Fiscal Deterioration May Force A Turn To Taxes

The postponement on September 25 of the Cayman Islands' annual budget illustrates to us in stark terms the depth of the territory's fiscal crisis, and lends further support to our view that the Caribbean state will suffer severely from the impact of the G20's new financial regulations on transparency and tax standards. With falling tourism and financial services revenues exacerbated by high spending on infrastructural development in recent years, the government has found itself breaking its own fiscal regulations by running an operating fiscal deficit in 2008 to the tune of CI$131mn (US$162mn). With the crisis in the islands' financial sector - the Cayman Islands are the world's largest hedge fund venue - leading us to project a 4.7% contraction in real GDP in 2009 (and only a moderate recovery to 0.5% real GDP growth in 2010), the government was forced to turn, for the first time in its history, to the UK government for help. However, its request at the end of August for a GBP278mn (US$443mn) loan from the British government has been rejected, with the Foreign and Commonwealth Office insisting that the territory reduce its borrowing and debt, and present a medium-term strategy for ensuring sustainable government revenues before it receives any assistance. Although discussions continue between the two governments over a GBP30mn (US$48mn) emergency loan, the islands' rapid fiscal deterioration means that it may well find itself forced to introduce some form of direct taxation, most likely in the form of a property tax.

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