Fitch Downgrades Bermuda’s Ratings to ‘A+’

May 30, 2014

[Updated with PLP & Minister's response]

Fitch Ratings has downgraded Bermuda’s long-term foreign and local currency Issuer Default Ratings [IDRs] to ‘A+’ from ‘AA-’, downgraded the issue ratings on Bermuda’s senior unsecured foreign and local currency bonds to ‘A+’ from ‘AA-’, and downgraded Bermuda’s Country Ceiling to ‘AA’ from ‘AA+’ and short-term foreign currency IDR to ‘F1′ from ‘F1+’.

In a statement issued today [May 30], the ratings agency said, “The economy contracted in 2013 for the fifth consecutive year while total employment shrank further.

“The government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects.”

Fitch added, “The government’s fiscal consolidation strategy intends to reverse the trajectory of government deficits and the debt burden over the medium term. Fitch believes that such strategy faces implementation risks as it partially relies on economic growth and the ability to cut current expenditures without further undermining economic activity and employment.

The ratings agency also added, “Bermuda’s ratings continue to be supported by Bermuda’s wealth [the fifth-highest GDP per capita among Fitch-rated sovereigns], its high savings rate relative to its ‘A’ peers, large and persistent current account surpluses and a strong net external creditor position.

“Bermuda maintains its competitive advantage as a domicile for reinsurance and financial services companies due to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the U.S. and skilled human capital.”

This is the latest in a series of downgrades for the island, and the second one this month.  On May 19, 2014 Moody’s downgraded Bermuda to A1 from Aa3, in June 2013 Fitch downgraded Bermuda to AA-, in May 2013 Moody’s downgraded Bermuda to Aa3, in June 2012 Fitch downgraded Bermuda to AA, and in December 2011 Standard & Poor’s downgraded Bermuda to AA-.

The full statement from Fitch Ratings is below:

Fitch Ratings has downgraded Bermuda’s long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A+’ from ‘AA-’. Fitch has also downgraded the issue ratings on Bermuda’s senior unsecured foreign and local currency bonds to ‘A+’ from ‘AA-’. The Rating Outlooks on the long-term IDRs has been revised to Stable from Negative. In addition, Fitch has downgraded Bermuda’s Country Ceiling to ‘AA’ from ‘AA+’ and short-term foreign currency IDR to ‘F1′ from ‘F1+’.

KEY RATING DRIVERS
Bermuda’s rating downgrade and Stable Outlook reflect the following rating drivers:

The economy contracted in 2013 for the fifth consecutive year while total employment shrank further. The government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects. Fitch foresees GDP growth to be zero in 2014 followed a by 1% expansion in 2015.

Bermuda’s fiscal position is weak compared to peers in the ‘A’ rating category. The fiscal deficit in 2013 reached 6.2% of GDP. The government’s fiscal consolidation strategy intends to reverse the trajectory of government deficits and the debt burden over the medium term. Fitch believes that such strategy faces implementation risks as it partially relies on economic growth and the ability to cut current expenditures without further undermining economic activity and employment.

Bermuda’s gross public debt is expect to continue rising and reach 43.3% of GDP by 2016, although without exceeding the current statutory debt ceiling of USD2.5 billion (net from sinking fund balances, equivalent to 45% of GDP). Bermuda does not require financing until 2015 thanks to pre-financing operations in 2013. Bermuda’s debt burden, both in gross and net terms is below the ‘A’ median. However, these ratios are higher when measured against revenues, highlighting Bermuda’s narrow revenue base. Bermuda’s weak tax-raising capacity and expenditure rigidities limit fiscal flexibility.

Bermuda’s ratings continue to be supported by Bermuda’s wealth (the fifth-highest GDP per capita among Fitch-rated sovereigns), its high savings rate relative to its ‘A’ peers, large and persistent current account surpluses and a strong net external creditor position. Bermuda maintains its competitive advantage as a domicile for reinsurance and financial services companies due to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the U.S. and skilled human capital.

The revision of the outlook to Stable reflects Fitch’s expectation that economic growth will gain pace and the authorities’ commitment to a reduction in the fiscal deficit will be sustained in 2014-2016. A pickup in international business, tourism, retail and real estate activity support the improvement in growth prospects. In addition, the fiscal consolidation strategy, if successfully implemented, could decelerate the rate of public debt accumulation.

RATING SENSITIVITIES
The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:
–Improved employment and investment prospects leading to a sustained faster growth trajectory;
–A successful implementation of the fiscal consolidation strategy that results in decreasing budget deficits and public debt burden;

Negative:
–Failure to successfully implement a fiscal consolidation strategy that undermines confidence in the ability of the authorities to contain the increase in debt burden;
–No material pick-up in economic growth resulting in further job losses and adversely affecting the trajectory of fiscal accounts;
–Regulatory changes that hurt international companies operating in Bermuda.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions.

–The growth, fiscal and external forecasts assume that Bermuda maintains its attractiveness as an insurance and re-insurance jurisdiction.

–Fitch assumes that economic growth in the U.S. will reach 2.8% in 2014 and 3.1% in 2015, providing some support to Bermuda’s tourism sector.

–Current account surpluses will provide support to the pegged exchange rate regime in 2014-2016.

Update 1.58pm: Shadow Finance Minister David Burt said, “Today’s downgrade by Fitch Ratings is yet another vote of no confidence in the OBA’s “Job’s and Economic Turnaround Plan”. The OBA’s Economic plan, which Fitch describes as risky, has turned into an unemployment and economic nightmare for Bermudians. Since the OBA have taken office Bermuda has lost 1,166 jobs and seen 261 companies close their doors.

“Employers are cutting staff, hours, and benefits – meanwhile the cost of living continues to rise making life harder for most Bermudians. Our young people are leaving the island as they see no opportunity at home while work permit policies seem to put the rights of employers and non-Bermudians over the rights of Bermudians. Major construction projects are coming to an end with no new projects scheduled to begin.

The OBA’s focus on mature industries and lack of attention to diversification and new industries is not working. We cannot build an economy for the future with ideas from the last century; we must diversify to bring new industries and jobs to Bermuda.

“This is why the PLP have called for immediate action on online gaming; immediate action on alternative energy investments; immediate action on promoting the blue economy; immediate action on freeing up local industry from unnecessary regulation, which is stifling the creativity of our entrepreneurs; and the establishment of a Bermuda Fund to attract new job creating industries to our shores. These ideas will assist Bermuda and Bermudians by diversifying the economy, creating new jobs, and increasing government revenue.”

Update 3.27pm: Finance Minister Bob Richards said the ratings downgrade was not unexpected, given the high level of debt accumulated since the financial crisis, and added, “Fitch has said that our economic data in 2014 suggests that the Bermudian economy could be stabilizing and foresees GDP growth to be zero in 2014 followed a by 1% expansion in 2015.”

Minister Richards noted that the adjusted rating remains in the upper medium investment grade, with a stable outlook and reiterated the Government’s strategy to implement a Jobs and Economic Turnaround Plan that strikes a balance between responsible growth and disciplined financial management and added: “As the Minister of Finance, I remain committed to creating an economy that works for everyone and returning our public finances to a sustainable position”.

Update 4.23pm: Video comments from Finance Minister Bob Richards

Update 4.31pm: Video comments from Shadow Finance Minister David Burt

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  1. Bermuda Downgrade Does Not Impact Insurers | Bernews.com | June 3, 2014
  1. "Still I Rise" says:

    This downgrade merely tells us that OBA does not have a PLAN to grow our economy. The old strategies are not effective and the outcomes are merely resulting in no growth. If Mr. Richards had a plan I am sure we would have at least began to see the beginning of the roots. But so far we have nothing. It Bermuda is to turn around. The OBA must begin to put a REAL PLAN in place.

    “Fitch Ratings has downgraded Bermuda’s long-term foreign and local currency Issuer Default Ratings [IDRs] to ‘A+’ from ‘AA-’, downgraded the issue ratings on Bermuda’s senior unsecured foreign and local currency bonds to ‘A+’ from ‘AA-’, and downgraded Bermuda’s Country Ceiling to ‘AA’ from ‘AA+’ and short-term foreign currency IDR to ‘F1′ from ‘F1+’.”

    • Ex-pat says:

      Did we read the same article? Fitch predicts that the OBA’s plan will first stabilize and then grow GDP over the next 2 years.

      • Black Soil says:

        The fall in rating is PLP fallout. The increase confidence in the future is OBA fallout. In the near future the ratings will improve and PLP will freak out…probably at the same time as they freak out over new resort developments.

        • Baltic Fury says:

          David Burt, you have no right of comment. A decade of PLP overspending caused this.

    • Navin Johnson says:

      Actually it says the opposite but nothing would convince you…..improved business confidence and positive investment prospects are mentioned….just by being saved from another 5 years of the PLP would boost confidence…rating agencies were given incomplete data from the previous Government with gaps in reporting and now ratings are getting the full and complete devastation of the debacle that was and is the PLP….at least there is some hope of recovery but the likelihood is that the PLP will fight anything and everything

    • Lois Frederick says:

      “The government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects.”

      Taken from the Fitch article above. I suppose to you this doesn’t signal any sign of a plan. The OBA are slowly turning it around. It will take time though and people are impatient after 5 years of negative growth. As Bob has said it is like stopping an oil tanker. It takes a long time to do that.

    • Joonya says:

      No.. it tells us that PLP REALLY F*^#ed us. Put it where it really belongs man. You couldnt have possibly expected a fix in one year.. come on man.
      And further more, “The OBA must begin to put a REAL PLAN in place.”
      are you serious? Everytime they try, the PLP are swatting it away to gain political points. RUBBISH

      • "Still I Rise" says:

        But there is no doubt that the Fitch downgrade is an alarm bell not only for the Bermuda’s economy, but more particularly for members of OBA. This is not good news, no matter how one attempts to spin it. A downgrade is actually a no confidence vote. The nice things about improvement in Confidence is only a tiny way to soften the blow. One must read beyond the words, and look at the underlying implications. This is the where the real concern and problems are found.

        But the reality is Bermuda’s OBA needs to address this second downgrading within less than one month. The question now is how the government will plan to answer the downgrade. The gloomy side of the economy and the most challenging times comes the most innovative answers. If Mr. Richards had a plan we should at least see the roots begins to grow. It does confirm that the OBA never did have a Plan that was workable, if not we would see the beginning of the results. What happens after 2015, will the government once again borrow or what?

        • Rick Rock says:

          Out of interest, what kind of “no confidence” vote was it when there were multiple downgrades under the PLP? Were those downgrades clear signs that the PLP has no ideas how to improve Bermuda’s economy?

          After all, the PLP told us they had no choice in the matter. Paula was too busy looking for the nearest hat shop, and all the PLP would tell us was “there’s a World wide recession, we can’t do anything about it, we’re helpless”, while wringing their hands and spending our borrowed taxpayer money like drunken sailors.

          By the way, this is not the ‘second downgrading in less than one month’. The other downgrading was from another rating agency. It’s essentially the same downgrading affirmed by another agency. It does help if you have a basic idea what you’re talking about.

        • Concerned says:

          why is it people always see, live, breath, negativity when it is not the PLP speaking, saying, doing and spewing. You all should have been shouting an waving and marching when they put up the Payroll tax which started the exodus of companies and all that followed. People are hurting yes, but it is not the blame of the OBA or themselves… People Lying People

      • BETTTY TRump says:

        “Today’s downgrade by Fitch Ratings is yet another vote of no confidence in the OBA’s “Job’s and Economic Turnaround Plan”. The OBA’s Economic plan, which Fitch describes as risky, has turned into an unemployment and economic nightmare for Bermudians. Since the OBA have taken office Bermuda has lost 1,166 jobs and seen 261 companies close their doors.

        “Employers are cutting staff, hours, and benefits – meanwhile the cost of living continues to rise making life harder for most Bermudians. Our young people are leaving the island as they see no opportunity at home while work permit policies seem to put the rights of employers and non-Bermudians over the rights of Bermudians. Major construction projects are coming to an end with no new projects scheduled to begin.”

        Well said MP Burt…

        • BETTTY TRump says:

          A PLAN by the OBAubp should have at least by now seen something happen. Mr. Richards seems to be falling on his sword on this one, and has not put forward anything that is working, except telling folks “you just do not understand”…I understand you do not have a Plan..

          A rating by Fitch agency speaks volumes. It tells us that we must move forward to improve our economy. Attempts to smooth it over will not change our ratings. Ratings will only reflect change when an effective PLAN with OUTCOMES is actively put into place and begins to bear fruit. Oh course Fitch has to soften the blow and suggest and highlight a few good things, but it does not change the overall rating applied to Bermuda..So far nothing from the OBAubp..

          • Terry says:

            Oh Betty and Laverne and Chris…..just shut up.

        • Try reading the article ... says:

          If you actually read the article it actually says just the opposite of what you’re claiming.

          “The government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects.”

    • AgeBees says:

      Definitely read a different article – in fact, it is the OBA that has the fiscal consolidation strategy and Fitch has said that failure to implement this will be bad…so why are the unions and the opposition and people like you not paying attention to the hard decisions that have to be made…

    • Steve Biko says:

      Give us a minute FITCH they’re still looking under the hood!!!!!!!!!!!!

  2. sonso says:

    The downgrade merely tells us that our economic situation is dire! The OBA has been in office for 1.5 years. I can assure you that this downgrade cannot 100% be attributed to their short stint in power. It is merely a sign that things have been brewing for some time now and we are now feeling the effects even greater.

    While i do not support either party and rather vote for whoever i think will do the best job running the country, do you think the PLP would be doing a better job considering their track record??

    And further, what sort of PLAN do you suggest to get things turning around? It is not effective as just creating a plan to put in place and hoping that things happen. This was clearly the PLP’s “plan”, and I have far more faith in Bob and his crew to foster a better economic environment for people like you and I to see our own PLANS to fruition! Be it being a company man, or starting your own business, you should not be waiting for the government to create a plan for you!

  3. Ex-pat says:

    My favourite lines:
    “Regulatory changes that hurt international companies operating in Bermuda.”
    “The growth, fiscal and external forecasts assume that Bermuda maintains its attractiveness as an insurance and re-insurance jurisdiction.”
    Maybe the xenophobes will shut up now…probably not.

  4. Jo Blo says:

    I think its fair to say the rating isnt not pointing blame at our government, but rather cluing us in the FACTS regarding the state of affairs. It was not entirely negative.

  5. Coffee says:

    Bob Richards needs to address this , or use Dr.Gibbons as a surrogate to address it for him .

    • Navin Johnson says:

      Rating agencies meet with the organizations they are reviewing so Bob Richards no doubt spent a great deal of time with them…..he most likely tried to answer many questions left from the PLP related to unaudited and/or qualified opinions during their financial disaster….the confidence mentioned comes from meeting with the OBA….you have never met anyone from a rating agency and I have so I know how they work

      • Coffee says:

        You actually have no idea who I’ve had the privilege of meeting !

    • Anon says:

      Well Dr.B got one of his puppet surrogates David Burt to speak today so it would only be fair don’t you think?

    • 32n64w says:

      Bob is an intelligent Bermudian who doesn’t need anyone to speak for him. Unlike former Premier Cox who disastrously remarked some years ago (2010 if I recall correctly) that we were now heading towards an economic recovery. But why let facts get in the way of your false narrative, eh?

  6. San George says:

    The government needs to stop subsidizing and paying rents for people. Let the market dictate rents. Man-up people. Landlords and tenants will be better for it. The country will also be better for it. Use those funds to reduce debt.

    • Concerned says:

      Subsidies is what keeps a roof over your aging relatives head at the continued care unit and anyother seniors residence. What needs to be done is a thorough investigation into the Financial Assistance scheme – $50M un real

  7. San George says:

    We should be converting our debt from U.S. to Bd$. Pay that interest expense to local investors, given the banks refuse to pay our senior citizens on their deposits.

  8. terry says:

    The horses mouth speaks louder than the one that won’t accept reality.
    Shalom.

  9. Sandgrownan says:

    Burt, as always, is utterly clueless and clearly didn’t read the report.

    • sonso says:

      well at least he is on the side of the house that is all clueless who dont read anything they do not produce! could you imagine if he was a part of the OBA how deadly he would be!

  10. aceboy says:

    A plan being implimented is much better than all the plans for plans under the PLP.

  11. swing voter says:

    a**hol#@ will continue to make stupid comments. Fitch downgrade is not the end of the world… OBA are our only chance of survival. ignore a**hol#S and continue to sell Bermuda to investors….too many of us are on the edge of loosing everything.

  12. John Thorne says:

    We continue to suffer as the result of the mess that the PLP handed to the OBA in December 2012. It is going to take years if not decades to get out of this mess if ever.

  13. Vote for Me says:

    All
    Lets be objective in our comments. Any downgrade cannot be good news for Bermuda. The ratings agency want to put some context to their commentary, thus they have to reflect on what they see as the future prospects for Bermuda.

    The practical implication for all ratings is that Bermuda will have to go to the capital markets to borrow more money before March 31, 2016 and the costs of borrowing will be higher because of the downgrades. Add to that the recent dire predictions that BHB needs and additional $40m per year to continue operations once they open the new wing and start paying $2.5m per month for 30 years!!

    The longer term implication is that government will have to make some of the more difficult SAGE recommendations for cutting costs.

    My expectation is that we will see significant reforms in public servant pensions.

  14. Credit rating?….That is because we are not equifiable in terms they understand….we are (and yes it is funny),we are not down in black and white as their system is over there,and their system is clearly unsustainable,200,000,000 an hour every hour everyday of every year is spent out that dey don’t have…they don’t have the ability to pay the interest!…..and I need their opinion?….put it on some tp and I’ll purchase it at the grocery store once a week!Our economy is a living breathing thing…it expands and contracts…..sounds good ennit?That is because it is…and it is blatent,and honest…without pretence nor excuse…..but like ship it happens….when it is oba it is good…when it is plp…..it is in serious trouble…..at present were good and getting better…..I really don’t need +itch to tell me ship!

  15. Don’t talk no ship….and it won’t be no ship!

  16. So….you wanna get fiscal with me?….I’ll go there…..let’s dance *itch!

  17. Alvin Williams says:

    ‘Fitch downgrades Bermuda’ The bitter and the sweet; the UBP/oba likes to claim the sweet under it’s watch but is unable to swallow the bitter under the same watch. But time is running out next year will be here before we know it and than who will the UBP/oba blame for Bermuda’s economic woes?

    • Anon says:

      Ha …thanks Alvin, that’s a good one. I know you couldn’t possibly be serious in thing this wasn’t 10000% caused by the Plp

  18. Mark says:

    That’s an easy one Williams – even you know which crap party got us into this mess!!

  19. Ringmaster says:

    If only Paula Cox hadn’t extended the Exempted Undertakings Act until 2035 there could have been dialogue with IB to put a small tax on profits that would have raised revenue and helped get Bermuda away from the tax haven image. This would have helped reduce the debt too. Instead the PLP have tied Bermuda until 2035, but I guess Paula and the PLP knew what they were doing.

    • forwhatitsworth says:

      You are correct that the Exempted Undertakings Act has truly restricted Bermuda’s ability to raise taxes, and in effect renders the fact that Bermuda has the “fifth-highest GDP per capita among Fitch-rated sovereigns” rather irrelevant, because Government cannot tax even half of that.
      But don’t imagine that any other Government would have had the guts to do any different. International Business is fundamentally greedy and would not tolerate such tax increases. Look at how it squealed when payroll tax was increased.
      The fact of the matter is that the Bermuda Government (whoever they are) must live within its means, and its “means” are currently $800-850million per year less the interest ($120million and rising). Any further expenditure than that is simply irresponsible.
      I agree that the PLP got the Government’s finances into this mess, obviously. But don’t be fooled, the OBA are not getting us out of the mess, but are continuing to stick their collective heads in the sand.
      Bermuda’s Government (whoever they are) will I am afraid continue its downward spiral in credit ratings, the Bermuda dollar will collapse, and the divide between the haves and havenots will grow ever wider.