Column: Burchall On Looking Forward Until 2017

September 17, 2015

[Opinion column written by Larry Burchall]

After six years of decline [2009 to 2014], Bermuda’s isolated and unique economy is bound to uptick marginally. Even if only, as now, from general price rises and reductions [some fuels].

Between January 2015 and December 2017, I anticipate that general price rises/reductions, a push from ACBDA, and a nudge from Morgan’s Point, will help to give a small uptick to nominal GDP. However, any real growth in GDP can only come as the consequence of a material rise in ResPop resulting from the ingress of new Business Residents.

Nominal GDP, just reported for 2014 at $5.651bn [nominal], could snuggle up close to the just reported $6.18bn [nominal] level of 2008 level, and achieve that by late 2017. That requires only 2.1% annual nominal growth in nominal GDP in each of 2015, 2016, and 2017. Without any material rise in ResPop, but with general price increases, a push from the America’s Cup, and a nudge from Morgan’s Point et al, and without an increase in the fundamental of ResPop, that level of nominal growth is just about possible.

But in the real world, every action brings an immediate and equal reaction or creates a significant consequence. In five simple steps, between October 2015 and December 2017, this is how basic things are likely to flow.

Point One – October 2015 to December 2017 – Action. As overall national economic activity [nominal GDP] appears to improve, with fanfares and press conferences, the governing political party will claim credit as ‘good managers of the national economy’ and as the ‘people best equipped to lead’.

Reaction – 6,000 plus Government/Quango employees will acknowledge this national economic growth. Based on the agreed fact of an improving economy, and behaving logically, these employees will more strongly resist apparently arbitrary personnel cost cuts or serious downsizing. To make up for their ‘five years of sacrifice’, these employees may seek small pay increases or benefit adjustments.

Point Two – Financial Year April 2016/March 2017 going into April 2017/March 2018 – Action. If GDP sniffs at $6.0bn by or in 2017, then by FY 2017/18, actual Government revenues might rise as high as $1,000m. However, after priority feeding Nanci with $184m, Government will still only have $816m left to spend on Personnel, Operations, Capital.

Reaction – As suggested in Point One, with revenues rising, the pressure to not cut spending or downsize will also rise. It will be politically impossible for a re-election seeking political party to even suggest, much less actually cut, Government spending.  For purely short-term political reasons, Government spending – and consequential borrowing – can be expected to rise in 2016 and in election year 2017.

Point Three – October 2015 to July 2017 – Action - Government will continue to overspend. Since 2005, Government’s annual revenue has averaged $906m; Government’s total annual spending has averaged $1,111m; Government’s annual deficit has averaged $205m. Since Government will not change this pattern of overspending, annual deficits will continue from now into election year 2017. The consequential need to borrow yet again will result in yet another increase in Gross Debt and the cost of priority feeding Nanci.

Reaction – [a] This links up with Point Two.  Government won’t suddenly break its now ten year overspending pattern.  Because Government will continue to overspend, Government will be forced to re-finance all existing debt. On Redline Day in July 2017, gross debt will total at least $2,295m, and will then rise higher. It is certain that from Redline Day on, all re-financing will attract higher interest rates.

[b] The $200m two year Loan Facility [a form of ‘overdraft’] from Butterfield Bank will have to be converted into long-term ‘paper’. This conversion will trigger a Sovereign Credit Rating Review which must complete about 90 days ahead of the $200m conversion. The Rating Agencies will observe that:

  • Gross National Debt rose from $1,574m in December 2012 to at least $2,295m in July 2017;
  • Increases in revenue are trailing increases in spending;
  • Massive deficit spending continues;
  • A General Election looms.

The foreign Rating Agencies, S&P and Moody’s, will evaluate the changed and heightened risk to foreign lenders. Independently and arbitrarily, these foreign observers will decide whether Bermuda gets downgraded one, two, or three notches.  So Bermuda can anticipate getting financially slapped in the Spring of 2017.

Point Four – October 2015 to December 2017 – RESPOP – Action – Since 2000, born Bermudians have been leaving Bermuda. Linking up with a post-2008 loss of Guest Workers, this has resulted in a 7,000 person reduction [10%] in ResPop.  ResPop commenced falling in 2009.  ResPop continued falling into 2014 dropping to 61,777.  ResPop reduction impedes growth in GDP.  O c

Reaction – If Bermuda does not import overseas Bermudian investors or foreign Business Residents, ResPop will continue declining. For short-term political reasons, one party will mute the need to import people while the other party will not emphasize the need to import people. Neither party will acknowledge the significance of the steady reduction in the number of people residing in Bermuda. So neither party will deal with the fundamental factors that underlie this ongoing reduction in ResPop.

Overall - Although ACBDA, Morgan’s Point, and general price rises/reductions will help push nominal GDP up, declining or flat-lining ResPop will slow GDP growth and help pull GDP down.

These are just four linked points. There are more. And then there’s the big question: “What happens after 2017 and ACBDA?”

Summary look forward to 2017.

  • By the end of 2017, nominal GDP will rise slightly, perhaps about 7% overall.
  • With the pattern of overspending unchanged and revenue still oscillating around $900m, Government borrowing will continue and Gross Debt will rise.
  • Redline day will arrive in July 2017.
  • ResPop will continue falling, though the rate of fall may decrease.
  • There will be a General Election.
  • ACBDA will end in October 2017 – what then?

It’s time for some clear and hard thinking because some, but a steadily reducing number, of the impending negatives can be avoided or softened …. But time is now very short and getting shorter.

- Larry Burchall

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Comments (21)

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  1. Ryan says:

    Great piece—Larry gets it, as usual!

  2. swing voter says:

    ok who will be first to label Capt. Burchall a ‘number bomber’

  3. Vincent Vega says:

    When is redline day for the public pension? I’ve heard it is at least $2 billion underfunded.

  4. Hoolieh says:

    Airport? St. George hotel? Business Spinoff from AC? Always different assumptions…
    Mr. Burchall, is your view conservative or optimistic?

    Best foot forward, and weakness in the above approach, would be to give a range of possibilities based on different assumptions.

    Of course, “No two economists can agree!” They don’t have crystal balls!

    Smith

    • Larry Burchall says:

      Hoolieh,

      You asked, conservative? Optimistic?

      Revisit the lead-in and Point Four, the answer lies there.

      Between 2001 and 2008, GDP growth averaged 7.5% a year, year-on-year. In that same time, ResPop went from about 63,000 to 68,000. That was healthy and fast growth with the increase in ResPop a major factor.

      In 2014, ResPop was reported – by Government – as lower than in 2001 (and, for that matter than in Census year 2000). I have previously, in other articles, said and shown that ResPop changes are connected to GDP changes.

      Put the two together.

      All the ‘new construction’ that you refer to will help push GDP up, but do remember that 40% of all new construction goes into imported materials. Hence 40% of the ‘big’ spend number for new construction never impacts the local economy.

      With ResPop currently about 10% below the level of 2008, getting back to 2008 GDP level, means reliance on the peripherals of inflation, price increases, and cost decreases to get back to the $6.0bn GDP level of 2008.

      The only way for solid growth in in GDP is for ResPop is to become an increasing figure.

      To help you, I’ll tell you that the facts that I’ve presented show that I’m being optimistic – perhaps even generously optimistic.

      But look at the 2017 end game, and think about that. That’s the really important bit.

      Larry

      • Hoolieh says:

        Gracias!
        And I agree, government spending levels will be the key!
        Smith

        P.S. Perhaps they should start immediately with government pension fund terms – move to contributory like the rest of us!

      • Tree frog music.

      • Build a Better Bermuda says:

        Fairly good analysis, though you predicate much of it on government not reducing expenditures further. And if the government is able to further reduce expenditures, while revenues continue to grow as you have asserted…?

  5. Keepin' it Real!...4Real! says:

    In all due respect Larry…you must know, the state of the economic crisis looming Globally…so, I’m saying that you have the right solutions but only in a stable environment out side of Bermuda…its all well and good to plan a fabulous picnic inside your kitchen until you go outside to find that it’s raining.
    Also I get a little twitch when you talk about Respop. ..residential population I take it…well I see it like this …as of today we have too many unemployed…and too many unemployable Bermudians now…so I don’t see where more babies will help…so that can only mean we need more “outsiders” to gain residency here to contribute to the wealth and well being of Bermuda…NOT Bermudians. ..people come and people go…only the prepared will survive.

    • So do we still blame PLP for this Global economic crisis?

      • RBKing says:

        Ah. the Mythical PLP global crisis. You lot love that story don’t you.

      • Keepin' it Real!...4Real! says:

        Nah we can’t blame them for the Global crash just ours…

      • Build a Better Bermuda says:

        I don’t blame the PLP for the global crisis, I don’t blame them for the inevitable recession locally. I do blame them for failing to maintain this country’s competitive standing, for implementing ideological based policies that further weakened our economy and sunk us into an a deeper and more protracted recession than we should have otherwise been in if we hadn’t lost as many companies who left our shores for othe juristitcions that weren’t as hostile to them and were being more competitive. They damaged our reputation, and continue to do so with their hostile misinformation electioneering campaign. They failed to make the hard choices when they were needed and now our children are burdened with a debt never before known of in our history. They were operating budget deficits that were edging ever closer to being 50% of government revenues and trying to pass this off as normal. The PLP can talk a good game, but when it comes to actual leadership, they lack the actual abilities to be on the field, much less trying to captain or coach… and the shame is, they actually have people that could, but the are sidelined from any actual responsibilities for the sake of those that can talk.

    • Thief says:

      Bermuda was prepared and even profited handsomely during global economic crisises before 2008.

    • frank says:

      What we. Needs. Is. More bermudiana. Working
      The none Bermudian only sends their money. Out of. The. Island
      If the government. Did their. Job they would. Not be. Here.
      Case in point went. For dinner at a. Restaurant on. Reid street there were no Bermudian
      Waiters.

  6. Michael Hardy says:

    Larry Burchall do you factor in the external war on tax havens?
    Your article is an excellent view of the numbers but there is no reference to outside changes in tax system and transparency in many counties..

  7. Adam Smith says:

    ACBDA actually ends in July, 2017. General election must be held by early 2018, but the latest realistic date is December, 2017.

  8. Politically incorrect says:

    The trouble is that now even an increase in population won’t help as there are no jobs for experienced expats to do. The jobs went with them when they left. The landscape of international business has changed forever. Bermuda is on a downward spiral with a few things on the horizon which will cushion the fall but not reverse it. Unless a new industry which needs what Bermuda has to offer is developed we’d better get the fishing rods out.