S&P Revises Outlook On Bermuda To Stable

Standard & Poor’s has revised their outlook on Bermuda to Stable from Positive.

The Minister of Finance Curtis Dickinson announced that ratings agency Standard & Poor’s [S&P] has revised Bermuda’s A+ long-term sovereign credit and senior unsecured debt ratings as well as its A-1 short-term rating and its AA+ transfer and convertibility assessment on Bermuda from Positive to Stable.

Minister Dickinson stated, “S&P, recently reviewed its ratings on 10 tourism-dependent sovereigns in the Caribbean and North Atlantic, as the spread of the COVID-19 pandemic has had a negative impact on tourism and each country’s economy. As a result, Bermuda was assessed as being stable as there is an expectation of a moderate increase in debt and negative growth in tourism. However, S&P noted that international business will still contribute positively towards the economy.”

Minister Dickinson further stated, “I am pleased that S&P has affirmed Bermuda’s A+ long-term sovereign credit and senior unsecured debt ratings even though they revised our outlook from positive to stable. As I stated in my press statement on Wednesday, April 15th, our economy will change, and the Government will change to address the challenge head-on to create outcomes that benefit the people of Bermuda. The establishment of the COVID-19 Economic Advisory Committee will also be paramount to helping us to maintain a quality sovereign credit rating as the Government rises to the challenges brought on by the pandemic.”

Standard & Poor’s Statement

A spokesperson said, “Bermuda outlook revised to Stable from Positive on Slower Economic Growth, Weaker Debt Position; ‘A+’ Ratings Affirmed.

“On April 16, 2020, S&P Global Ratings revised its outlook on Bermuda to stable from positive and affirmed its ‘A+’ long-term sovereign credit and senior unsecured debt ratings, its ‘A-1′ short-term rating, and its ‘AA+’ transfer and convertibility assessment on the territory.

“The stable outlook reflects our expectation that, while a moderate increase in debt and the impact of global market volatility on the government’s liquid assets will weaken Bermuda’s existing fiscal and debt positions over the next two years, the positions are strong enough to absorb the economic impact of the outbreak in 2020. In our current assumptions, we also expect that beyond 2020, real GDP growth will recover but remain below 1% and that the government will resume its efforts to achieve fiscal balance.

“Unexpected weakness in Bermuda’s IFS sector, as a result of sector uncertainty or material job losses tied to the sector’s ongoing consolidation or the effects of COVID-19 that contribute to a larger economic contraction, could result in sustained flat or negative real GDP growth leading to below-average growth prospects compared with those of peers. Market losses that lower the government’s large liquid assets to less than 25% of GDP on a sustained basis would weaken Bermuda’s fiscal assessment. Under either scenario, we could lower the rating within the next two years.

“Although we view this scenario as unlikely, we could raise the rating over the next two years if the territory realizes a return to more robust real GDP growth on a sustained basis and greater economic diversification that contributes to improving fiscal results that persist, leading to lower interest burdens and a net creditor position.

“The global spread of COVID-19 will have unprecedented implications for tourism-dependent sovereigns in the Caribbean and North Atlantic. We expect that, in addition to the human costs, the pandemic, together with travel restrictions in Bermuda and in visitors’ countries, will have a significant impact on GDP, fiscal accounts, and foreign exchange inflows in 2020 (see “Stress Scenario: The Sovereigns Most Vulnerable To A COVID-19-Related Slowdown In Tourism,” published March 17, 2020). Although there is a high degree of uncertainty about the rate of spread and the duration of the coronavirus outbreak, S&P Global Economics’ baseline assumption is that the pandemic will peak about midyear globally (for more information see: “The Escalating Coronavirus Shock Is Pushing 2020 Global Growth Toward Zero,” published March 30, 2020). While the timing of the peak of the pandemic will differ across sovereigns, the global peak will inform governments’ decisions regarding travel restrictions and border closings, as well as tourists’ propensity to travel. Our base case for tourism to the Caribbean and North Atlantic in 2020 assumes a decline of 60%-70% in the last three quarters of the year compared with 2019, with the largest declines occurring in the second and third quarters. While we expect a subsequent rebound in tourism in 2021, in most cases, we do not expect a full recovery until 2022-2023, at the earliest. We believe that the pace of recovery will depend on the timing of the outbreak peak in the country and key visitors’ countries, the nature and resiliency of the tourism sector and sectors that indirectly depend on tourism, and the government’s policy response.

“We expect Bermuda will record GDP per capita of about US$115,000 in 2020, which gives the territory one of the highest GDP per capita figures in the world. We project real GDP growth of 0.9% for 2019 will decrease to at least negative 1.5% in 2020 due to the economic shock felt by Bermuda, and its main trading partners, from the pandemic. We believe that the pandemic is a 2020 event and that real GDP growth will increase steadily in the following two years but remain below 1%. Of note, the tourism sector represents about 5% of GDP while the IFS sector dominates Bermuda’s economy and provides it with some stability compared with other island economies. The IFS sector represented about 24% of nominal GDP in 2019, and we don’t expect this will materially change.

“The government’s trajectory to achieving balance has been pushed out beyond fiscal 2023. Despite Bermuda’s cutting discretionary spending and reallocating capital funding to mitigate an increase in the operating budget, in the current fiscal year, we project debt will increase as the government funds the deficit resulting from a material decline in hospitality-related and payroll tax revenues, and increased spending related to the outbreak. The increase in net general government debt in fiscal 2021 is the result of both debt issuance and a forecast decrease in external assets due to global market volatility. Improvement following fiscal 2021 will result from growth in the government’s liquid assets and the trend to smaller deficits through to fiscal 2023. As a result, we now expect Bermuda will remain in a net general government debtor position for the next three years and the average change in net general government debt will reach 0.3% of GDP in 2021-2023. The government holds significant assets in its civil service superannuation plan and its contributory pension plan that enhance its credit profile. These assets will represent more than US$2.1 billion or about 30% of 2020 GDP.

“Bermuda’s net general government debt as a share of GDP will increase, because we expect that the government will use part of the room created by a $150 million increase in the debt ceiling to fund larger-than-expected fiscal deficits with lines of liquidity through local banks. Net general government debt as a share of GDP will increase in 2020-2021 to 10% and trend down thereafter, reaching 8.3% in 2022-2023. Concurrently, the interest burden should moderately rise with increasing general government debt, averaging 11.1% for the 2020-2023 period. Our assessment of the government’s debt burden is weakened owing to the high levels of debt denominated in foreign currency and of commercial debt held by non-residents.

“We expect Bermuda will remain a substantial narrow net external creditor of about 58% of current account payments in the 2020-2023 period, because of the government’s large external asset holdings and the banks’ large external assets. Owing to the banks’ large deposit liabilities, gross external financing needs are high in 2020-2023 at about 210% of capital account receipts and usable reserves. Current account surpluses should remain high and average about 11.7% of GDP for the same time frame.”

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