Is Cayman getting its fair share?

Tuesday, June 13, 2006

A recent issue of the Observer carried a banner "Banking Sector generates 25% of GDP".
The story goes on to reveal that this was the finding of a study commissioned by the Cayman Islands Bankers Association (CIBA).

The cynics amongst us, me very much included, will always be wary of findings of studies commissioned by industries geared at measuring their own performance, (negative or positive), as it relates to the economic, social or environmental well being of their communities.

Immediately, the numerous studies commissioned by the tobacco industry, which served to cast the industry  in a  significantly less harmful light than authoritative independently conducted studies consistently revealed, as well as the studies commissioned by the  airline industry which purport to attribute far lower levels of carbon dioxide emission to the industry and as a consequence, a significantly lower contribution to global  environmental degradation than independent studies, spring to mind.

The point here is not that the findings of the CIBA commissioned study are in question, but rather that independent corroboration would serve to significant widen their acceptability.

I would further submit that it ought to be relatively easy for these findings to be substantiated by Government, from their own data and research, in the absence of the domestic independent research capacity.

Validating the industry measured contribution of the lead sector of the economy (either by tactic acceptance through lack of comment or by way of authenticating the accuracy by through public comparison to Governments' findings), is vital to how the debate regarding the viable options for the funding of the public sector will be shaped in the coming years.

 It is precisely for this reason that I urge that this study get more public attention and scrutiny than the usual public-sector, private-sector partnership, photo opportunity, such "events" elicit.

Perception issues aside, the press revealed findings of the study that raise some issues which still require immediate comment.

Firstly, we the public have, in the past, been correctly informed by more than one senior public sector, financial management official that the per capita GDP measurement does not accurately reflect the position of the indigenous element of the population in the overall economic framework.

A former Financial Secretary made the point forcibly in a budget debate some years, suggesting a discount factor of 50 percent from the then prevailing per capita levels was in order, when seeking to arrive at the per capita GDP of locals.

(Consistent with global trends which have seen a widening of the gaps in income between the top wage earners and others, I am given to suggest that the discount factor today may well be somewhat larger.)

More recently a Government team, in discussion with EU officials in Brussels, invoked a similar argument as a basis for the Cayman Islands being given access to concessionary / grants funding.

The implication here is that we must be extremely careful how measures of GDP aggregates and sectoral contributions thereto are utilised in the economic performance debate.

Issues of distribution also have to be taken into the equation.

In the context of our dual-path economy (offshore, onshore) it is an established fact that Central Government has and will undoubtedly continue to have a critical role in ensuring the well-being of the  indigenous portion of the population.

Having regard to this fact I believe it is equally as important to examine the direct contribution of the Banking/Financial Industry to Government relative to its size and performance, as it is to measure its contribution to GDP.

The CIBA study notes that the OffShore Banking sector "hosts/manages" some $1trillion dollars in assets. 

Based on current Return on Assets performances (US Banks, Average ROA 1.6%, UK Banks 1.34%, Swiss Banks 0.5%) and assuming an average ROA of 1%, minimum annual profits of some $10 billion would be attributable to the sector.   

On the domestic side, the $10 billion of assets, at a similar rate of return would generate in excess of $100 million in net profits.

The industry survey indicated that the direct contribution of the sector as whole to Government was the princely sum of $32.2 million.

Try working that out as a percentage of the profits generated by the industry.

Having read the Observer piece early in the week, a piece in the New York Times later in the week, caught my eye.

Written by journalist Jenny Anderson, the caption was, " Atop Hedge Funds, Richest of the Rich get even more so".

Now remember in the world of Hedge Funds, as a domicile, Cayman it the Premiership, La Liga, Seri A, the Bundesliga and the Brazilian Top League, all rolled into one. (The soccer metaphor since its World Cup season)

Anderson's article states... " last year managers had to take  home- yes  take  home - $130 million  to  make  it to the ranks  of the  top 25 and  there was a tie for  25th , so there  were actually 26 hedge fund  managers who actually made  more than $130 million or more. (Hedge Fund Managers generally get compensated on a "2 & 20" basis. Two percent of the Assets under Management and 20 percent of the profits generated).

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