Moody’s Investors Service has affirmed the Aa3 government bond rating of the Cayman Islands. The rating outlook remains stable.
Today’s action – both the affirmation and the maintenance of the stable outlook – reflects the combination of the following credit drivers for the Cayman Islands:
1. A comparatively low debt burden despite the recent increase in the main debt metrics.
2. A very high per-capita income, the result of prudent macroeconomic management and a well-functioning legal system.
3. A small, narrow economy susceptible to weather-related shocks.
4. A strong institutional framework, including policy consensus on basic macroeconomic policy and institutional oversight from the UK.
The Cayman Islands’ Aa3 rating balances a very high per capita GDP, one of the highest among rated sovereigns, and a comparatively low debt burden with a small economy highly dependent on two industries and the recent deterioration of the fiscal accounts. At $53,253 in 2011, Cayman’s per capita GDP is the eleventh highest among all rated sovereigns and a key ratings support. Higher economic development gives Cayman the ability to deal with regular natural disasters. But its economy is the third smallest among countries we rate and tourism and financial services represent over 70% of GDP, a sign of limited diversification. Debt to GDP of 24.9% is low but has risen from 8% in 2007.
The country’s strong institutions further support the rating. A long history of policy consensus and a sensible macroeconomic approach explains its high economic development and still low debt burden. Cayman scores highly in such measures as the World Bank’s governance indicators, higher than most of its peers. The United Kingdom provides further institutional support through fiscal oversight and ultimate judicial review.
Factors that limit upward movement in the rating include vulnerability to hurricanes, limited fiscal flexibility given a narrow revenue base that excludes direct income taxation, and dependence on exogenous sources of growth. Significant negative structural changes in the Cayman Islands’ main sources of growth coupled with a steady erosion of public finances could lead to negative rating actions.
Cayman’s stable outlook balances the very high levels of economic development and still low debt metrics with the potential risk of recently rising debt burdens. While debt at less than 25% of GDP remains low by international standards the debt rose rapidly between 2007 and 2011. Since then the government has stabilized the debt burden and the projection of small deficits going forward support the current outlook.
WHAT COULD CHANGE THE RATING UP
A positive outlook could be considered in the event of a significant reduction of overall projected debt levels and a policy framework that makes it unlikely to return. Alternatively greater growth that pushed per capita GDP even higher relative to peers higher could lead to an upgrade.
WHAT COULD CHANGE THE RATING DOWN
A negative outlook could result if the government’s efforts to limit the increase in the debt ratios fail, either due to policy reasons, a slower economic recovery or both. While Moody’s does not have a specific numerical target that would trigger a change in outlook, given that long term growth prospects for Cayman are modest and the economy has little diversification, we see the current levels of debt, measured as percentage of GDP and percentage of revenues, as relatively high for the country.
FOREIGN AND LOCAL-CURRENCY CEILINGS
Moody’s has today adjusted the Cayman Islands’ long-term foreign-currency bond ceiling to Aa2 from Aaa, and the long-term local-currency bond and deposit ceilings to Aa2 from Aaa and Aa1 respectively, to better capture the country’s external vulnerability risk and the default correlation between the government and private-sector borrowers. The long-term foreign currency bank deposit ceiling was affirmed at Aa3.