Bermuda Weathering The Storm Thus Far: Fitch

by Phillip Morton, Investors Offshore.com

11 September 2009

Fitch Ratings has retained its credit rating on Bermuda despite strain imposed by the financial crisis. Whilst commending Bermuda's resilience to the economic crisis thus far, it warns that the lack of flexibility it is afforded on fiscal policy, and changes to the architecture of global financial services could pose risks for its creditworthiness.

In a statement on September 9, Fitch Ratings affirmed Bermuda's foreign currency Issuer Default Rating (IDR) at 'AA+' and its local currency IDR at 'AAA', noting that the outlook for both ratings remain stable. Whilst, affirming Bermuda's short-term rating at 'F1+' and the country ceiling at 'AAA'.

“A longstanding commitment to prudent fiscal policy underpins Bermuda's creditworthiness and provided a strong starting position for facing the global economic crisis,” said Casey Reckman, Associate Director in Fitch's Sovereign group.

A high per capita income of over USD97,000, low public debt burden and effective management of the business and economic environment afford additional support to Bermuda's Sovereign ratings, commended Fitch. However, Bermuda's key credit weakness is the economy's lack of economic diversification and small size, which curbs the capacity to absorb extreme shocks relative to other high-grade sovereigns, Fitch warned.

“As a small island economy, Bermuda is vulnerable to external dynamics, such as commodity price shocks and economic downturn in trading partners. As a result, Fitch expects GDP to contract by 2.0% in 2009 before recovering moderately in 2010. A strong track record of macroeconomic stability and large current account surpluses bolster the island in the face of global economic and financial turbulence. In addition, Bermuda has not been exposed to global and local financial market distress to the same degree as other high-grade peers. Financial system supervision continues to improve and uphold high international regulatory standards. Bermuda's well-established reputation as a domicile of choice for (re)insurance and financial services companies provides a basis for sustainable economic growth,” Fith observed.

“In the absence of greater policy flexibility, the fiscal policy response to global recession has resulted in some slippage. Fitch expects Bermuda's general government debt to expand to 11.6% of GDP in 2009 as a result. Although this indicator still compares favorably with those of 'AA' peers and a ten-year category median of 45.6% of GDP in 2008, a lower debt burden is prudent given the government's low revenue base and more limited financing options relative to other high-grade peers. Moreover, Bermuda's balance sheet is growing far less rapidly than those of sovereigns, providing liquidity to financial institutions”.

“The limited information with respect to non-bank private-sector external assets and liabilities remains a concern given the size of Bermuda's international financial sector. However, the government of Bermuda appears unlikely to provide support to international firms owned by non-residents. Fitch also believes that these liabilities pose little risk to the stability of Bermuda's exchange rate or the domestic financial system, as most related transactions take place entirely offshore.”

“Sizeable fiscal slippage which results in a sustained increase in the sovereign's public debt burden could put downward pressure on Bermuda's ratings in light of limited financing flexibility. Changes to Bermuda's tax regime, whether originating domestically or abroad, which result in erosion of the territory's attractiveness as a domicile for international companies could also be negative for creditworthiness. On the other hand, fulfilment of the government's expressed commitment to fiscal consolidation and debt reduction when the economy recovers would help uphold Bermuda's ratings,” the report concluded.

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