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Guernsey's economic report card is positive - for now

Guernsey's economic report card is positive - for now

Monday 15 January 2024

Guernsey's economic report card is positive - for now

Monday 15 January 2024

Measures taken to protect Guernsey’s economy in the short-term have met with approval.

S&P Global‘s latest assessment has kept the island’s credit rating at the same level as six months ago.

But it all comes with some warnings, particularity the historic under investment in capital projects and demographics.

S&P's assessment follows a failure to agree the former Policy & Resources Committee’s major tax package, which had a GST at its heart, at the end of last year, something that ultimately cost members their jobs when a no confidence motion was passed.

S&P is expecting a positive outcome from the forthcoming Moneyval inspection, something that will assess the island’s compliance with international standards for  anti-money-laundering and countering the financing of terrorism.

While the agency has also predicted that economic growth will continue to cool, dropping from  the 3.2% seen in 2022 to about 0.25% on average over 2024-27.

“I am very pleased that we have been able to retain a good credit rating, signalling to the world that Guernsey is somewhere to invest and do business,” said Chief Minister Lyndon Trott.

“S&P recognises the important steps we have taken to prevent the structural deficit from significant deterioration. That said, it is also quick to highlight the need for us to continue to prioritise sustainable public finances and I know our community also appreciates how important this is.

“The current direction, with some limited revenue raising and a significant curtailing of the capital programme, is a temporary solution which allows us some more time and space to look for a genuinely sustainable long-term solution that is right for Guernsey. But we cannot be complacent, and we must continue that work even if ultimate decisions are made by the next Assembly.”   

Guernsey’s rating is A+/A-1 with a stable outlook.

It was downgraded in January 2023 from AA-/A-1.

The ratings are typically used by prospective lenders and businesses seeking to invest in Guernsey to help assess the level of risk associated with the jurisdiction.


S&P’s broad view


The States failure to pass a GST was highlighted by S&P.

“The tax would have broadened Guernsey's tax base, which is highly concentrated in personal income taxes,” S&P’s assessment says.

“This exposes the government to the impact of the jurisdiction's aging and shrinking workforce.”

But it said other measures taken should help avoid a more serious fiscal deterioration.

These include reducing spending on major capital projects by £160m., so it is capped at £340m. this term.

This has come mainly because of the mothballing of the schools rebuilding project and also halting other minor projects not underway.

A phased increase in social security contradictions between 2022 and 2031 is eventually expected to generate an extra £39m. a year.

Global pillar two tax increases - where multinational firms with global revenues of over €750m per year will pay 15% tax from 2025 -  should generate at least another £10m. annually and could be significantly more.

S&P also points to the possibility of another £16m to £17m coming from other measures like hiking motor taxes and visitor taxes.

“We expect Guernsey's liquid public sector asset buffer to remain large, in spite of growing fiscal pressure, at 42% of GDP by end-2027. This is despite authorities transitioning a larger portion of the asset portfolio into more illiquid exposure. 

“Notwithstanding that these illiquid assets could have greater return potential overall, we view such assets as encumbered and not readily available for debt service in times of stress.

“We understand Guernsey aims to have 30%-35% of assets in private equity and private credit exposure by 2028-2029, up from about 20% currently.”


S&P on the economy


Economic growth has benefited from a strong banking sector performance, but S&P says it should decelerate.

“Guernsey's economy grew stronger than expected over the past two years, mainly from robust performance in the financial sector as hyper-low interest rates come to an end,” it said.

“For the banking sector, which employs about one-quarter of the jurisdiction's finance sector, margins have benefited as interest rate differentials have widened given increasing rates.

“Lending rates typically rise more rapidly than savings rates, directly affecting net interest margins, real GDP, and government tax collection. As the interest rate cycle gradually turns this year, this dynamic will unwind.”

However, global interest rates are unlikely to return to pre-pandemic levels and so a complete reversal in surpluses seems unlikely, it said.

“The fiduciary and funds sectors (which together employ about half of Guernsey's finance sector) have also fared well and are growing, supported by market recovery. Meanwhile, other factors such as prolonged inflation, lower capex, and a weakening external environment (particularly in the U.K.) will dent consumption.”

It has estimated that overall economic growth cooled to 1.5% in 2023 from 3.7% in 2022 and will remain low at about 0.25% on average over 2024-2027. 


S&P on Moneyval


Guernsey’s Moneyval assessment takes place in April.

A positive outcome is seen as crucial for maintaining the island’s reputation.

The assessment includes an in-depth peer review by Moneyval's committee of experts, and an accreditation would signal Guernsey's compliance with international standards for anti-money-laundering (AML) and countering the financing of terrorism (CFT) in the legal, financial, and law enforcement sectors. 

“As a jurisdiction with a large financial services sector, a negative assessment (which could include being added to the grey list until any shortcomings are remedied) would undermine Guernsey's economic model, but we do not expect this, and understand that even in negative scenarios, there would be some lead time to allow for corrective measures,” S&P said.

Guernsey was last assessed and deemed compliant with the AML and CFT standards in 2015. 

The final report is expected toward the end of the year. 


And some warnings…


S&P on house prices


Overall house prices have rallied significantly over the past five years, and the annual price growth remains positive in 2023 despite a dip in the first and second quarters.

S&P expects transitions to pick up as interest rates decline in the next few years.

“While supporting the jurisdiction's economic stability, considerable house price increases have heightened intergenerational inequalities and constrained the flow of much-needed workforce,” it said.


S&P on government spending


States spending is on the rise.

This has been covered in 2023 by the effects on the money it collects by what is happening in the financial sector where corporate taxes on banking sector profits are likely to be above budget and employment growth in the funds sector is also helping out tax collection.

Most departments are expecting to overspend their budget, most notably in health care.

“This underlines the jurisdiction's aging population and expensive agency fees from an acute inability to attract long-term workers.” 


S&P on capital investment and the demographic headache 


Mothballed capital projects such as the school rebuilding plan cannot be put on hold indefinitely, it said, not least due to Guernsey's historical underinvestment in capital spending.

This has undermined infrastructure and economic competitiveness. 

“The jurisdiction's worsening demographics are also likely to continue gradually undermining fiscal balances, as the population lives longer and therefore uses state services for longer, and the working age and income tax-paying population shrinks further. 

“Notwithstanding the increase in the retirement age, we view the demographic pressures as still significant. The States Assembly has committed to revisit medium-term fiscal plans by September 2026, and we believe further concrete measures are likely to be necessary to avoid further balance-sheet degradation.”

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