S&P Affirm Bermuda’s Ratings, Outlook Negative

April 1, 2014

[Updated with Finance Minister's comments]

Standard & Poor’s today [Apr 1] affirmed their ‘AA-/A-1+’ sovereign ratings on the Government of Bermuda, and said the outlook remains negative.

S&P said, “The ratings on Bermuda are supported by our view of the country’s ongoing achievements in attracting and retaining foreign financial services companies [largely reinsurance], which underpin high per capita income; its large net external asset position; and the government’s net fiscal asset position, although the latter has declined with growing deficits. Constraining the ratings are Bermuda’s lack of monetary flexibility and continued gaps in official data, despite some progress.”

Chart provided by S&P along with today’s ratings announcement, click to enlarge:

Fullscreen capture 04012014 14914 PM

The ratings agency added that they expect Bermuda’s economy to “stabilize and begin to modestly grow in 2014-2015, particularly if its major trade and finance partner, the U.S., continues to increase its GDP by 2%-3%, in real terms, as we expect.

“In addition, the new One Bermuda Alliance governing party is undertaking a variety of measures aimed at economic revitalization,” said S&P.

Speaking on the negative rating outlook, S&P said it reflects their “view of the potential for a downgrade [most likely to 'A+/A-1'] over the next two years if the island’s economy fails to show signs of emerging from its contraction since 2009, if the new government’s fiscal consolidation plans prove difficult to implement, or if ongoing bank loan deterioration leads to further weakness in the broader banking system.”

The full statement from S&P is below:

On April 1, 2014, Standard & Poor’s Ratings Services affirmed its ‘AA-/A-1+’ long- and short-term foreign and local currency sovereign ratings on Bermuda. The outlook remains negative.

At the same time, Standard & Poor’s affirmed its ‘AAA’ transfer and convertibility assessment.

The ratings on Bermuda are supported by our view of the country’s ongoing achievements in attracting and retaining foreign financial services companies [largely reinsurance], which underpin high per capita income; its large net external asset position; and the government’s net fiscal asset position, although the latter has declined with growing deficits. Constraining the ratings are Bermuda’s lack of monetary flexibility and continued gaps in official data, despite some progress.

We estimate that nominal GDP in 2014, although still much higher than that of most sovereigns at nearly US$80,000 per capita, will be 15% below its 2008 peak. Nevertheless, we expect Bermuda’s economy to stabilize and begin to modestly grow in 2014-2015, particularly if its major trade and finance partner, the U.S., continues to increase its GDP by 2%-3%, in real terms, as we expect. In addition, the new One Bermuda Alliance governing party is undertaking a variety of measures aimed at economic revitalization.

Reflecting the weak economy, fiscal revenue has also declined in nominal terms, and Bermuda’s deficit has gradually risen. We expect general government debt to rise by less than 2% of GDP over the next three years, after increasing by nearly 13% of GDP in 2013 [partly to prefund its financing needs in 2014-2015]. We expect the government to remain in a net asset position, with large government-run defined-benefit pension fund assets exceeding gross government debt. Still, we estimate that net general government assets will be 6% of GDP this year, down from 25% of GDP in 2006.

Because banks on the island have relatively low corporate and securitization exposures, significant liquidity, and appear well-capitalized, we believe the sector still poses only a modest potential contingent liability to the government. The Bermuda Monetary Authority operates a currency board–as such it cannot function as a lender of last resort.

The banking system has suffered over the last five years from rising nonperforming loans and 20%-30% declines in residential housing prices. The two largest banks are HSBC Bank Bermuda Ltd. and Bank of N.T. Butterfield & Son Ltd. We place Bermuda’s banking sector in group ’4′ on our Banking Industry Country Risk Assessment scale, which is from ’1′ to ’10′ ['1' being the best]. Bermuda’s banks collectively and individually hold regulatory capital positions well in excess of fully phased-in Basel III requirements to include the more recently introduced leverage ratio.

In our view, Bermuda’s external flexibility balances high gross external financing needs against an extremely strong net external creditor position, even excluding external assets of the nonfinancial private sector. Although the recently initiated official reporting of Bermuda’s international investment position represents a significant step forward in terms of statistical coverage, the lack of an estimate of households’ foreign assets and liabilities still represents a significant data gap.

The negative rating outlook reflects Standard & Poor’s view of the potential for a downgrade [most likely to 'A+/A-1'] over the next two years if the island’s economy fails to show signs of emerging from its contraction since 2009, if the new government’s fiscal consolidation plans prove difficult to implement, or if ongoing bank loan deterioration leads to further weakness in the broader banking system. A downgrade of HSBC Bermuda, which is currently on CreditWatch with negative implications, would not likely in itself result in a downgrade of the sovereign. In 2013, total equity of HSBC Bermuda fell to $1.1 billion from $1.6 billion, largely reflecting payment of an extraordinary dividend. However, according to the Bermuda Monetary Authority, the amounts transferred by the dividend do not impact HSBC’s ability to comply with Bermuda’s adoption of Basel III capital standards. On the other hand, improved prospects for GDP growth, low fiscal deficits, and a stabilization of banking-system asset quality could lead us to revise the outlook to stable.

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Update 5.05pm: Finance Minister Bob Richards said, “I expected our rating to remain at AA-/A-1+ with a negative outlook based on where we are in our efforts to turn around our economy.

“I remain encouraged by the report which says that our ratings are supported by our ongoing achievements in attracting and retaining foreign financial services companies and the fact that S&P continues to expect the Bermudian economy to stabilize in the next few years, in line with the Government’s expectation.

“It is also pleasing to note that S&P has recognized that we are undertaking a variety of measures aimed at economic revitalization.”

“Though Bermuda, like a number of other jurisdictions, has seen its ratings and outlooks adjusted, the Government is pleased that the underlying fundamentals and strengths of our economy have been recognised and that our rating remains in the top tier of the ratings matrix. At AA-, our sovereign bond rating is only four notches below the highest rating of AAA.”

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Comments (25)

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  1. Justin says:

    Thank you PLP for putting Bermuda in massive debt. The gift that keeps on giving!

    • Greed Killed Bermuda says:

      Borrowing by the PLP is the only thing that saved this country for collapse. Unless you wanted poeple to starve, die, and steal, you better be happy that the PLP was able to borrow come the recession – unlike other countries that were tapped out!

      • Al says:

        The borrowing didn’t start with the recession, it started before the recession. Now the borrowing will make us poorer by over a billion dollars a decade and put an economic anchor around our necks for generations.

      • Axcot says:

        Yea, and why were they in the situation to HAVE TO BORROW money in the first place? Man, some of you kool-aid drinkers are so blind to reality. Get a grip people. Learn to think for yourselves. Have an independent thought for a change.

      • Build a Better Bermuda says:

        Your denial about the state of PLP’s financial planning (or lack there of) is quite evident. It was the PLP’s fiscal irresponsibility that lead to their need for the massive borrowing, and that began well before the global economic crisis began, continued before it got to our shores. Even as the crisis was washing upon our shores, the PLP showed no sign of even trying to protect us from its effect, entrenched in what could only be described as an economic policy of ‘wait it out and see’. How much longer do you think the PLP could have maintained their borrowing at the levels they would have needed under their ‘wait it out’ policy. For the first time in several years, S&P has not downgraded us, but kept us at our current level, and you seem to want to turn a blind eye to the fact that they credit the OBA with take steps and measures to correct the previous errors and that they recognize the government effort to once again stimulate economic growth.
        You are quite correct though, Greed Killed Bermuda. It’s just not the greed the PLP liked to point at.

      • Sandy Bottom says:

        This ignores the hundreds of millions wasted by the PLP. Wasted. It all could have been so different.

  2. Plp says:

    Your Welcome

    • inna says:

      You’re*

      • Justin says:

        LOL! Now we have a better understanding of how they managed to stay in power for 14 years.

  3. Bermuda First says:

    No comments because many cannot understand the significance of these reports.
    They can talk all day about who was on an airplane or who got a contract for TCD (I AM NOT POLITICAL.SORRY) Let’s go BDA Time to get over your pettiness and learn to swim. OBA/PLP/UBP/NLP/NEW PARTY HAVE NO INTEREST IN YOU OR YOURS. Self serving PARTY!! THEY ALL ARE.

  4. Bermewjan says:

    Thank you S&P, your forecast of moderate growth in 2014-2015 is certainly more positive than I had expected. Your outlook for Bermuda remaining negative is in line with many other of your sovereign ratings and given the state of the global economy, that is not really any surprise.

    The question remains, how will this affect Bermuda’s ability to attract further international business to our lovely shores? Positively I hope.

  5. Rhonda Neil says:

    Bermuda is another world unaffected by the global economy, we have a Bermuda made recession. Just voting OBA should have increased revenues, what part plpers don’t get. Plp 1.2 mill in 14 years OBA plans 800 mill so they say in 3years might be more, they are on track to borrow in 2015. Blame PLP for the global recession.

    • Justin says:

      Paula Cox told us that Bermuda would be unaffected by the US Recession. Bob Richards said otherwise. Bob Richards also warned that the PLP were over-inflating Bermuda’s economy with their capital spending during our peak years. The PLP continued to spend.

      Rhonda, like the rest of the PLP, would like to have you believe that the OBA are borrowing because of incompetence. However, the OBA continue to have to borrow because the PLP set us on the path of debt. The OBA have promised the people there will be no job cuts and this is essentially what the borrowing is for. Who expanded the civil service to unsustainable levels? You guessed it, the PLP!

      The PLP will try to spin this all sorts of ways, but if you just follow the facts, it will lead you to the doorstep of Alaska Hall!

    • Sandy Bottom says:

      The “global recession” excuse is a myth. The USA was out of recession in a year. Canada never went into recession. We have been in recession for five years. Total mismanagement.

      • Rhonda Neil says:

        @ Sandy Bottom: according to S&P..they expect Bermuda to grow in 14/15 IF…. only IF the US starts growing by 2-3% annually…..do you trust their finding.

        The ratings agency added that they expect Bermuda’s economy to “stabilize and begin to modestly grow in 2014-2015, particularly if its major trade and finance partner, the U.S., continues to increase its GDP by 2%-3%, in real terms, as we expect.

        • Sandy Bottom says:

          I never said anything about s&p’s predictions. I just pointed put that the “worldwide recession” excuse is based on a myth.

  6. campervan says:

    Its time to put the hurt on the top -ier civil service who are earning 175+ k a year.
    Garnish them all 25k until things are straightened out.
    Leave the lower earning blue collar guys (they can’t afford to take the hit)
    1000 top earning civil servants garnished thus saves the Country 25 million right off the bat.
    Maybe there are a couple of 1000 earning that much? That would save 50 million a year!

    Sorry guys but you are paid way more than your contemporaries elsewhere and the Country can no longer afford it.

  7. Really says:

    A certain someone “planted some seeds” of destruction,the party’s, concerts celebrity posing building and opulent wasteful spending …….running wild with a no limit credit card well it’s pay back time now as the PARTY is over .

  8. Rhonda Neil says:

    I don’t think anyone expected an upgrade…….but for the Fin. Min. to say he is please with a continued negative outlook, makes a fool out of all of us…. key word “outlook” future plans…… S&P is confirming the Bermuda Govt, the OBA has no credible financial plans….

    • Dan Moody says:

      The current finance minister actually knows what he is talking about.
      Not all of the OBA are performing but Bob Richards is one smart cookie and he has a chance of getting us out of this mess. But if he does the PLP won’t get a shot for a long time.

  9. Alvin Williams says:

    As we continue to travel further away from the blame the PLP government planet and travel deeper in the now OBA deep economic space; one wonders when this anti-Bermudian one term OBA government is going to realize that it can no longer blame the former PLP government and accept that it is in fact lost in space and the focus now is on their economic policies and decisions?

    • Sandy Bottom says:

      No, we still know the PLP is to blame for this mess. Don’t worry about that.

    • Mike Hind says:

      *sigh*

      more rhetoric with no content.

      It’s getting sad, Mr. Williams.