FRIDAY, NOV. 23: Why is it important to maintain an optimum credit rating?

In June this year, Fitch Ratings downgraded Bermuda’s rating from an ‘AAA’ to ‘AA+’. The reasons cited for this downgrade were:

  • Our weak macroeconomic performance;
  • Deteriorating fiscal and government debt ratios;
  • Lack of a credible fiscal consolidated strategy;
  • Narrow and volatile revenue base.

All of these concerns have prompted our rating decline because government policies have limited our growth scope and maintained large fiscal deficits and debt burdens.

On the upside, however, we still benefit from access to international capital markets and the local financial system. In addition to this, the sinking fund also provides the government with some flexibility to service our debt.

Another favourable consideration that supports Bermuda’s ratings is its wealth (the fourth-highest GDP per capita among Fitch-rated sovereigns) and the high savings rate relative to our peers in the ‘AA’ rating category.

Our competitive advantage as a domicile of choice for insurance, reinsurance and financial services companies remains intact. Primarily, this is due to the following reasons:

  • Our sophisticated legal system;
  • Strong regulatory framework;
  • Simple tax regime;
  • Proximity to the US markets;
  • Highly-skilled human capital.

All of these positive factors, however, are being counter-balanced by our lack of:

  • Economic diversification;
  • Weaker growth prospects;
  • Limited policy flexibility.

Moreover, our economy depends extensively on insurance and tourism business, two industries that are mature and face strong competition from other jurisdictions.

Fitch expects GDP growth to remain negative in 2012 and be zero in 2013 before rebounding in 2014. This would be the weakest output performance among all ‘AA’ Fitch-rated sovereigns. The weak economic performance has accelerated the deterioration in public finances observed since 2007 because of:

  • a still-contracting economy;
  • higher government operating expenditures;
  • Government deficit for 2011/12 fiscal year.

Our deficit could be the equivalent to 4.5 per cent of GDP by the end of 2012, twice what was originally estimated and above the median in the ‘AA’ rating category.

Fitch foresees fiscal deficits to remain above 4 per cent of GDP in 2012 and 2023 before improving moderately in 2014 after growth is restored.

Large fiscal deficits have resulted in an important build-up of government debt since 2007. Although from a low base, the government debt to GDP ratio has rapidly converged to the ‘AA’ median of 23 per cent in 2011.

More importantly, our debt/revenue ratio at 150 per cent in 2011 is above the ‘AA’ median, and is deteriorating faster than our peers.

We are on the doorstep of our general election. Fitch expects the next government to renew its commitment to business friendly policies irrespective of the electoral results. However, Fitch will continue to monitor our plan for fiscal consolidation.

Both the PLP and the OBA have yet to tell the electorate how they are going to address our weak economic performance.

A lack of a plan to stabilize our deficits and generate new revenues, will have an enormous impact on our next rating review.

With debt obligations set to be due, renegotiated or renewed in 2014 and given  our poor economic performance and weakness in diversifying our economy, our cost of borrowing will escalate rapidly. The risk to bankers will be greater and they will therefore increase interest rates.

The current level of interest rates are costing the taxpayers $3.67 ever second. With our debt expected to increase, this could rise to $5 every second. Think about this, look at your clock and watch  the seconds go by.

This is the threat we are faced with if we do not hold the government of-the-day, and any future administration, accountable.

Written by David J. Tavares and Erwin Adderley, independent candidates running for Constituency 8 Smith’s South and 19 Pembroke West respectively.