Opinion Column: “Two Nuggets & Three Issues”

[Opinion column written by Larry Burchall] If, as I wrote last week, Bermuda’s recession ends with GDP rising as much as 15% – 16%, and Bermuda gets back to providing 38,000 jobs with every currently unemployed Bermudian re-absorbed into the economy; then Bermuda will have resolved the first of three issues currently bedevilling Bermuda’s present and near future.

Bermuda will, or can, fix its ‘unemployed Bermudian’ problem.

But without any serious – 20% to 25% – reduction in Government’s Personnel Costs, the overall problem remains unchanged. So the second issue is that still, Government’s total Personnel Costs must soon and eventually get down to an overall $450 million level.

That can happen in two ways.

First, reduce the number of Government employees by 1,000/1,200. Second, cut the overall costs for the near 6,000 persons who draw their pay directly or largely from Government.

Since the first action has never been recommended or suggested – by me – as a viable option, the second action is the only option.

With the America’s Cup coming, with the anticipated aggregate construction works at the Airport, Ariel Sands, Club Med, Morgan’s Point, Pink Beach, and possible renovations for, and start-up of, Casino gaming; there will be a demand for workers in those sections. This fresh demand should ramp up the general economy. A ramping up economy can – I hope will – absorb all said-to-be 3,000 unemployed Bermudians.

The ramp-up could go even further and actually require 4,000 workers filling jobs. Should this happen – and I hope that it will – then the private sector economy will be able to draw this additional 1,000 workers from those Government workers who ‘jump ship’ from Government into the private sector.

Jumping ship achieves two objectives. One, Government painlessly downsizes. Two, the private sector – and tax base – adds an additional 1,000 workers and grows larger. However, this still means that Bermuda’s National Workforce [NWF] only ever rises to 38,000. [Bernews: 9 December 2014.]

At 2013’s NWF level of 34,277, the NWF was close to the 34,633 level of 1996. Nor will 4,000 new private sector jobs replace the 5,936 jobs lost since 2008. So filling 38,000 jobs still means only getting back to the ten years ago 2004 level when there were 38,363 in the NWF. It still means that GDP will likely settle around $6.5bn/$6.6bn.

That’s the first nugget.

The second nugget? If as many as 1,000 current Government workers jump ship to the private sector, then the possibility of Government finances ‘breaking even’ in 2017 shifts to probability.

If Government’s spending can match Government revenue in FY 2017/18, then in that Financial Year, Government will not need to borrow. That means that after thirteen consecutive years, Government finances will finally begin to look healthy.
Healthy enough, that is, for the credit rating agencies [Standard & Poor’s, Moody’s, Fitch] not to slide Bermuda’s sovereign credit rating down into their generic ‘B’ territory – as has already happened with Italy. [Moody’s May 2014 Report assigned an A1 rating to Bermuda– that’s only two levels [A2, A3] above Moody’s ‘B’ territory.]

So jumping ship is the second nugget.

At this point, it is vitally important to note that between December 2014 and December 2017, there will be an election. Whenever the election and whatever the outcome, a new political administration will be in place for FY 2018/19. That new political administration will either be OBA with some faces changed, or PLP with some faces changed.

Though faces and parties may change, the arithmetic will not. It will still be balance – or borrow!

Achieving a balanced Budget by or in FY 2017/18 means that any future Government-of-that-day must not overspend, because overspending will force more borrowing in FY 2017/18

In May and November 2019 the newly elected administration must repay a total $180 million. The newly elected administration can only get that $180 million through fresh BORROWING prior to May 2019, or by paying off that $180 million out of surpluses built up in FY’s 2017/18 and 2018/19.

If, in 2018, the newly elected administration borrows in order to have the $180 million repayment in hand for 2019, then Bermuda will face a ‘Barbados Drop’. If the borrow includes funds to cover two more deficits in FY’s 2017/18 and 2018/19, then the ‘Barbados Drop’ will be bigger.

What is the ‘Barbados Drop’? In September 2013, the Barbados Government sought to borrow a large tranche. The global market was quite willing to lend, but demanded a much higher interest rate. Facing this fact and arithmetic of Debt, the Barbados Government temporarily withdrew its loan request and re-assessed. The Barbados Government then decided that it had to lay off up to 3,000 of its Government workers [Bernews: 16 December 2013]. Those layoffs were first notified to those workers just two weeks before Christmas 2013.

If Bermuda returns to the global market before 2019, then, as with Barbados, it will be the global market – not us Bermudians – that will decide what rate of interest Bermuda pays on whatever Bermuda borrows.

In Bernews [August 19th 2014], I described this cut or borrow decision of 2017 or 2018 as the ‘hurdle’ before the ‘wall’. Even with GDP ramping up 15% – 16% by 2017, the ‘wall’ will still appear.

On 20th July 2020, Bermuda is obligated to repay the $500 million borrowed in 2010. On 20th July 2020, Bermuda will not be able to repay that $500 million bundle. That’s the ‘wall’.

The global investor community will acknowledge that Bermuda cannot repay. In July 2020, when that $500 million gets rolled over, the global investor community will demand a new and higher rate of interest.

If Bermuda borrowed in 2017 or 2018 to cover $180 million as well as two or three more deficits, then Bermuda can expect a huge upwards surge in the rate of interest demanded for re-loaning the $500 million.

And after that $500 million ‘wall’ of July 2020, there is the $140 million of December 2022, then the $475 million due March 2023. None of this total $1,115 million [or $1.115 billion] can be repaid. All of this $1.115 billion will have to be rolled over.

However, if the newly elected administration acts sensibly and responsibly in FY 2017/18, then Bermuda stands the best chance of getting the best interest rates for this series of unavoidable rollovers. This means that – in FY 2017/18 and 2018/19 – the newly elected administration must demonstrate that it can balance a budget and not overspend.

If balanced budgets are not happening by FY 2018/19, then Bermuda can anticipate that investor demands for a higher interest rate will push Nanci well past the $200 million level. Nanci will be sniffing at $230 million by March 2023. With $750 million of Bob’s ‘borrow’ to be dealt with in February 2024, Nanci will float past $250 million. This means that Bermuda could see a series of ‘Barbados Drops’ – commencing as early as 2017.

Bermuda’s overall and only solution?

Grow Bermuda’s National Workforce [NWF] way past the possible 38,000 of 2017. Get Bermuda’s NWF through and past the 40,213 of 2008. Get Bermuda’s NWF up to at least 44,000 and get GDP up to and past $8.0bn.

The third issue? Bermuda must grow ResPop!

The absolute financial arithmetic of FY 2017/18 stalks towards us. But between December 2014 and December 2017, Bermudians, Bermuda, and the Bermuda Government have now got a thirty-six month ‘breathing spell’. Remember though, during these thirty-six months, Nanci will and must get three annual payments of $190 million.

- Larry Burchall

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