer jobs and lower wages.
Mr Byles says what is not clear is how this will affect Cayman’s economy. But what is almost certain to happen, is that American lawmakers will attempt to prevent the current failures from recurring by introducing tighter regulations of the financial market.
“So far we have not seen a major reaction in the US as far as increased regulation is concerned. We will have to wait until the dust has settled and new regulations are introduced to determine any potential impact,” he said.
While the cost of living creeps ever higher, offshore banking is definitely trying to ride out the storm here in Cayman.
David Collins, a partner in Walkers’ Finance Group, told Cayman Net News that while the global economic slowdown has led to fewer transactions through the territory’s financial infrastructure, Cayman’s future as a market player remains secure.
“There is still a significant amount of financing going on in the Cayman Islands, involving special purpose vehicles, hedge funds and private equity funds. Many of these deals involve new players, who do not fall into the established categories.”
Mr Collins added, “The credit crisis has inevitably had an impact on the financial services industry in Cayman, and it is possible that we will feel the tremors for some time. Cayman is too deeply embedded in the markets not to have been affected.”
The Cayman Islands Financial Services Association (CIFSA) says that the offshore banking industry is alive and well. In fact they say that from 2001 to date assets in the banking sector have grown at a pace of almost 14 percent per year on average and hedge funds based in the territory continue to grow at an average rate of 17.2 percent.
CIFSA does say that the current situation is “major” but is optimistic that the mistakes of the past will not be soon repeated.
A spokesperson for CIFSA told Cayman Net News: “While we have seen some bank failures within the US, such as Washington Mutual, from a global perspective we believe that as financial regulators across the globe work together and with better risk management from private sector organisations, countries can prevent situations like this from causing a major crisis across global financial markets.”