Burchall: 3 Facts Underpinning The Economy
[Opinion column written by Larry Burchall]
Fay and Gonzalo really knocked us about, but, in typical Bermuda fashion, full recovery from that big double strike is well in hand.
Like those hurricane winds, three facts drive Bermuda’s six year recession and underpin Bermuda’s economic problem.
Driver and new fact One– Nanci, our evil spider. The Bermuda Government’s first priority is to “feed Nanci” his average $170 million a year. That’s over $465,000 a day, $19,400 every hour, and $323 every minute. [Nanci = NNC = Non Negotiable Costs = Debt Service Costs = Interest + Sinking Fund]
Nanci is priority because in all the small print in the Notes and Bonds with all of its foreign lenders, the Bermuda Government agreed to treat Debt Service as priority. Nanci comes before Financial Assistance, Education, Civil Service pay, etc…. and Minister for Finance Bob Richards emphasized this fact at his 8th October ‘Town Hall’.
All Nanci payments are in foreign exchange – not Bermuda dollars. So those Nanci-paying dollars must first be earned.
Who earns those dollars? IB brings in $85 out of every $100. Tourism brings in the remaining $15.
Where do those dollars come from? They come from places north of North Rock; east of Five Fathom Hole; south of Argus; and west of Chub Head Beacon. Those dollars come from ‘foreign’. Nanci is a voracious spider that always gobbles up the first big chunk of our hard-earned foreign dollars.
Nanci is the first and primary driver.
Driver and fact Two – A falling or non-growing residential population [ResPop]. With no natural resources of any kind, Bermuda is a pure service economy and has been so since 1921 – that’s 93 years. Almost a century.
Bermuda’s economy once depended on the passing through of up to 600,000 Tourists who lived in Bermuda five days at a time. Now Bermuda’s economy is far more dependent [with Tourism less than 5% of GDP, Bermuda is over 80% dependent] on the 5,000 [now less] Business Residents who reside in Bermuda 365 days a year.
Nine general economic indicators [GDP, Container tonnage imported, Customs Duty receipts, Belco energy sales, Retail sales, Car registrations, Motorcycle registrations, Unoccupied houses and apartments, Emptied out office space.] say that since 2008, ResPop has fallen significantly.
Three times in four years [2011, 2013, 2014] the neutral and foreign Credit Rating agency Standard & Poor’s commented negatively that the Bermuda Government had ‘gaps in official data’. However, blinded by these ‘gaps in official data’, Government still denies that ResPop has actually fallen from a peak around 68,000 in 2008 to a low around 60,000/61,000 in 2013.
Falling ResPop results in decreasing on-Island demand for all goods and services [see the indicators] which means less general economic activity which results in an overall drop in GDP.
The drop in GDP is confirmed by Government which reports nominal GDP at $6.11 billion in 2008 and $5.57 billion in 2013. That’s an overall 9% drop in nominal GDP.
[If, as you should, you factor in inflation, it’s worse. From $5.85bn in 2008 to $4.94 in 2013 = 16%.]
Falling ResPop is the second driver.
Driver and fact Three – The third driver is not as clear and tangible as the first two. This third driver is an amalgam of ignorance [Government ‘gaps in official data’ and consequent ignorance regarding ResPop]; a lack of community knowledge [a community non-understanding of how Business Park Bermuda actually works]; and a community complacency borne out of 88 years of more-or-less unbroken economic growth that saw tiny isolated resource-less Bermuda’s GDP-per-capita go from being less than that of the USA [in 1921]; to parity with the USA [in 1983]; to almost twice that of the USA [in 2008].
When, for four generations, a whole national community has only ever known an overflowing ‘horn of plenty’, that community finds it difficult to do three things.
The first is to rid itself of a sense of entitlement and accept that there has been economic change.
The second is to acknowledge that economic hardships, unknown until now, will come or have come; and that they will simply have to be borne.
The third is to understand that necessary and consequential change will cause some unavoidable shifts in the balances in Bermuda’s total social community.
Together, the consequence is an inability to take action, and a reluctance to accept change that is aided by a fear of what is perceived but not understood.
This triple coupling of inability, reluctance, and fear results in what physicists call “inertia”. Bermuda’s national inertia is currently supported by Bob Richards’ August and December 2013 $800 million cushion of fresh Debt.
But Bob’s $800m cushion is fast deflating! The $800m ‘air’ in Bob’s cushion will not last past 31st December 2017.
The third driver is this prevailing national inertia.
The way out?
The way out? First, ensure that every resident understands the problem. However, the comments and questions during and after that two hour October 8th “Town Hall” at Pier 6 indicate that a lack of understanding could be a fourth driver!
Some good news
Government faces unexpected costs for the two hurricanes. There will be a general national impact caused by the overall loss of a day and a half in the pre-Gonzalo period. Two unexpected losses and expenses.
There is, though, some good news. The damages from the two hurricanes will result in a mini-influx of dollars as insurance companies pay out.
There will be a mini-boom as construction workers, landscapers, truckers, and painters rack up thousands of hours in remedial works. There will be a surge in sales of building supplies and materials. So those two ‘ill winds’ blew some good.
- Larry Burchall
Mr. Burchall I thank you because I don’t believe anyone on this Island could have explained our predicament more clearly than you have.
“All Nanci payments are in foreign exchange – not Bermuda dollars. So those Nanci-paying dollars must first be earned. Who earns those dollars? IB brings in $85 out of every $100. Tourism brings in the remaining $15.
Where do those dollars come from? They come from places north of North Rock; east of Five Fathom Hole; south of Argus; and west of Chub Head Beacon. Those dollars come from ‘foreign’. Nanci is a voracious spider that always gobbles up the first big chunk of our hard-earned foreign dollars.
Nanci is the first and primary driver.
Way out #2 – ensure that the Bda Gov shrinks its massive wage bill – starting by reducing the numbers of employees by 19%, which equals the number of Non Bermudians employed by the Bda Gov..
Oh, it’s you again. Yesterday the village idiot was suggesting there are 1,900 expats in the civil service. Total lie, of course.
But still, if you’re suggesting we fire 1,900 civil servants, I agree. Do it right away. Makes Sage look mild.
@jonah
You could reduce the wage bill at a restaurant by firing all the chefs but I don’t think that will keep the business alive. You have to look at who you are firing; in particular their value to the business (in this case gov. dept.) that they are in.
I’m not saying that all expatriates in gov. are hard working and all Bermudians are not. However SAGE paints a dreadful picture of inefficiencies in gov. and the unions recently pressured the current administration to forgo implementing these much needed recommendations (by the way, OBA, I’m so unimpressed).
So, fire the chefs if you must. Just don’t expect to receive your order … ever.
Ride
the lack of comments on this particular article is quite telling…and disturbing.
@ wondering: either the average person doesnt understand, doesn’t care or both. Better to nip at the ankles of someone who was entitled to avail themselves of some public assistance in the form of a tarpaulin for a leaking roof brought on by a Hurricane.
^ the lack of comments on this particular article is quite telling…and disturbing. ^
Larry explains that here =
*The way out?
The way out? First, ensure that every resident understands the problem. However, the comments and questions during and after that two hour October 8th “Town Hall” at Pier 6 indicate that a lack of understanding could be a fourth driver! *
Just a thought..
If Non Negotiable Costs (‘Nanci’) are paid first, it cannot be true that Bermuda is borrowing to pay its debt!
The reality is that Bermuda is paying its debt out of taxes that are collected. Bermuda is borrowing for goods and services that are delivered to the public, including public servant salaries and benefits.
Just a thought but we need to be clear on what the borrowed funds are used for.
And borrowing to pay basic operating costs is simply unsustainable. No matter if you are a Government or a business.
Borrowing should be to fund large capital projects and developments and not for paying the salaries and benefits of your employees.
Vote for Me,
In the interest of absolute clarity and honesty, I offer this sub-analysis:
HOW GOVERNMENT REALLY SPENDS
Gov Revenue $901.7
Gov priority pays out $-161.2
Leaving this to spend $740.5
But Gov wants to spend $1,007.8
So Gov spends $740.5
Then Gov borrows $161.2 [Seen this number before?]
And Gov borrows $106.1
Now Gov can spend $1,007.8
$161.2 + $106.1 = $267.3 = The Deficit for 2014/15.
Larry Burchall
Now that’s what I’m talking about. People should see and understand these numbers. Thanks Larry, from your biggest fan
@Mr. Burchall
Seems to me there are some mixed messages here in Bermuda surrounding this debt. Perhaps this why the layman doesn’t really believe that Bermuda is in a financial quandry when the Bermuda Government continues to spend at $1,007.8 when there is only $740.5 available.
When is any government prepared to do the right thing: SPEND ONLY WHAT IS AVAILABLE. The average layman understands that you need to stay within your budget if you are ever going to climb out of debt.
The average layman wants to know how this country can manage with $740.5 and what that means in terms of reduced services and more importantly how long would would this period of austerity last before we are significantly out of debt – 5, 10 years. This is my idea of shared sacrifice.
Or is this more a Political Issue and less of a Financial issue?
Larry,
As usual, I am your biggest fan. PLEASE make your opinion letters understandable to the average reader. A layman (someone not in finance as my intention is not to offend anyone here) might not understand what a deficit is, or what debt is or what debt service is! If your intention is to an write opinion letter for the people that already understand the mess we’re in, then you have succeeded. Bermuda needs for someone of your great understanding to explain our situation in terms everyone can understand.
Deficit – Earning $3k a month, but having expenses of $4k.
Debt – Money you have borrowed. Eventually you will have to pay this back.
Debt service – Paying a fee to the person you have borrowed from, usually as a percentage of the debt (interest).
I was also thinking more along the lines of. Deficit= hole or cash needed, debt service= interest and debt=mortgage. Thanks for understanding that we need to communicate this in terms that everyone can understand
Great article and analysis as always. Who in the Bermudian community will be “big enough” to put politics aside and find a way to help people understand this position. Those with financial acument get it clearly, but much of the population does not understand it, and until they do, they cannot accept or understand the need for the pain. Who is out there? A pastor, a businessman or whoever. Stand up for your country and help your people to understand.
What about appointing a financial/economic/guru-come-ombudsman one of who’s tasks would be to drag Bermudians into the new economic age with both a campaign of education and one of supplying information on how to cope with less. I nominate Larry Burchall.
I second Larry Burchall!