Kurt Tibbetts, the Cayman Islands' Leader of Government Business, has warned that the jurisdiction is unlikely to escape the fall-out from the financial crisis in the United States, especially since the vast majority of the world's hedge funds - many of which are heavily exposed to the debt instruments at the heart of the meltdown - have registered there.
"It will have escaped no-one's attention here in the Cayman Islands that notwithstanding the strenuous interventions of the US government, the financial markets are far from back to normal," Tibbetts said in a statement on October 9, designed to reassure the financial services sector - a vital lynchpin of the Cayman economy - that the government is responding to the unfolding turmoil in the global markets.
"It is well understood by everybody that Cayman's economy does not operate in isolation and that we are not immune from the global volatility and uncertainty. As with natural disasters, there are things that we simply cannot control, but we can take sensible precautions and put ourselves in the best possible position to preserve what must be preserved and restore quickly, if it comes to that, what must be restored," he added.
Tibbetts said that while the retail banking sector in the Cayman Islands is reported to be functioning close to normally, the areas that are expected to suffer most are those connected with hedge funds and structured finance, and he warned that there could be a sharp decline in the number of new fund and business formations in the coming year.
"Current global market conditions in the hedge fund arena are characterized by heavy redemptions, suspensions and re-structurings coupled with much-reduced (although not zero) new fund formations. In the structured finance arena there has been severe drop-off in deal flows as a result of the freezing of the global capital markets. This situation is not expected to significantly improve until 2010. We are already seeing an impact on the public sector side, with new company registrations Jan-Sept down 10% over the same period in 2007."
According to Tibbetts, some experts are forecasting that the number of hedge funds globally could contract by 20-30%, "which will obviously affect Cayman's book of business."
The Cayman Islands has rapidly become the domicile of choice for hedge funds due to its favourable regulatory regime. It is thought that about 80% of the world's hedge funds are registered in the jurisdiction, and at the last count, its financial industry regulator, the Cayman Islands Monetary Authority (CIMA), reported that more than 10,000 investment funds had registered there by the end of the second quarter of 2008.
In a bid to manage the crisis, the Cayman leader announced that he will be chairing a new Economic Monitoring and Advisory Group which is due to meet at least monthly. The group will comprise representatives from the private sector and members of the cabinet. Its terms of reference are to facilitate the sharing of updated information on the local economic situation, and identify issues that need to be addressed as they may arise.
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