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Rating Action:

Moody's affirms the Cayman Island's Aa3 ratings, maintains stable outlook

19 Apr 2021

New York, April 19, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Cayman Islands' Aa3 issuer ratings. At the same time, the rating outlook was maintained at stable.

Today's action reflects the following credit drivers for the Cayman Islands:

1. The Cayman Islands' low government debt burden and low pandemic related increases

2. A very high per-capita income, which supports the islands' ability to deal with economic and weather-related shocks despite its small size

3. And a history of strong institutions and a broad consensus on macroeconomic policies

The Cayman Islands' local and foreign currency country ceilings remain unchanged at Aaa. The three notch gap between the local currency ceiling and the sovereign rating reflects a small government footprint in the economy and financial system as well as low political risk. The foreign currency ceiling at the same level of the local currency ceiling reflects negligible transfer and convertibility risks in a very open economy that is an important international financial center.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE Aa3 RATING

FIRST DRIVER: A LOW DEBT BURDEN AND LOW PANDEMIC RELATED INCREASES

Despite the recent pandemic-related uptick Cayman's debt burden remains comfortably below rated peers. Moody's expect Cayman's government debt will reach 9% of GDP in 2022, a fraction of the 39% of GDP median for similarly rated peers.

The fiscal impact from the pandemic has been relatively muted and follows years fiscal surpluses that had reduced debt to 5% of GDP in 2019, right before the pandemic. The budget surpluses reflected a combination of comparatively strong growth and fiscal oversight from the UK which limits the ability of the government to increase debt. While the fiscal balance has now moved to a deficit Moody's expects only a 1% of GDP average deficit for 2020-2022, compared to 3% of GDP median deficit for Aa-rated peers.

SECOND DRIVER: HIGH PER CAPITA INCOME THAT SUPPORTS SHOCK ABSORPTION

Cayman has a small and relatively undiversified economy but it is also one of the richest among rated sovereigns. This level of wealth provides it with significant flexibility to deal with external shocks, be it a worldwide pandemic or the destruction from a hurricane.

Per capita GDP (PPP basis) reached almost $80,000 in 2019 and is significantly higher than for peers. While GDP fell more than 6% last year Moody's expects a recovery both in 2021 and 2022. And the full impact of the drop in the economy on per capita results was muted due to a highly mobile labor force that relies on workers from abroad that left the island once employment opportunities disappeared.

Cayman's economy is highly concentrated, and tourism and financial services represent over 60% of the island's GDP. Tourism was particularly hard hit by the pandemic and the hotels and restaurant sector contracted more than 75% last year as the island shut down its borders. Notwithstanding, the Cayman Islands' high level of economic development increases its resilience in the face of economic and natural disaster shocks, the latter of particular importance given the country's exposure to hurricanes.

Over the last two decades many developed nations and international organizations have prioritized reducing tax evasion, increasing the risk that sanctions on Cayman's financial sector would reduce economic growth in the islands. But the Cayman Islands has consistently managed to adjust its laws and regulations, and negotiate international agreements, including tax information agreements, to reduce this risk. Moody's expects that Cayman will continue to succeed in containing this risk to its economically crucial financial sector.

THIRD DRIVER: A STRONG INSTITUTIONAL FRAMEWORK

The Cayman Islands benefits from decades of strong and stable institutions. The Cayman's Worldwide Governance indicators results are among the highest in the region and among all rated sovereigns, including highly developed countries. A long history of policy consensus and a consistent macroeconomic approach is a key support of its economic development. The United Kingdom provides further institutional support through fiscal oversight and ultimate judicial review. Legal limits on government borrowing and oversight from the UK's Foreign Office have contributed to the decline in public debt in recent years. Moody's expects that those limits and oversight will continue to shape and support Cayman's institutional framework.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk.

The Cayman Islands' ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting moderate exposure to environmental risks, neutral-to-low exposure to social risks, and a very strong governance profile that supports the sovereign's credit rating and its capacity to deal with sudden shocks.

Its overall E issuer profile score is moderately negative (E-3), reflecting its location in the Caribbean, small size and significant reliance on tourism (about 30% of GDP), features that leave the islands vulnerable to the physical effects of climate-related shocks. In particular, the country is exposed to hurricanes that have the potential to cause flooding, loss of crops and life, and damages to infrastructure.

Moody's assesses Cayman's Social issuer profile score as neutral to low (S-2), reflecting low exposure to social risks across most categories. Cayman benefits from comparatively strong education results as well as a strong economy that supports low unemployment levels. Cayman is a wealthy economy and access to basic services and health provision compare well with other countries worldwide.

The Cayman Islands' very strong institutions and governance profile supports its positive G issuer profile score (G-1), reflecting the strength of domestic institutions and rule of law as well as the institutional support provided by its historical relationship with the UK.

RATIONALE FOR THE STABLE OUTLOOK

Cayman's stable outlook indicates that the rating is unlikely to change over the outlook horizon. The outlook balances the high level of economic development and low debt metrics against the credit challenges resulting from a small and narrow economic base.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A positive outlook could be considered if developments alleviate the constraints that Cayman Island's small and relatively undiversified economy poses to the sovereign credit profile. Greater and more diversified economic growth that pushed per capita GDP even higher relative to peers could lead to a positive rating action. The buildup of significant fiscal buffers to address any sudden economic shocks, and a policy framework that ensures debt levels will remain very low, could also result in a positive rating action.

A negative outlook could result if the debt burden begins to rise, either due to policy reasons, sustained weaker growth or both. A change to the institutional arrangements that eases current restrictions on excessive debt would also lead to a negative rating action. Sanctions to the financial sector severe enough to structurally weaken the country's growth prospects, or storm-related damage to the country's infrastructure beyond historical levels, could also lead to a negative rating action.

GDP per capita (PPP basis, US$): 78,276 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.8% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 2% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -17.5% (2019 Actual) (also known as External Balance)

External debt/GDP: 5.7% (2019 Actual)

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 14 April 2021, a rating committee was called to discuss the rating of the Cayman Islands, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have materially increased. The issuer's governance and/or management, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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