Poor economy leads to another downgrade

The ongoing deterioration of Bermuda’s economy and the never-ending recession have led to Moody’s downgrading Bermuda’s rating to A1 from Aa3 and changed the outlook to stable from negative.

The ratings agency said Bermuda’s key fiscal metrics “which although still at moderate levels, are now more aligned with those of its A-rated peers” and “the persistent economic recession, which has been the main factor in the weakening of the government’s balance sheet”.

It said one of the key drivers is the “significant increase” in Bermuda’s debt and interest burdens. 

“Following the issuance of a $750 million global bond in 2013, government debt stands at an estimated 42 per cent in relation to the country’s GDP, up from 28.8 per cent at the end of 2012. The debt increase continued a trend that started in 2006, when the government’s debt was below 5 per cent of GDP. Part of the bond’s proceeds were used to cover the 2013-14 fiscal deficit, and the authorities expect to use the remainder to fully finance the current fiscal year’s shortfall and provide some funding for fiscal year 2015-16.”

Moody said after adjusting for the Sinking Fund, net debt stands at 32 per cent of GDP “and is 10 percentage points below the gross debt figure, but we expect this ratio to deteriorate as the government draws down assets to finance future deficits. Moody’s expects deficits to reach approximately 4.8 per cent of GDP in 2014-15 and 3.4 per cent in 2015-16.

Moody’s added: “ In addition, debt affordability as measured by the ratio of interest payments to revenues for the sovereign weakened to around 12 per cent in 2013 (from just 2 per cent in 2008). This decreased fiscal flexibility also places Bermuda above the median for Aa- and A-rated peers.

Contracted

Moody’s estimated that Bermuda’s economy further contracted by 2 per cent in real terms last year, making 2013 the fifth consecutive year of falling GDP in both real and nominal terms.

“Bermuda’s weak growth has led to revenues falling below budgeted amounts in four of the last five fiscal years, making it difficult for authorities to appropriately allocate resources and, consequently, widening the fiscal deficits.”

The ratings firm said it expects real output to return to growth in 2014 but “the recovery will be fragile because the reforms the government has implemented over the past year to incentivize the international business and tourism sectors (Bermuda’s main drivers of growth) are likely to have a gradual impact over the next five years.”

It added that it is “unlikely” that Bermuda will have upward movement in its rating over the next few years. 

Finance Minister Bob Richards said: “One of the key drivers stated as the reason for the downgrade is the persistent economic recession. We are pleased, however, that Moody’s has attached a stable outlook to the rating.”

The Minister said: “Moody’s continues to endorse the Island’s institutional strength and Government’s program for prudent fiscal management. Government remains optimistic about future prospects for growth and will manage the economy accordingly.

The Government will continue to press ahead with our Jobs and Economic Turnaround Plan that strikes a balance between responsible growth and disciplined financial management. As the Minister of Finance, I remain committed to creating an economy that works for everyone and returning our public finances to a sustainable position.”

Shadow Finance Minister David Burt took a different spin on the Moody’s downgrade, saying it was “a vote of no confidence in the OBA’s ‘Jobs and Economic Turnaround Plan’. 

“Instead of the words such as ‘Turning the Corner’ used by the OBA when talking about the economy; Moody’s used language that all Bermudians know to be true, ‘ongoing deterioration’. The OBA’s Jobs and Economic plan has turned into an unemployment and economic nightmare for Bermudians. Since the OBA have taken office Bermuda has lost 1,166 jobs and seen 261 companies close their doors.”