For sale: The heart of retail in Georgetown, Cayman Islands. Both Bermuda and Cayman use a work permit system to strike the balance between the opportunities for the local workforce and the needs of businesses to grow. *Creative Commons photo by Fevi Yu
For sale: The heart of retail in Georgetown, Cayman Islands. Both Bermuda and Cayman use a work permit system to strike the balance between the opportunities for the local workforce and the needs of businesses to grow. *Creative Commons photo by Fevi Yu

WEDNESDAY, OCT. 3: At first glance Bermuda and the Cayman Islands appear to have the same problems in the face of economic challenges. Both UK Overseas Territories are of roughly similar size and their island economies rely heavily on financial services and tourism, which in turn require the importation of foreign labour.

A work permit system attempts in both countries to manage this process and strike a balance between the opportunities for the local workforce and the needs of businesses to grow in areas where suitably qualified local labour is not available. At the same time, a term limit or rollover policy aims to control the size of the population in both Overseas Territories.

 

What are the challenges?

Talking to business owners in Hamilton there is little doubt Bermuda is in a recession and hardly a week goes by without the front pages of the local press giving another example of a local supermarket, retailer or school nursery closing.

Ronnie Viera, president of the Chamber of Commerce, says the challenges facing Bermuda are shared by all other offshore jurisdictions:  the effects of globalisation and a shrinking volume of businesses conducted offshore as a result of the recession, which has taken hold in most of the world.

“Over the course of the past six or seven years we have seen the effects as the island has gone from a comfortable life as the leading offshore financial centre to one dealing with a more difficult business environment,” he says.

As the worldwide recession is hampering the flow of money offshore from key jurisdictions, such as the US and the UK, Bermuda is seeing for the first time in recent history unemployment among Bermudians.

The recession is, however, not the only issue. Craig Simmons, economics lecturer at Bermuda College, says as far back as 1980, official sources identified high business costs as the biggest threat to sustained growth of tourist and offshore financial services.

“These costs include residential and commercial rents, salaries of qualified and unqualified workers, energy – electricity and gasoline, and customs duties on intermediate goods. High business costs at the microeconomic level, affect, at the macroeconomic level, the real exchange rate, arguably the most profound economic indicator for small open economies,” Mr Simmons explains.

Whether due to recession or high business costs, the results are the same: people are leaving Bermuda.

 

The effect of a declining population

In a recession, the work permit system functions as a pressure valve, which means unemployment among the expatriate labour force is small, because generally expatriate workers will have to leave the country when they lose their jobs. Although attractive for the unemployment statistics, a shrinking of the population becomes a problem in the local economy as spending declines.

In Cayman, the number of work permit holders dropped from 26,500 in 2008 to 19,850 in 2011. While some of the work permit holders obtained permanent residency rights, the vast majority had left the Islands together with their dependents. Work permit numbers have since recovered to over 20,000 in Cayman, but in Bermuda this development has not found a bottom yet. Bermuda’s resident population peaked at around 67,000 in 2008 and dropped to 64,237 in 2010 and approximately 62,000 in 2012, a decline of about nine per cent.

Between 2008 and 2011 the number of non-Bermudians in the workforce, who are not spouses of Bermudians, fell by 19.22 per cent from 10,367 to 8,374.

But there is also a brain drain among Bermudians.

For those pursuing a career in the financial services sector for example, medium to long-term stints abroad are part of the promotional ladder that has to be climbed by these Bermudians, who may or may not eventually return to Bermuda.

When unemployment is added to that, the number of Bermudians in the private sector has declined by about 1,000 people since 2000.

Bermuda’s construction sector, the most heavily hit of all industries in terms of the declining workforce, shed 30.15 per cent of jobs between 2008 and 2011. International financial services business, or IB as it is termed in Bermuda, lost 14.36 per cent of its jobs during that time and the real estate industry lost 14 per cent of its jobs in 2011 alone.

Retail

The effect of this decline can be felt anywhere in the local economy from reduced payroll tax revenue for the government to declining retail sales and lower demand for rental accommodation.

Average monthly retail sales fell by -3.6 per cent in 2009, by -4.7 per cent in 2010 and by -3 per cent in 2011, particularly as a result of less demand for motor vehicles and building materials.

Real estate

The rental market has seen rents drop up to 25 per cent depending on the type of property, says Buddy Rego of Sotheby’s Realty.

The declining population “certainly has affected the rental market, thereby making rents a lot more affordable, because of the increase of inventory we now have”, he says. Real estate sales have been less affected because of the restrictions that still exist for foreigners who can only buy at the very upper end of the market.

While some of these restrictions have been lifted, for example permanent residency certificate holders are now allowed to buy any non-Government condominium and houses with an ARV value over 63,600, the 18 per cent licence fee for condominiums and 25 per cent licence fee for houses required when purchasing a property still severely restrict activity in the market.  

“Compared to Cayman we are much more densely populated,” says Rego. “If anybody could buy anything from anywhere in the world you would see an increase in average housing prices.”

Tourism

Although tourism figures on the whole have improved recently, it is the low spending cruise tourists that make up the numbers. Air arrivals of holidaymakers, in turn, have declined considerably. So much so that the Department of Tourism launched a new tourism promotion campaign in August aimed at attracting US tourists to Bermuda all year around, instead of just for four months a year during the summer.

Restaurants

In the restaurant business the impact of the recession and a dwindling population can be felt as well.

Philip Barnett, owner of Island Restaurant Group, says “the knock-on effect has been severe and we had to look carefully at our operation to add as much value as we possibly can to retain the existing customers that we have because, unfortunately, we have seen a number of residents of Bermuda leave, due to several issues; some economic, some other.”

To deal with the crisis, his business just has to be a better operator to try to retain the demographic, he adds. Although some jobs were added in 2011, Barnett believes there were a few places that opened up, which means that the pie has to be divided even further.

“Perhaps we may have done a little bit better last year but overall the industry saw less profitability. Oftentimes we see an increase just because of inflationary factors,” he notes.

International business

After the financial crisis, the transactional activity in the financial services industry in Bermuda, like in other offshore financial centres, fell off a cliff. Although the industry has recovered somewhat since then and insurance/reinsurance remains an industry in which Bermuda has a competitive edge, a transformation has taken place.

“Since 2008, insurance and reinsurance around the world has grown, but it has shrunk in Bermuda,” says Diane Newman, co-chair of the Economic Advisory Council of the Chamber of Commerce. “It is important to note that the structure of the reinsurance industry has changed in a way that will prevent waves of new reinsurance companies from setting up and staffing up in Bermuda and spurring local economic growth, as happened in the 1990s and the early part of the 2000s,” she says.

For instance, insurance linked securities are one area where Bermuda is becoming a driving force. Reinsurance companies are now controlling risks by using “sidecars”, an insurance investment vehicle that allows outside investors to take on the risks and returns of some of their books of business.

“These do not create additional local jobs, but have established Bermuda as highly competitive in the global insurance-linked securities market,” Ms Newman says.

Michael Klein is a photojournalist with the Cayman Free Press and this article was printed with his permission. This is part 1 of a multi-part series.