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Fiscal, Economic Weakness Triggers Bermuda Downgrade

by Amanda Banks,, London

29 June 2012

The sustained contraction of the Bermuda economy, and the lack of a credible fiscal plan have led to Fitch Ratings downgrading Bermuda's currency ratings.

The ratings agency says that the international financial centre suffers from a narrow and volatile revenue base, limiting Bermuda's scope to maintain large fiscal deficits, expected until the island exits a protracted downturn.

Fitch has cut the territory's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'AA', from 'AA+', and the Long-Term Local Currency IDR to 'AA+', from 'AAA', with a stable outlook going forward.

Fitch explained that the downgrade reflects Bermuda's weak macroeconomic performance relative to its peers, deteriorating fiscal and government debt ratios, and "the lack of a credible fiscal consolidation strategy".

The Bermuda economy is expected to recover significantly more slowly than the Caribbean region, with negative growth to persist in 2012, after three years of contraction. The economy is expected to post 0% growth for 2013, with an economic recovery only expected in 2014. This would be the weakest output performance among all 'AA' Fitch-rated sovereigns.

The agency observed that although Bermuda benefits from a competitive advantage as a domicile of choice for insurance, reinsurance and financial services companies - attributed to its "sophisticated legal system, strong regulatory framework, simple tax regime, and proximity to the US market", the government's ability to stimulate growth is limited, due to Bermuda's lack of economic diversity, and the territory's dependence on the tourism and insurance industries.

Fitch stated: "Weak economic performance has accelerated the deterioration in public finances observed since 2007. Fuelled by a still-contracting economy and higher expenditures, the government deficit for the 2011/12 fiscal year could be equivalent to 4.5% of gross domestic product (GDP). This figure is twice what was originally estimated and above the median in the 'AA' rating category. Fitch foresees fiscal deficits to remain above 4% of GDP in 2012 and 2013 before improving moderately in 2014 after economic growth is restored."

"Bermuda's debt/revenue ratio at 150% in 2011 is above the 'AA' median, and is deteriorating faster than its peers. Moreover, recurrent changes to the debt ceiling, withdrawals from the sinking fund to meet interest payments and the inability to implement a multi-year budget program have undermined the credibility of the fiscal policy anchor and the commitment to fiscal consolidation," the agency said.

"A sustained weak economic performance, lack of a credible plan to consolidate public finances, and continued deterioration in the sovereign's fiscal metrics could put downward pressure on the ratings. Regulatory changes that negatively affect international companies operating in Bermuda could also undermine creditworthiness. Conversely, resumption of economic growth and concrete signs of fiscal consolidation and debt stabilisation would help to sustain Bermuda's ratings," Fitch concluded.

TAGS: tax | investment | economics | fiscal policy | insurance | gross domestic product (GDP) | international financial centres (IFC) | budget | Bermuda | offshore

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